We came across a bullish thesis on Sable Offshore Corp. (NYSE:SOC) on wallstreetbets Subreddit Page by Kooky_Lime1793. In this article, we will summarize the bulls’ thesis on SOC. Sable Offshore Corp. (NYSE:SOC)’s share was trading at $22.90 as of Dec 31st. SOC’s trailing and forward P/E were 47.20 and 15.06 respectively according to Yahoo Finance.
A drilling rig fueled by the energy and expertise of the oil & gas exploration and production company.
There’s an intriguing opportunity unfolding around Sable Offshore’s acquisition of the Santa Ynez Unit, a previously highly productive oil asset in California, which has the potential to offer significant returns for investors. The Santa Ynez Unit, once owned by ExxonMobil, was forced to shut down in 2015 due to a pipeline leak and regulatory hurdles, but after a lengthy regulatory process, Sable has made substantial progress in its efforts to restart production. The company acquired the asset for $883 million, despite its net asset value being approximately $10 billion, indicating that Sable bought it for a fraction of its true value. Sable is now nearing the completion of the regulatory requirements necessary to restart production, with the hydrotesting of the pipeline scheduled to begin in January 2025 and a potential production restart targeted for Q1 2025.
The Santa Ynez Unit consists of three offshore platforms with 112 wells and a substantial resource base of 646 million barrels of oil equivalent, positioning Sable with significant upside potential. The company aims to ramp up production to at least 10 million barrels in 2025 and up to 20 million barrels per year by 2028, with the possibility of achieving up to 30 million barrels per year through improvements in drilling technology. With oil priced at $70 per barrel, the company expects to generate annual free cash flow of $400 million at a production level of 10 million barrels and potentially as much as $1.2 billion with increased output. This would result in a cash flow yield of 20% to 63%, based on the current market cap of $2.0 billion and an enterprise value of $2.5 billion. The overall valuation of Sable, particularly the Santa Ynez Unit, is extremely attractive given the potential for significant cash flow generation and the minimal long-term capital expenditures required, estimated at around $150 million per year.
From a broader perspective, the resumption of operations at the Santa Ynez Unit would not only boost California’s domestic oil production but also provide a reliable source of supply as the state faces increasing reliance on foreign oil, particularly from the Middle East and Canada. Sable operates under federal offshore leases, meaning that it faces less regulatory pressure from the state of California, and with a more favorable pro-oil production administration on the horizon, this could further improve the company’s prospects. In terms of shareholder returns, management has outlined an aggressive program, including a target quarterly dividend of $1 per share and a potential $2.50 per share upside, as well as the possibility of opportunistic share repurchases with excess cash. Additionally, the company plans to maintain a conservative leverage profile by focusing on paying down debt aggressively.
In terms of valuation, Sable’s potential is significant. The bear case scenario involves a situation where production is not resumed by January 1, 2026, which could lead to the assets reverting to ExxonMobil without compensation, resulting in a loss of capital. However, under the base case, with production ramping up to 10 million barrels per year and generating $400 million in annual free cash flow, Sable’s valuation could rise to $4 billion, effectively doubling its current value. In the best-case scenario, with production reaching 30 million barrels annually and oil prices rising to $100 per barrel, the company could generate $1.65 billion in free cash flow, leading to a potential valuation of $37.5 billion, representing a nearly 20x upside.
Despite this compelling upside, Sable faces certain risks, primarily related to regulatory hurdles, California’s political climate, and oil price volatility. However, if the company clears these obstacles and begins operations, the stock could experience significant upside, with shares potentially increasing by more than 50% to over $30 per share. If management successfully delivers on their dividend expectations, the stock could rise to over $40 per share, representing almost a double from its current price. Overall, Sable offers a highly attractive risk/reward profile for investors willing to navigate the regulatory and political landscape.
Sable Offshore Corp. (NYSE:SOC) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 22 hedge fund portfolios held SOC at the end of the third quarter which was 11 in the previous quarter. While we acknowledge the risk and potential of SOC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SOC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.