Sable Offshore: The Incoming Narrative Shift
Going From "Will Production Ever Restart?” To “What Is It Actually Worth?"
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Overview
The important narrative change that is imminent for Sable Offshore, and the red flags that disappear when oil flows.
I go through an abbreviated version of the story of the Santa Ynez Unit, and the process that Sable has gone through up to this point.
Laying out the order of operations for production restart, from Park repairs, to pumping oil into the Las Flores Canyon processing facility, and last but not least, a successful hydrotest and Fire Marshal sign off.
What happens after first production, including the refinance of the Exxon debt, and the potential for future capital returns.
The float is tightly held by insiders and institutions, while short interest is very high. I think any good news creates potential for some near term fireworks, and I think what happened on Friday with shares up nearly 10% is just a taste of things to come.
The valuation is very compelling if you think Sable has significant potential to grow production and is sitting on several decades of low cost reserves. If you think oil is headed higher from now until 2030, the current valuation is a joke.
The setup on Sable is very asymmetric, even with sentiment on oil in the dumps. I think fair value is much higher, and I hope to hold onto my shares for a very long time.
I know that some of you are probably getting tired of me writing or talking about Sable Offshore SOC 0.00%↑ nonstop for the last several months, but to be perfectly honest, I don’t think we will see another situation like Sable Offshore again anytime soon. With recent developments, I think we are very close to the catalyst that investors have all been waiting for, and the narrative around the company is set to change dramatically in the next couple months. The delays to this point have been frustrating, but I think it will be worth the brain damage in the end.
Why Is Sable Worth The Brain Damage?
In short, the answer to this question is the size of the prize. This is an asset that would 100% be owned by a major in any other jurisdiction. Until Sable bought the Santa Ynez Unit off of Exxon Mobil XOM 0.00%↑ in 2022, it was owned by a supermajor. The regulatory environment in California has driven other energy companies to sell or spinoff their California assets over the last decade. Chevron is moving their headquarters out of the state, Exxon has sold other major assets in California in the last decade, and they aren’t the only large energy companies trying to get rid of assets in the state. Two more refineries are expected to shut down in the next year, with Phillips 66 PSX 0.00%↑ set to close their LA refinery, and Valero VLO 0.00%↑ set to close their Benicia refinery.
The regulatory environment is also why there is uncertainty about Sable restarting production, and why it has taken longer than expected with multiple delays to this point. The California regulatory environment is definitely a double edged sword, but in my opinion, Sable Offshore wouldn’t exist outside of California. My uncle (who knows his way around the energy sector, and was degenerately long Occidental Petroleum OXY 0.00%↑ warrants in 2020) said last fall that the stock would probably be trading at $60 if it was in the Gulf of Mexico (now Gulf of America) due to the existing infrastructure, the reserves in place, and the fact that the production restart wouldn’t be in question.
Green Flags
Potential to be a low-cost, low capex, low-decline rate asset with massive reserves and several decades of reserve life. The bull case scenario is that Sable could be oil production with the closest thing to Saudi economics in the US.
A stock that could provide massive capital returns in the form of dividends and buybacks for a very long time.
You’re paying roughly $2-5 per barrel of oil in the ground (depending on what your view on recoverable reserves might be).
Massive insider & institutional ownership, and meaningful insider buying after the SPAC merger closed (including the CEO swapping his private jet for shares).
Red Flags
It’s a single asset California oil company that has went through a complicated regulatory process and legal questions to get to first production.
For all of the progress they have made, there have been delays, and it’s still pre-revenue.
It’s a former SPAC. Enough said.
I have talked to a bunch of investors on Sable, and I have been getting more and more bullish as the company has continued to jump through regulatory hoops, along with what I have been hearing through the grapevine about the Santa Ynez Unit. It’s really hard to find a perfect comp for an idiosyncratic situation like Sable, but when sharp guys bring up names like BP Prudhoe Bay Royalty Trust BPT 0.00%↑ or Texas Pacific Land TPL 0.00%↑, I was at least curious enough to pull up some historical charts and their dividend history. I know Sable isn’t a royalty company, so please save the angry comments, but if there are certain elements of the company that are similar to where those companies were in 2000, it will probably be worth hanging onto shares of Sable for a long time (in my totally unbiased, completely objective opinion). I really try to avoid quoting investors at readers because it’s cliche, but I’ll make an exception in this case.
“It doesn't matter what a company's earning, what they have earned. He taught me that you have to visualize the situation 18 months from now, and whatever that is, that's where the price will be, not where it is today.”
- Stan Druckenmiller
For those that have been following Sable closely, I think we are quickly approaching a very important change in the narrative around the stock. We are about to go from the dominant question around Sable being “Will production ever restart?” to “What is it actually worth?”. For what happens to the share price over the next couple months, I cannot emphasize the importance of this narrative shift enough. I have talked about Sable with a bunch of different investors, and plenty of them get stuck on the trifecta of red flags above. This includes guys that like the energy sector.
Most get stuck on the fact that it’s a California oil company, and they think it will never restart or it’s too complicated, but a couple have a different view from my own on where Sable will be valued after the Santa Ynez Unit is fully operational. When oil flows, all the red flags quickly disappear. At that point, I think it turns into a trophy asset with significant production growth potential that the company bought for pennies on the dollar. In a lot of ways, Sable is the exact opposite of shale production in the Permian Basin, and the setup today is as compelling as any point in the last several months.