We love a good turnaround story. Typically the market only rewards a stock after the company has been successfully turned around, which means that identifying a good turnaround early presents a good investment opportunity. We think we’ve found a good candidate in Camber Energy.
Camber is an independent oil and gas company engaged in the development of crude oil, natural gas and natural gas liquids in the Hunton formation in Central Oklahoma and San Andres formation in the Permian Basin of Texas.
Approximately six months ago, the company was in real trouble. They had resources in the ground, but they defaulted on their bank loan, and received notice from the NYSE-American that their stock was not compliant with the listing standards. In addition they had run out of capital, and they had several production assets that were shut down. In short it looked as if the company was about to go out of business.
Fast forward to today and things look vastly different. In June, Richard Azar II was appointed as the Interim CEO and he immediately began to make changes to stabilize the business. He started by bringing in a team of industry veterans and turnaround experts to help him right the ship. The new team has nearly 100 years combined experience in the energy sector and turnaround management. With the new team installed, the company raised $16 million with an institutional investor. It was this financing that actually caught our attention because that kind of capital can be transformative in the right hands.
Then two weeks ago, Mr. Azar published an open letter to shareholders, in which he made clear his objectives for the company, and detailed his plan to revitalize the business. The letter is worth a read, but to summarize: Camber’s first order of business is to repair (or “workover”) the 6 wells the company owns that are currently offline. Simultaneously, the company will work with its senior lender to bring the company back into compliance with the financial covenants. The company is also working with the NYSE-American to regain compliance with the exchange’s listing standards, and Camber has submitted a plan to the exchange which – if accepted – would have the company back in the NYSE’s good graces next year. In addition, Mr. Azar intends to use to drill up to eight new wells in 2018 and/or strategically acquire companies that will add additional cash flow and resource reserves to the company’s asset base. Either way, the company has publicly set a $1M EBITDA target by the end of 2018.
It’s an ambitious agenda, but it seems very achievable. And if Mr. Azar et al. can pull this off, the business should be worth well in excess of the company’s current valuation of roughly $5.75 million. Hence, why we like this turnaround play.
Earlier this week, Camber put out another press release stating that the workover process on the six down wells had already begun, and initial production from one of these wells has already started. The company expects all six wells to be back online within two weeks, and if so, an additional 1.8 thousand cubic feet (MCF) per day of natural gas liquid (NGL) rich natural gas will be produced from these wells. Based on the current spot prices of natural gas and NGL, the company should be generating an additional $200,000 in revenue per month once all of the wells are back on production. So the turnaround is already underway.
With respect to the new wells Camber intends to drill next year, the company’s opinion is that the new wells present low geological risk. This is because Camber already has wells pulling resources out of the ground in areas adjacent to where the new wells would be drilled. Even still, prior to drilling a new well, Camber will use the latest technological devices to confirm that there are in fact resources in the ground that can be extracted. This methodology presents an excellent risk/reward profile for the company’s prospects. Drilling only when the odds are tilted heavily in the company’s favor is a technique Mr. Azar has used to great effect throughout his entire career. It’s yet another reason we like the company’s new management direction.
But there’s still work to be done. The company must restructure its debt facility with its senior lender, because Camber is currently in default. In the shareholder letter, Mr. Azar said that the company is working closely with the bank to get back into compliance. We’ve certainly seen companies re-work credit facilities with lenders before, so our own experience tells us this is hardly an impossible task. Additionally, the company must also get back into compliance with the NYSE-American so the stock can continue to be listed on the exchange. Currently, Camber does not meet the NYSE listing standards but the company has until August of 2018 to get back into compliance. We like the fact the exchange has given the company ample time to regain compliance. Based on the company’s new direction, this too seems like an achievable milestone.
If the company is able to get back on track with the bank and the NYSE-American, they would ostensibly have considerable tailwinds at their back. With current assets back online, access to capital, and new wells to be drilled in 2018, Camber’s future could be very bright indeed.
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