On Tuesday, Jefferies, a global investment banking firm, initiated coverage on Sable Offshore Corp. (NYSE: SOC) stock with a Buy rating and a price target of $19.00.
The firm highlighted the company's strong free cash flow (FCF) potential due to its unique offshore asset, known as SYU, located in federal waters off the coast of California.
The analyst pointed to the longevity and stable production of the SYU asset as key factors that should support Sable Offshore's ability to generate robust FCF. Additionally, the analysis included a net asset value (NAV) calculation, suggesting that the current stock price of SOC implies an approximate 29% discount rate (DR).
The discount on Sable Offshore's shares was attributed to regulatory challenges the company has faced. However, with the recent approval of pipelines Line 324/325 by the Office of the State Fire Marshal (OSFM), the company's next step is to acquire permits from Santa Barbara County for the installation of safety valves.
A hearing on Sable Offshore's lawsuit against the county is scheduled for August 20, 2024, and Jefferies anticipates a settlement that will lead to the necessary permit approvals.
Management at Sable Offshore expects that the SYU asset will recommence operations in early fourth quarter of 2024. The company is under a deadline to reactivate its assets and settle a payment-in-kind (PIK) loan from Exxon Mobil (NYSE:XOM) by January 2026 to prevent XOM from reclaiming the assets. This situation was described by the analyst as creating a higher risk/reward profile for the company.
In other recent news, Sable Offshore Corp.'s environmental plan for 2021 has been upheld by the California Office of State Fire Marshall (OSFM). The decision comes after Sable Offshore's efforts to align with California State Assembly Bill 864, aimed at minimizing the environmental impacts of oil spills.
Following the denial of necessary permits by Santa Barbara County, Sable Offshore submitted a Supplemental Plan which the OSFM deemed less effective in environmental protection compared to the original 2021 Plan.
Currently, Sable Offshore and Santa Barbara County are in discussions to address the permit denial, which has resulted in ongoing litigation. The OSFM's reaffirmation of the 2021 Plan's effectiveness in mitigating potential environmental damage underscores these negotiations.
In accordance with the OSFM's directive, Sable Offshore is moving forward with pipeline repairs, the construction of new pump stations, and the establishment of control facilities for lines 324 and 325.
These developments are in preparation for the anticipated restart of the Las Flores Canyon processing facilities and the associated Santa Ynez Unit offshore production platforms.
The company aims to resume operations in late 2024. These are the latest developments in the company's ongoing efforts to adhere to environmental regulations.
InvestingPro Insights
As Sable Offshore Corp. (NYSE: SOC) positions itself for a potential return to operations with the SYU asset, the real-time data from InvestingPro paints a nuanced picture of the company's financial health. The market capitalization of Sable Offshore stands at $853.76 million, reflecting investors' current valuation of the company. Despite challenges, Sable Offshore has seen a strong return over the last three months, with a 28.77% price total return, indicating a positive investor sentiment in the short term.
However, the InvestingPro Tips suggest caution. The company's gross profit margins are considered weak, with the last twelve months as of Q1 2024 showing a meager $0.16 million in gross profit. Additionally, analysts are not optimistic about profitability in the near term, expecting a net income drop this year, and the company has not been profitable over the last twelve months. On the positive side, Sable Offshore's liquid assets exceed its short-term obligations, which could provide some financial flexibility as it navigates regulatory hurdles and works towards resuming operations at SYU.
For investors considering Sable Offshore as an addition to their portfolio, it's worth noting that the company does not currently pay a dividend, which might deter those seeking regular income. However, for those with an appetite for risk and a focus on capital gains, the potential upside reflected in the recent price movements and Jefferies' price target could be appealing. Further insights and additional InvestingPro Tips can be explored by investors seeking more in-depth analysis at https://www.investing.com/pro/SOC.
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