Sable Offshore Corp

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Sable Offshore Corp (SOC), is a newly public energy company focused on late-life oil and gas properties in offshore California.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Sable Offshore Corp (SOC) is a relatively new entity with an initial focus on late-life oil and gas properties, and thus its moat is primarily based on cost advantages and operational expertise in this niche, it is currently not strong enough to be considered a business with wide moat, thus we give it a rating of 2/5.

Business Overview

Sable Offshore Corp is an emerging energy company focused on the acquisition and operation of late-life oil and natural gas properties. As a recent IPO, the company is in a transitional stage, working to integrate multiple acquisitions. Their focus is primarily on offshore oil and gas assets within California.

  • Revenue Distribution: SOC’s revenue is primarily generated through the sale of oil and natural gas. The company operates in the late-life stages of oil and gas production, implying revenues are dependent on the extraction and sale of these existing properties rather than exploration activities or large production volumes. For the six months ending June 30, 2024, the company generated total revenue of $2.3M, which was primarily from oil and gas sales.

  • Industry Trends: The energy sector is marked by high volatility, influenced by geopolitical and economic factors. Oil and gas prices are a major influence. Within the U.S., regulatory pressures and environmental concerns are also increasing. There’s a growing emphasis on sustainable and cleaner energy practices. The industry is also seeing consolidation, especially in the late-life field, as larger companies sell off less profitable assets. In general, there is a need for more capital for new production and for maintaining and improving the current assets and infrastructure.

  • Competitive Landscape: The oil and gas industry is highly competitive, with many companies vying for resources, and often those companies are significantly bigger and have much higher cash reserves than SOC. There are also few opportunities in late-life oil and gas wells, which may prove difficult for companies who rely mainly on acquiring those assets for returns. Companies need both the ability to control costs and increase the sales revenue, which is a tough task to do in a highly fragmented industry with a lot of competitors in the sector. There are limited number of companies focusing on only late-life assets, which reduces the competition for such opportunities.

  • Differentiation: SOC differentiates itself by specializing in late-life assets and by integrating acquisitions that improve the cost structure, and the company’s operating expenses are quite minimal which could translate into higher profits compared to some other companies with similar assets. They also appear to be seeking opportunities in the energy sector that are not widely addressed, which would provide some level of differentiation. However, this difference is yet to proven on a longer period.

Financial Analysis

SOC’s financial statements show a company in the early stages of growth with low current and historical performance.

  • Income Statement: Revenues are relatively low with large losses from operations. For example, for the three-month period ending September 30, 2024, they incurred a loss from operations of $10 million. Net loss is at $192.4M for the last six months, a massive loss.

The company is operating with a low operating margin and the company also recorded major interest expense, leading to loss per share on both basic and diluted levels. For the most recent reported quarter ending Sept 30, 2023, they have EPS of (-0.22).

Note that the company has not generated enough revenue to offset the operating costs and the interest payments. And to add on top of this, their business is facing heavy impacts of the write-offs and losses that have been accumulating.

  • Balance Sheet: Total assets stood at around $735 million, where the majority is represented by oil and gas properties at $724 million. Total liabilities stand at around $650 million. The company shows a significant deficit in the equity section which is around $179 million. The balance sheet is not entirely stable given that equity is negative, indicating that liabilities are greater than the overall assets.

  • Cash Flow: The company has a negative operating cash flow and is mainly being financed with financing activities such as debt and issuance of equity. The company needs to improve its operation and cash flow to become self-sufficient in the long term.

Moat Analysis

Sources of Moat:

  • Cost Advantages: SOC’s moat is primarily driven by its operational experience in late-life assets and by having a relatively lean organization. They claim to have identified cost reduction opportunities in their acquisitions, and their cost structure is smaller, this is not a stable moat as they are reliant on the company itself being able to provide lower costs.
  • Unique Resources: They claim to have unique access to “hard-to-replicate and under-valued” assets, however, this still needs further analysis and justification.
  • Intangible Assets: Company is newly founded and doesn’t have any recognizable brand, patents, or regulatory licenses.

Moat Rating: 2 / 5 While SOC shows potential for creating some level of cost advantage with its unique operating model and focus on late-life oil and gas wells, it does not have sufficient barriers to entry to be considered a wide moat business.

  • It’s difficult for a new company to come and steal all the late-life assets as the assets can have some level of regulation, location and other characteristics that prevents any easy switch or replication.
  • The company itself is also relatively small, and its scale makes its current cost advantage not so defensible and very easy to erode.

Risks to the Moat and Business Resilience

  • Commodity Price Volatility: SOC is subject to fluctuating oil and gas prices, which directly impacts its profitability, revenues and cash flow.
  • Operational Risks: Operating in late-life oil and gas fields implies challenges with infrastructure, maintenance, and potential production declines due to the natural depletion of resources.
  • Environmental and Regulatory Risks: California’s regulations are strict, and changes can limit or increase operational costs for companies operating in this region. Compliance is also a concern.
  • Competition: The energy industry is highly competitive, with large established players and a variety of strategies for value creation.
  • Acquisition Risk: As a newer company, SOC’s growth strategy relies on acquisitions which can come with additional risks, both integration and execution. Also, they can overpay for acquisitions.
  • Technology Risk: Although not a high-tech business, technology still plays a role in oil and gas exploration and refining, such as extraction methods, and those risks could have adverse effects on SOC.
  • Financial Instability: With a negative net-equity, and a debt-heavy structure, the company has a great financial burden to perform under normal and adverse conditions, and may potentially not be able to generate sustainable revenue to pay back debt.

Business Resilience:

Despite a niche focus, the resilience of SOC is not very strong given its recent inception and reliance on cost management along with having a debt-heavy balance sheet.

  • The company is not well diversified, and the sector is very volatile and cyclical.
  • The company does not have a long history of operating in tough and varying economic climates, and thus it’s difficult to measure its resilience in down markets.

Understandability Rating

3 / 5

Understanding SOC’s business model is not that complicated since they are operating in a specific niche of the energy industry. However, their financials are quite complex, especially with regards to different forms of funding and special acquisition accounting terms.

The core business of extracting oil and gas and then selling it is quite easy to comprehend. However, many complications arise when evaluating the financial statements, and making sense of the companies various moves to acquire and integrate different firms together. So, overall, we’d put it as a 3/5, not very simple, and yet not complicated.

Balance Sheet Health Rating

3 / 5 The balance sheet of SOC is a cause of concern, and their aggressive pursuit of acquisitions has significantly affected its overall health and performance, with equity going negative.

  • Debt: The company has a high level of debt compared to total assets, which is a red flag. They are heavily relying on debt financing to cover their losses.

  • Equity: Total equity of the company is deeply negative, which is not a healthy indicator, and means the business has more liabilities than assets.

  • Cash: The company does not generate positive cash flows through its operation, implying that their financials are very shaky for the long term.

  • Overall: For now, the overall health of the balance sheet is shaky, and the rating of 3/5 is rather generous in this case.

Recent Concerns and Controversies

  • The company has recently been criticized for its low levels of operating revenue, while having significantly large management expenses. This includes heavy executive compensations, especially for a company of their current scale.
  • There have also been some doubts about whether the company would be able to capture the synergies of the acquisitions due to a highly fragmented acquisition strategy.
  • Several analysts have also warned that it is risky to buy the stock when the oil price is down as this puts extra burden on the financial performance.
  • A recent SEC investigation into the company raised eyebrows, which is another sign of concern for new investors.
  • The management has mentioned the importance of the company’s cost-reduction measures, and they also have indicated that their focus is to establish new operations and production in the near future in a cost effective manner. But, this is yet to be proved over a period.