Sable Offshore

Legal Quagmire Hides an Exceptionally Valuable Asset

Market Cap: $2,494,632,688

P/B: 8.91x (understated book value)

Net Debt: $665,535,000

EV: $3,160,167,688

Shares Outstanding: 100,000,000

Business Overview

Sable Offshore, based in Houston Texas, is the owner of the Santa Ynez Unit (SYU) producing and transporting crude oil and natural gas offshore Santa Barbra 10 miles offshore in the Gaviota coast. The offshore assets are a combination of 16 federal leases and 76,000 acres off the coast of Santa Barbra in water depth of between 900 – 1200 feet. Sables’ offshore asset base operates three platforms, Hondo, Harmony, and Heritage including 112 wells with 90 producing wells, 12 injectors, 10 idle with an additional 102 undrilled opportunities. The final piece of the asset is the 123-mile-long pipeline, otherwise known as Line 324 (10.8 miles) and Line 324 (113 miles) that extends from the Gaviota based pump station in Santa Barbra County to the Pentland sales point in Kern County. Ignoring, for now, the legal pretzel that Sable has had to work its way through, the opportunity to produce oil and gas offshore for Sable is incredibly lucrative. The assets that Sable owns have lifting costs per barrel of between $11.00 - $13.50 per barrel. We estimate that all in cost per barrel for Sable is $21 per barrel (Lifting Cost + GPT + G&A) which puts Sables oil at 50% cheaper than current break-even costs for onshore shale in the Permian Basin. In terms of quality of production, the oil cut on Sables offshore production is 86% which is exceptional, rounding out an asset value that we believe is worth $7B-$10B at a reasonable assumption of oil pricing ($65 - $70 Brent Crude). Finally, an important piece to the thesis is Jim Flores, the Chief Executive, and founder who owns 10% of the business personally. Jim is an exceptional oil and gas manager and has done a phenomenal job navigating the mine field that is the California regulatory process while simultaneously overseeing the repair of 123 miles of pipeline.

Historical Overview

Sable Offshore as we know it today began as Flame Acquisition Corp and was originally formed as a Special Purpose Acquisition Company or SPAC and merged into an $883M deal to create the existing entity. However, before we get into Sable today it is essential that one understands the background of this asset that dates to the 1980s and the Celeron Agreement marking the original commissioning of the pipeline.

The Celeron Agreement

In 1988 a legal battle over the construction of a new pipeline in Santa Barbra County (the county) set the stage for a barrage of legal feuds that lead us to the present day. Celeron Pipeline Co. V County of Santa Barbra was a long dated, fierce legal battle over the ability to install and operate an interstate pipeline. This lawsuit led to a settlement called “The Celeron Agreement” that would limit the scope of local authority over the pipeline and associated safety features. Celeron Pipeline Co. (an affiliate of Exxon) constructed a 24-inch pipeline that attached Exxon’s Santa Ynez offshore platforms to the onshore pipeline processing facility in Las Flores Canyon. From the period of 1981 to 2014 the SYU assets produced 671MMboe of oil and gas, averaging 27MMcf natural gas and 29MBbls of oil and condensates per day.

While the background of the Celeron agreement is helpful, it is equally important to look at the document and what it says. In a lot of cases, some of the historical background I do is used simply to give context on the business and show how it has changed over time. In the case of Sable, this 1988 document remains a key piece of evidence used in Sable’s favor to move the pipeline forward. For example, this agreement limits the scope of local regulators on the pipeline and defers to the federal government and FHLPSA. The agreement is accompanied by Coastal Development Permits that were issued in the 1980s that allow Sables to remediate and repair the pipeline and avoid the coastal commission’s current claims of the need to reapply for a CDP. This is key because if the CDP was found to be limited in scope, and Sable would have to apply for a new permit and go through environmental review, they would never get it. It is important to understand California regulators “win” in their minds by delaying their opponents as long as they can. With that said, let us break the agreement.