Amplify Energy (NYSE:AMPY): May Be Able To Eliminate Net Debt By 2024

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Cancellation of Amplify Energy’s Paycheck Protection Program (AMPY) loan helps reduce its net debt by another $5.5 million and could put it on track to reduce its net debt below $200 million by the end of 2021.

Tape prices are slightly improved now compared to when I looked at Amplify a few months ago. This puts Amplify on track to generate an additional $135 million of positive cash flow in 2022 and 2023, so it may be able to reduce its net debt to around $60 million by the end of 2023.

Given that it appears capable of generating around $75 million in positive cash flow in 2023 at current strip prices, Amplify may be able to eliminate its net debt by the end of 2024.

Debt reduction

Amplify has made solid progress in reducing its net debt. It had net debt of $250 million at the end of 2020. This was reduced to $239 million at the end of the first quarter of 2021.

Amplify recently announced that it received forgiveness of the entire $5.5 million PPP loan, which helped reduce its net debt to approximately $216 million at the end of the second quarter of 2021.

Amplify has hedges covering most of its oil and natural gas production in 2021, but only has hedges covering approximately 15-20% of its NGL production. High NGL prices could lead to a slight increase in Amplify’s cash flow. Antero Resources noted that C3+ NGL prices are currently about 28% higher than Q1 2021 levels, and ethane prices are also higher than Q1 2021.

Approximately 16% of Amplify’s production is NGL, and a 25% increase in realized NGL prices (before hedging) over first quarter 2021 levels would add approximately $3 million to Amplify’s cash flow in the second semester. Amplify thus has the potential to reduce its net debt to less than $200 million by the end of 2021.

Hedging position

Amplify has approximately 60% to 65% of its PDP oil production and approximately 75% of its PDP natural gas production hedged for 2022. Amplify is also budgeting approximately $16 million in 2021 capex for D&C activities across its Beta and Eagle Ford oil assets. , so its oil hedges will likely cover a slightly lower percentage (say, 55% to 60%) of actual 2022 production.

Source: Amplify Energy

Although it mentions a fixed/floor price of $48.14 for its 2022 oil hedges and a fixed/floor price of $2.42 for its 2022 natural gas hedges, the fixed/ceiling prices are a bit better. Amplify’s 2022 oil hedges have a fixed/cap price of $54.32 and its 2022 natural gas hedges have a fixed/cap price of $2.79.

Cash flow notes

Amplify projects that can generate approximately $55 million in free cash flow in 2022 and approximately $80 million in free cash flow in 2023 at $60 WTI oil and $3.15 natural gas. The difference between the two years is largely due to covers, with Amplify’s 2022 covers being worth around $17 million negative at these prices.

At current strip prices of approximately $65 oil and $3.40 natural gas in 2022 and $60.50 oil and $2.85 natural gas in 2023, I estimate that Amplify could generate the same $135 million free cash flow over the two years, but split differently to $60 million in 2022 and $75 million in 2023.

Source: Amplify Energy

Conclusion

Amplify Energy’s net debt is reduced faster than expected. With the cancellation of its PPP loan, it is now at $216 million in net debt (at the end of Q2 2021), down $34 million from the start of the year. Based on strip prices, it may be able to reduce its net debt to around $60 million by the end of 2023 and then eliminate its net debt by the end of 2024.

Amplify’s current market cap is under $130 million, which seems pretty low for a company that could generate more than that in free cash flow in 2022 to 2023. I still believe Amplify is worth around $5 to $7 a share, and I think towards the higher end of that range is more appropriate given its faster-than-expected debt reduction.

Ann J. Cox