Amplify Energy: Fantastic Revenues, But Low Profitability

Imaginima

Head to any financial market news website, and most headlines you read will likely refer to a story on inflation, Ukraine, COVID, interest rates, or the 4. With all the chaos and uncertainty, it’s easy to worry about stocks and a recession, but smarter, more experienced investors will find plenty of opportunities amid the panic. As Rudyard Kipling said in “If”;

And if you can keep a cool head when everyone around you is losing theirs,

(But, of course, those familiar with Kipling’s works know that’s only half the story…)

Amplify Energy Corp. (NYSE: AMPY) is involved in the production of oil and natural gas, so it is poised to take advantage of rising energy prices due to geopolitical turmoil, while the energy sector, in general, remains relatively weak. sheltered from inflation and high interest rates. So let’s dive into the spreadsheets and break down AMPY and assess the stock as an opportunity.

(Data and prices correct as of September 6, 2022 before marketing)

(Major oil and gas exploration and production stocks referred to can be found on this Seeking Alpha filter)

Want to skip the analysis and find out straight who had the best (or worst) valuations in the oil & gas sector? Download my research for free here

Amplify the basic financial health of Energy Corp.

To begin an analysis of AMPY, it is helpful to look at the basic financial health of the business to try to identify any areas of concern we might have. The following analysis compares AMPY’s financial metrics to its 65 industry peers and shows us both the metric alone and where it stands against its peers. We then assign a score and a “level of concern” to guide our view.

We immediately see concerns about the company’s fast ratio and its ability to quickly cover its obligations in the “worst case scenario”, as well as lean EBITDA margins and near breakeven net margins.

Further on, we see some tight serviceability of the company’s bonds, which poses profitability risk, as well as much larger short-term obligations relative to the company’s short-term assets.

AMPY does not pay a dividend, so we don’t need to pay attention to that.

Finally, a review of the company’s future expectations, which again we see solid revenue growth (although considered low growth for the industry, but double digit growth is still acceptable for me), however, EPS projections are significantly negative, which raises concerns about the company’s ability to capitalize on high energy prices both now and in the future.

A screenshot of a spreadsheet for Amplify Energy Corp.

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Finally, we add up the scores and apply weights, giving us an overall baseline financial health score of a worrying 66.7%. I think AMPY has financial health risks in its liquidity, profitability and bond structure. While the business is not at risk of closing overnight, there are certainly profitability risks and potential downsizing risks.

A screenshot of a spreadsheet for Amplify Energy Corp.

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Amplify Energy Corp. Price Attractiveness Rating

There is perhaps more to like about AMPY in its valuation metrics.

If you are looking for the price value for $1 in earnings in a business, AMPY has a lot to offer, with $0.71 per dollar earned, there are some serious discounts to offer here. The same value holds for company valuation per dollar of revenue, with both metrics in the top 5% for value relative to the peer group. Unfortunately, that’s about where the good news ends.

The price-to-earnings ratio and book value suggest that AMPY is trading at a very large premium, and the price-to-free cash flow ratio puts the company in the bottom 30% of value companies.

We then weight those metrics on an arbitrary scale of importance, and find a weighted attractiveness score of 28.3%, indicating there’s not much to like here.

A screenshot of a spreadsheet for Amplify Energy Corp.

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Find a suitable valuation method for Amplify Energy Corp.

With basic financial health and an assessed attractiveness score, it’s time to try and find an appropriate pricing mechanism for AMPY, based on how investors value companies in the oil and gas sector. To do this, we consider the variation across all companies when looking at valuation metrics and their correlation with price/sales valuation and market cap correlation.

Having already gone through the process for Crescent Point Energy Corp. (CPG), we already know the weightings for each of the metrics we’re going to focus on.

A screenshot of a spreadsheet for Amplify Energy Corp.

Author

Unfortunately for AMPY, these metrics suggest the company is a bit overpriced relative to the peer group, with a target price down 15.77%. That said, this is a peer group analysis, not necessarily looking to uncover deep value in company operations that is not captured in these metrics.

A screenshot of a spreadsheet for Amplify Energy Corp.

Author

Last word

I would suggest that investors consider AMPY currently overvalued relative to the industry peer group, however, there is a very real possibility that industry valuations could shift and change in the coming months, and AMPY could have a deeper value in its operations not visible from financial statements.

I consider AMPY as a hold, pending the improvement of its balance sheet and its profitability. There are strong revenue numbers here that suggest the company could see some major price moves, but I should see a real turnaround in EBITDA first.

With my own views on the likelihood of an impending Fed-induced recession, coupled with the historic outperformance of the energy market in high inflation environments and geopolitical instability leading to higher energy prices, I see a period of opportunity ahead for energy companies.