Value Trap
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“‘Value traps’ are cheap for a reason - perhaps an inept and entrenched management, a poor history of capital allocation, or assets whose value is in inexorable decline” - Seth Klarman
WPX / FELIX.
On Monday morning, WPX announced that it would buy privately held Felix Energy in a $2.5Bn transaction.
WPX’s shares rose 9% on the news, largely - in our opinion - due to the following bullets in their press release:
Transaction is accretive on all important metrics: EPS, CFPS, FCF per share, ROCE and NAV
Purchase price 3.5 times 2020 EBITDAX @ $50 WTI
In investing, there’s no free lunch (well, unless you have cash in a liquidity crisis).
From the perspective of value investing, something’s either cheap because (A) it’s misunderstood, or (B) it’s a value trap.
The Felix assets are pretty straightforward.
Permian, liquids, etc.
They shouldn’t be this cheap.
Which means there’s an implicit skepticism in the realization of that 2020 EBITDAX number.
In any case, time will tell.
With base declines rates in the Permian increasing “dramatically”, we’ll probably know sooner, rather than later -
WEATHERFORD.
On Friday, Weatherford emerged from Chapter 11, announcing a successful restructuring.
Unfortunately for them, the industry has yet to restructure.
Weatherford is the 4th largest oil field service (OFS) firm in the US, and it hasn’t turned a quarterly profit since ‘14.
The reason for this is twofold: (A) over-investment in equipment (which was subsequently written-down) and (B) extending credit, via terms, to clients that are not credit worthy.
They didn’t go out on a limb - their competitors did the same.
E&P bankruptcies illustrate the 2nd issue - OFS firms are often at the top of the existing accounts payable schedules in bankruptcy petitions.
**When your clients default on 8-figure bills, it’s not easy to operate a business**
Until the E&P sector returns to financial health, it’s going to be a rough ride for the OFSs -
OTHER NEWS.
We agree with this take (OPEC+ skepticism)
The EU reached a Green-Finance Deal (gas implications)
It’s a light week, and that’s a good thing… except for newsletter content.
That’s it for today - subject to there being newsworthy events, we’ll be back Friday -