Story of broken dreams and a broken pipeline
Let's play a game of odds
This has been plaguing my mind for a while now and I am about to take you with me as I think through the problem. Our story starts in 2015 when a pipeline, off the coast of Santa Barbara broke and leaked 100,000 gallons of oil into ocean. It was not the biggest oil spill the world had seen and it was not the fault of the oil-platform. But neither of that matters for the state of California, who were quick to shut this once and for all. Exxon purchased the Santa Ynez Oil field in hopes of getting a bargain and restart the oil field. They even suggested a solution of shipping the oil by trucks there by avoiding this nasty pipeline business. Honestly that sounds like a very reasonable solution.
However, Californians just did not want to hear the word Oil. It was as if even uttering the O-word would poke ten more holes into our Ozone layer. So the oil field was shut since 2015, sucking up $80M a year just in maintenance (I too learnt today that shut oil fields tend to suck money too!). As you might expect, Exxon was frustrated and decided to sell it. But who would buy this oil field with such a terrible history? *cues up James Flores*
James Flores, a dashing oil and gas entrepreneur, decides to buy this field and restart this. Exxon was so happy to let him take this asset off their hands that they themselves loaned $615M to buy it off them (Exxon took a $2.5B loss on this transaction. Flores got it really cheap). But the trick was this - If Flores cannot get the oil field up and running by 2026, Exxon has the option to take away the assets (oil field) and liabilities ($615M) within 180 days. Getting this field up and running essentially means getting state regulators to approve opening this field (LOL!)
Flores does not stop here. He sets up this company and merges with a SPAC to create Sable Offshore Corp (MCap $2.2). He personally owns 20% of this company, recently leased a 46,000 sq ft office property too. It certainly looks like he is taking a gamble of his lifetime in this oil field.
Now here we are. We have the chance to either buy this stock or ignore it.
But before we get there a few additional details to help. Based on 2015 figures, we know this oil field was producing around 15,000-20,000 barrels of oil a day. Assuming oil stays in the $70-80 per bbl range & 200-250M reserves left, a conservative value of this oil field is $5-7B (anything above this, let us call it blue-sky upside). So simply, we got a ~$6B worth oil field, $800M in liabilities ($615M loan + accrued interest + bits & bobs), netting an equity value of $5.2B/$58 per share (vs $2.2B market cap/$25 per sh). Pretty clear upside. I have also read reports which estimate fair value to be as high as $155 per share.
On Downside - This is bit tricky. On face of it, it appears to be complete shareholder wipe out. Assets could go away. But question is what are the odds of the downside being realized?
Points favouring Downside realization
Exxon couldn’t do it with their cash reserves, lawyers and lobbyists. What chance does Sable have?
It is California. Governments needn’t always act rationally.
Recent LA fires could sway public opinion to either extremes (make them more anti-oil or pro-oil)
Points favouring Upside realization
Trump is in power. Republicans are pro-energy, pro-oil.
Even if they do not start in 2026, it looks like Exxon does not really want this back.
Let me expand on this a bit. Exxon wanted to take this oil field out of their hands at all costs. Even willing to loan the entire amount if needed.
If they do get this back, Exxon either has to try start the field themselves or find a new seller or decommission this plant.
Finding a new seller is next to impossible (Good luck finding another swash buckling starry eyed optimist like Flores).
Starting the field themselves would mean going to fight these regulators again. Holding the field would mean additional $80M per annum payment
Decommissioning a field isn’t easy either. Just the cost is $1.5-2B and added to technological complexity of pulling a platform out of 800M depth.
Li Lu took a 1% position in this (Incidentally that is how it got on my radar)
Now it appears qualitatively it is hard to call these odds. There could be slight leaning for regulators to approve this field. But it is not hitting us like a no-brainer.
So let us do some scenario analysis.