Greenhaven Road’s Bet on Sable Offshore ($SOC)
In their Q3 2024 commentary, Greenhaven Road Capital delves into their new investment in Sable Offshore Corporation ($SOC), presented against a backdrop of general skepticism towards oil and gas investments due to volatile commodity prices and regulatory challenges. Greenhaven Road, with its long-standing reputation for pursuing undervalued opportunities with significant upside potential, sees Sable Offshore as aligning with their investment criteria, despite the unconventional nature and risks involved. This investment marks a notable pivot as it represents Greenhaven Road’s first foray into the oil and gas sector, attracted by the high insider ownership, operating leverage, and the potential for high free cash flow yield from Sable Offshore.
Investment Highlight: Sable Offshore Corporation ($SOC)
Business Overview
- An oil and gas company that recently went public via a SPAC.
- Engages in the management and development of a historically productive oil field in California, previously operated by Exxon.
Market Position
- Positioned to capitalize on a productive oil field with proven reserves and historical output.
- Faces significant regulatory hurdles but offers substantial upside if it can restart production.
Performance Analysis
1. Historical Production:
- Field has a history of high productivity, previously one of Exxon’s largest contributors in California.
- Previous production levels and potential for reinstating operations underpin investment attractiveness.
2. Operational Strategy:
- Aims for cost-efficient production with potential use of advanced recovery technologies like ESP (Electronic Submersible Pumps) which could significantly boost production rates.
Growth Runway
- Opportunity to reinstate and potentially expand production with existing infrastructures such as oil platforms, pipelines, and storage facilities.
- Legal and regulatory progress, including recent settlements, brightens the outlook for operational restart.
Market Dynamics and Opportunities
- High barriers due to regulatory challenges balanced by the strategic value of the oil field’s location and its substantial reserves.
- Unique positioning in a state with stringent environmental standards could yield strategic advantages if operational hurdles are overcome.
Valuation and Capital Allocation
- Acquired from Exxon under favorable terms, with significant potential upside in asset value realization.
- Financial structuring through SPAC provides flexibility and potential for high returns on investment.
Risks
- Regulatory challenges in California pose significant risks to operational restart and profitability.
- Dependency on successful negotiation and litigation outcomes with state and local authorities.
Other Key Points
- Insider investment by the management team aligns interests with external shareholders, reinforcing commitment to navigating regulatory landscapes and optimizing asset productivity.
- The potential for non-oil revenue streams, including carbon sequestration and gas monetization, which could diversify income sources and enhance sustainability.
Conclusion
Greenhaven Road views Sable Offshore as a high-risk, high-reward opportunity that embodies their investment philosophy of identifying and leveraging underappreciated assets with substantial intrinsic value. They acknowledge the unconventional risks associated with this oil and gas venture, but also highlight the strategic maneuvers and insider commitment that could lead to significant long-term value creation.
Click here for the full pro investor letter.
Disclaimer: The information provided in this blog post is for informational and educational purposes only and does not constitute financial, investment, or other professional advice. The content is based on a third-party investor letter and does not represent an endorsement, recommendation, or solicitation to buy or sell any particular security or investment product mentioned.
Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Investors should carefully consider their investment objectives, risk tolerance, and financial situation before making any investment decisions.
