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.
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