Tuesday, June 30, 2020

Spindletop Oil & Gas Co (SPND): Tons Of Cash, No Debt, and Optionality

This one is short, sweet and to the point. If you are looking for a way to bet on the price of oil, own a cash box, or, have an inflation hedge, look no further than Spindletop Oil and Gas (SPND).

They have a load of assets, mainly consisting of cash, NO DEBT, and are trading for a significant discount to book value. They aren't loosing much money, either.

Current market cap is ~$12.5mm ($1.88/share)

As of the most recent 10Q:
CASH AND CDS OF $17,282,000 ($2.55/share) and this is BEFORE a PPP Loan.
Total assets of $23,519,000
NET BOOK of: $16,213,000 (or, $2.39/share)

There is obviously no chance of the company running out of cash. In this weird time in the oil market, that is of the utmost importance, and could really play into the hands of SPND, given the bankruptcies that are coming in the oil and gas industry

This is a company that is generating cash flow, but had a decline in book value last year of around a 1/2 million dollars. If the price trades up to book value, there is 30% upside... Even though the company is loosing some money, the price of oil has not been nearly what it could be. Especially if there is a bit of inflation. 


Look at their Oil and Gas Properties- they are on the books, using the full cost method, of $27mm, but net out to $2.12mm, because of $25.7mm in accrued depreciation. Now, I have no clue what these assets are worth, but, I am guessing that it is a lot more than $2.12mm, since the company produced oil and gas revenues of $4.63mm, $5.85mm, and $4.49mm in the past few years... The company seems to have a fair bit of natural gas rights, which in my mind, is preferable given the amount of plants that use natural gas, right now. Natural gas is kind of the "in popularity" form of energy. 

On the company's balance sheet, their office building is carried at $1.276mm (net of depreciation). 

Here is the card from the Tax Assessor. The County has it assessed for $1.55mm. 

Given that the building was purchased in 2004, I am assuming that it is worth significantly more than it is on the books, or the tax rolls for. The main reason being, that generally, assessors use cap rates to assess property. SPND has a unique setup, in that they reside in their HQ (occupying 12,759 sq ft of the 46,286 sq ft building), but lease out a significant portion of it. As such, they only get 248,000 a year in rental revenue. If they leased out their part of the space at the same rate of the lease out 33,527 sq ft, at the rate of $7.40/Ft, that would bring rental revenue up to $342,500/year! Thats a nearly 40% upside! tack that on top of the assessed $1.55mm value of the building that has a below market total rent, and you get a value of $2.17mm! In all likelihood, this estimate is even low. I'm gonna guess that the building is worth in excess of $3mm, or, in excess of ~1/4 the market cap.

Controlling shareholder: Chris & Michelle Mazzini, own an astounding 86.65% of the company's common stock, so, the public float is relatively low. This makes me think that it would make a ton of sense for them to take this private, which, even if they don't pay a premium to book value, will reward shareholders decently well, based on today's prices. 

The company also will take advantage of buying back shares from time to time. In the 4th quarter of 2018, the company bought back over $250K in shares at $2.13/share! That not only represents a significant amount of outstanding shares, but, also represents a premium to where they are trading now. In the 2nd quarter of 2020 (in the subsequent events section of this 10Q​) SPND also repurchased over $50K in stock for $1.25/share. Again, a hefty amount of the float.

If that isn't enough, the company also raise their high cash levels even more, with a PPP loan of just over $400K...

This company really starts to do some impressive things financially with oil revenues the higher oil goes, which also makes its property worth more. Let there be no doubt about it. The reserves of the company are being depleted. They recently reassessed their BOE to under 1 million barrels, and, it would stand to reason that the fewer barrels left in the ground, the harder they would be to get out of the ground making their cost go up, and margins go down. I am under the impression that the quality of the company's assets are not the best, but that they are excellent at extracting value out of them. With the coming wave of oil and gas bankruptcies, this could be a compelling play, because of them being able to pick up assets on the cheap. 

In this crazy time, I can think of worse things than owning this company that has a HUGE cash cushion (providing a margin of safety), real estate worth around 1/4 of the market cap, and a controlling shareholder who is pretty incentivized to take the company private. PLUS, you get a lot of other items thrown on top, for free.

Disclosure: I am long SPND.

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