• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

Reading the Signs on Goodrich

Anticipating the oil company's preferred dividend.
By JIM COLLINS
Feb 25, 2015 | 09:00 AM EST
Stocks quotes in this article: GDP, SSN, LINE, BX

So, proceeding from yesterday's column, I'll now answer the question: Will Goodrich Petroleum (GDP) declare a preferred dividend?

In many of the energy companies I write about, I've developed strong relationships with senior management and can read body language, tone, etc. I don't have that here ... I've seen a couple of GDP presentations, but I've never sat down with CEO Robert Turnham or anyone else from GDP management. So I need to go with pure analysis:

1) Timing: Last year, GDP's board declared the quarterly cash dividend for the company's preferreds on Feb. 20, the day after GDP reported fourth-quarter earnings. Year-end earnings have to be blessed by the board, so this timing makes sense. GDP will report results this Friday before the open with a conference call at 11 a.m. ET. Thus, one could surmise a dividend declaration would come Friday or Monday.

2) Financial position. Goodrich sold assets in East Texas to Samson (SSN; the transaction closed just before year's end) for net proceeds of $51.8 million. This may have been the transaction that saved Goodrich Petroleum; in any event, it put Goodrich at a pro-forma level of cash of $53.4 million as of the end of the third quarter (this was disclosed in an 8-K filed on Dec. 29). Goodrich also completed a debt conversion in October that freed up previously restricted cash and would have put that cash amount at $60 million as of Sept. 30.

Pro forma for the note conversion, Goodrich's quarterly interest expense will run at about $12.3 million and preferred dividends cost another $7.4 million per quarter.

So GDP needs to come up with about $20 million to cover fixed charges on a quarterly basis. Operating cash flow (as measured by adjusted EBITDAX, as is standard in the E&P industry) was $37 million for the third quarter.

That's solid coverage, but also came in a period where oil prices were much higher than they are now. And that brings us to the key for any E&P: the hedge book. Goodrich's is actually pretty good. The company has 72% of 3Q annualized production swapped out for 2015 at a blended price of $96.11. GDP was also smart enough to write call options on 20,000 mmBTU/day worth of natural gas for 2015 at a price above $5/mmBTU.

So GDP is well hedged at current production, but the company's capex budget is still worrisome. GDP is planning on spending $90 million to $110 million in 2015. While that's down sharply from the ~$325 million level budgeted for 2015, that's still too high given $20 million in quarterly fixed charges. So I'll be listening very intently to management's comments on capex on Friday's call.

3) Revenue mix: GDP has been touted as the "TMS play," as the company was one of the pioneers of the exploration of the Tuscaloosa Marine Shale in northwest Louisiana. That was a huge selling point for GDP in the summer, given its huge acreage position in the TMS, but quickly became a major negative as oil prices plummeted and many analyses showed the TMS to be among the highest-cost plays in North America.

But a look at GDP's numbers shows it actually produces more natural gas than oil, and less than half of the oil produced is in the TMS.

In the third quarter, GDP's production was 57% natural gas, and the company produced about 60% of its oil in the Eagle Ford shale in Texas, with TMS representing the balance. So TMS really represented less than a quarter of GDP's production in the third quarter.

The divestitures and GDP's heavy investments will have increased the TMS share of GDP's output in the fourth quarter (we'll find out by how much with Friday's earnings report), but again, GDP's TMS exposure has been more perception than reality.

But, honestly, I don't think my number crunching will matter. Goodrich is the poster child for a private-equity infusion a la the GSO-Linn Energy (LINE) transaction (GSO is the credit arm of Blackstone, BX). Good assets, much debt and the operational knowledge to produce enough hydrocarbons to fund a minimum-rate-of-return setup.

And that's what I believe is going to happen. Goodrich will receive a cash infusion and give away the upside from the TMS in exchange for interest coverage. That makes the equity story less appealing, but has the opposite effect on the credit side, and hence I have been buying GDP-C for my clients for the past few days.

Get an email alert each time I write an article for Real Money.  Click the "+Follow" next to my byline on this article.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Collins was long GDP-C, although positions may change at any time.

TAGS: Investing | U.S. Equity | Energy

More from Energy

Don't Waste Energy Divining Energy's Future; Ride With LNG Shippers Instead

Jim Collins
Jan 21, 2021 10:30 AM EST

A hot market for liquefied natural gas makes companies that transport the fuel sensible plays at a time when oil is demonized.

Renewable Energy Group Is Set to Drive to New Highs

Bruce Kamich
Jan 21, 2021 10:08 AM EST

REGI is the nation's largest biodiesel maker.

At What Price Is Ballard Power Systems a Buy?

Bruce Kamich
Jan 15, 2021 3:09 PM EST

Let's check out the latest charts of BLDP.

Time to Nail Down Some Profits on Halliburton

Bruce Kamich
Jan 14, 2021 10:47 AM EST

Our latest technical analysis and trading strategy for the oil services stock.

A Rising Tide Is Going to Lift LNG Shippers in a Very Cold Winter

Jim Collins
Jan 14, 2021 10:30 AM EST

Also, my take on Jack Dorsey and Twitter, along with Facebook.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    I discuss price targets in my Saturday column.
  • 07:54 AM EST GARY BERMAN

    Friday Morning Fibocall for 1/22/2021

    SPX (Long-Term View) The 1/21/21 NEW high @ 3861...
  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login