In a March 30 research note, analyst John White reported that ROTH Capital Partners revised its rating and target price on Goodrich Petroleum Corp. (GDP:NYSE) due to its expected "free cash flow, credit strength and a high percentage of hedged production."
ROTH has a Buy rating and a $6.50 per share price target on Goodrich Petroleum, the stock of which is trading now at around $4.26 per share.
White wrote that Texas-based Goodrich Petroleum has a favorable outlook for 2020 because it is 99% gas, and gas-weighted names are better positioned now than oil-weighted ones, assuming the Organization of the Petroleum Exporting Countries keeps adding oil to a market in which demand for it is decreasing. If this OEPC trend continues, U.S. oil production should drop significantly and thereby result in less associated gas production, which ultimately should support natural gas prices.
That said, White noted, gas prices also face near-term headwinds. Specifically, a U.S. recession would dampen gas demand from the industrial sector, which is what happened during 2008 and 2009 of The Great Recession, when total U.S. natural gas consumption decreased 2.1%. of that decrease, in the industrial sector it dropped 7.5% and in the residential, 2.3%. However, natural gas prices were higher then, averaging $6.53 per million British thermal units ($6.53/MMBtu) Henry Hub versus $1.60/MMBtu today, "which may provide a cushion for U.S. gas demand in the current situation," commented White.
Regarding 2020 cash flow, according to White, ROTH calculated that Goodrich Petroleum will generate about $15.7 million assuming an average West Texas Intermediate oil price and an average Henry Hub gas price of $31.53 per barrel and $1.90/MMBtu, respectively.
"This [cash flow] will allow a reduction of the bank revolver from $92.9 million as of Dec. 31, 2019 to $77.2 million as of Dec. 31, 2020," noted White.
The facts that Goodrich should be able to reduce the revolver and does not require further financing mean its bank borrowing base, which ROTH calculated to be about $108 million this season, is in "good shape," White added.
Finally, concerning hedges, the oil and gas company hedged roughly half of the natural gas volumes ROTH estimated for 2020 and did so at a blended average price of about $2.60/MMBtu.
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Disclosures from ROTH Capital Partners, Goodrich Petroleum Corp., Company Note, March 30, 2020
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
ROTH makes a market in shares of Goodrich Petroleum Corp. and as such, buys and sells from customers on a principal basis.
A Research Analyst and/or a member of the Analyst's household own(s) debt or equity securities of Goodrich Petroleum Corp. stock.
ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months.
