Taking a Quick Look at Goodrich Petroleum
By: Tim McPartland,
We are continuing to take a look at some of the oil and gas companies with income securities outstanding and we decided to look at Goodrich Petroleum (ticker:GDP) since they have 2 cumulative preferreds outstanding.
We note that today both preferreds are down sharply–the 9.75% issue (ticker:GCP-D) is at $11.62 for a current yield of a whopping 20.98%. The 10% issue is trading at $11.90 for a current yield of 21.01%. Obviously the markets are counting on a suspension of dividends some time in the future. The common shares are trading around $3.60–down from a 52 week high of $30!!!
We note that Goodrich is in the middle of a program to move more toward crude oil production instead of producing natural gas–currently 70% of revnue comes from crude oil. Guess their timing was off a bit.
Looking at some top line revenue numbers Goodrich has recently flatlined–at around the $200 million level. They are selling a few assets so one has to look closer than just a quick peek to see what is transpiring. The problem here is that we looked at some of their well declines and they are massive in some areas. Some of the wells have 90% declines at 24 months–this is very scary for a $10 million dollar well and leads to the never ending drilling cycle just to stay ‘even’.
As we noted above the company has gross revenues around $200 million and in 2014 had a Capex spend of around $325 million–this is simply not going to continue at these crude oil price levels. This kind of spending is what leads to the never ending spending just to stay level. Obviously they show no profit whatsoever–but they do show a positive cash flow (from their 10-Q for the quarter ending 9/30/2014). The amount of depletion charged against earnings is simply massive (for a company this size) and given the rate of decline on the wells this is understandable (and real–versus real estate depreciation which many times does not indicate a reduced value in the property).
As we look at the balance sheet the company has $615 million in debt–some of it at 5%–but a fairly large chunk at 8.875%. As of the date of the last 10-Q the company had drawn down $118 million of a $250 million credit facility (no doubt they have drawn down more since 9/30/2014) and had almost no spendable cash on the balance sheet.
Goodrichs hedging program would look to yield a realized total sales value of around $83 at $70/barrel and considering that they are only about 50% hedged for 2015 this isn’t too bad. We can’t readily find out information on a hedge past 2015.
The company has been selling off some non-core assets which generates some cash to pay down their credit facility (so they can borrow more against it).
In summary we are amazed that lenders are lending to Goodrich–spending 150% of revenue each year on exploration just to maintain a flatline revenue stream is ridiculous and can not be maintained for 2015. Unless there is a sharp upward adjustment in prices of crude oil (above $90) we believe that they will not be able to service preferred stock dividends beyond June of 2015. We do not believe that they will be able to borrow money at anything but loan shark rates and we will start to see asset sales within 6 months as the company struggles to pay debt service costs. The decline rate of wells will put them in a catch 22–they have to drill to pay interest, but they can’t borrow more to drill and the decline means a lower and lower revenue stream.
For this issue (and their preferreds) cross your fingers for $90 oil.