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Amplify Energy Falls 5.4% in August: Here's How to Play the Stock
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Amplify Energy's (AMPY - Free Report) stock price has been under pressure since the beginning of August. Shares have dropped 5.4% this month, underperforming the sector and the S&P 500. Some of the energy explorer’s losses can be tied to declining oil prices on the back of slower economic growth in China. But with the company also faring worse than its peers like W&T Offshore (WTI - Free Report) and Ring Energy (REI - Free Report) , there could be more than meets the eye.
August Price Performance
Image Source: Zacks Investment Research
Is the selling off of this stock now over, or do need to wait and allow the dust to settle in order to get a clearer picture of just what the future might hold?
Let’s take a closer look at the company and try to find an answer.
About Amplify Energy
Founded in 2011, the Houston, TX-based operator has a strong presence in Oklahoma, Southern California and Texas, and has stakes such as Bairoil in the Rocky Mountains. Amplify Energy’s diversified operations — spread over five U.S. basins — mitigate pricing and operational disruptions, while its long-life, long-production assets generate sustainable cash flows.
An Earnings Miss for AMPY in 2Q
On Aug 7, 2024, Amplify Energy announced its second-quarter 2024 results and missed the Zacks Consensus Estimate by 45%. Earnings were just 17 cents per share compared to expectations of 31 cents. The latest disappointment adds to the company’s already troubling earnings surprise trend. AMPY missed the Zacks Consensus Estimate in three of the past four quarters.
Image Source: Zacks Investment Research
The soft headline numbers compelled analysts to lower this year's EPS consensus by 19% from $1.28 to $1.16, representing a 9.4% drop in annual profits.
In the second quarter, Amplify Energy's production was significantly impacted by unforeseen flooding in East Texas, which curtailed operations for over 100 days. This disruption, which hampered access to a large number of wells, underscores the vulnerability of the company’s operations to natural events. Such production interruptions not only reduce output but also expose Amplify to risks of missed revenue and earnings targets, particularly if similar events recur, potentially leading to downward pressure on the stock.
Other Issues Plaguing Amplify Energy
The company’s decision to allocate $60 million to $65 million in capital expenditures for 2024, with a heavy focus on the Beta project and non-operated drilling, raises concerns. This elevated spending, particularly with the majority concentrated in the first three quarters, could strain free cash flow.
Amplify Energy's net debt of approximately $117.5 million, with a net debt to EBITDA ratio of 1.2X, suggests limited financial flexibility. The slight increase in net debt, driven by changes in working capital and increased investment, indicates that the company may struggle to manage its debt efficiently if cash flow generation does not meet expectations.
Amplify Energy’s history of environmental incidents, particularly the 2021 oil spill off the California coast, also continues to cast a pall over its operations. The $96.5 million settlement from the shipping companies highlights the financial burden of such incidents. Additionally, the ongoing regulatory scrutiny and potential future environmental risks could lead to further liabilities or operational restrictions.
Amplify Energy is a component of the Zacks Oil and Gas - Exploration and Production - United States industry, which currently ranks in the bottom 17% out of more than 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next few months.
The gloomy outlook for the short term has pushed the AMPY stock lower.
It’s Not All Gloom and Doom for AMPY
Even though the weak quarterly results caused a post-earnings share plunge, there are, however, positives.
Amplify Energy’s successful development of the A50 well in the Beta field, which exceeded production expectations, highlights the untapped potential of this asset. Then, the company’s strategic decision to participate in high-return non-operated wells in East Texas and the Eagle Ford is poised to enhance cash flow in early 2025. Finally, Amplify Energy’s continued focus on reducing lease operating expenses should improve profitability.
Is Amplify Energy Cheap?
From a valuation perspective, while Amplify Energy might appear attractive relative to the industry, it is still trading above its 5-year median. Going by the price/earnings ratio, the company is trading at forward earnings multiple of 4.93, higher than its 5-year median of 4.65. We don’t think that this premium is justified given the company’s unexpected production disruptions and elevated capital allocation.
Image Source: Zacks Investment Research
Takeaway
On the horizon, Amplify Energy looks cheap but the company could end up being a value trap as its EPS outlook continues to weaken. The fact that AMPY is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns.
Therefore, based on the current setup, Amplify Energy’s stock is one to avoid.
Image: Bigstock
Amplify Energy Falls 5.4% in August: Here's How to Play the Stock
Amplify Energy's (AMPY - Free Report) stock price has been under pressure since the beginning of August. Shares have dropped 5.4% this month, underperforming the sector and the S&P 500. Some of the energy explorer’s losses can be tied to declining oil prices on the back of slower economic growth in China. But with the company also faring worse than its peers like W&T Offshore (WTI - Free Report) and Ring Energy (REI - Free Report) , there could be more than meets the eye.
August Price Performance
Is the selling off of this stock now over, or do need to wait and allow the dust to settle in order to get a clearer picture of just what the future might hold?
Let’s take a closer look at the company and try to find an answer.
About Amplify Energy
Founded in 2011, the Houston, TX-based operator has a strong presence in Oklahoma, Southern California and Texas, and has stakes such as Bairoil in the Rocky Mountains. Amplify Energy’s diversified operations — spread over five U.S. basins — mitigate pricing and operational disruptions, while its long-life, long-production assets generate sustainable cash flows.
An Earnings Miss for AMPY in 2Q
On Aug 7, 2024, Amplify Energy announced its second-quarter 2024 results and missed the Zacks Consensus Estimate by 45%. Earnings were just 17 cents per share compared to expectations of 31 cents. The latest disappointment adds to the company’s already troubling earnings surprise trend. AMPY missed the Zacks Consensus Estimate in three of the past four quarters.
The soft headline numbers compelled analysts to lower this year's EPS consensus by 19% from $1.28 to $1.16, representing a 9.4% drop in annual profits.
In the second quarter, Amplify Energy's production was significantly impacted by unforeseen flooding in East Texas, which curtailed operations for over 100 days. This disruption, which hampered access to a large number of wells, underscores the vulnerability of the company’s operations to natural events. Such production interruptions not only reduce output but also expose Amplify to risks of missed revenue and earnings targets, particularly if similar events recur, potentially leading to downward pressure on the stock.
Other Issues Plaguing Amplify Energy
The company’s decision to allocate $60 million to $65 million in capital expenditures for 2024, with a heavy focus on the Beta project and non-operated drilling, raises concerns. This elevated spending, particularly with the majority concentrated in the first three quarters, could strain free cash flow.
Amplify Energy's net debt of approximately $117.5 million, with a net debt to EBITDA ratio of 1.2X, suggests limited financial flexibility. The slight increase in net debt, driven by changes in working capital and increased investment, indicates that the company may struggle to manage its debt efficiently if cash flow generation does not meet expectations.
Amplify Energy’s history of environmental incidents, particularly the 2021 oil spill off the California coast, also continues to cast a pall over its operations. The $96.5 million settlement from the shipping companies highlights the financial burden of such incidents. Additionally, the ongoing regulatory scrutiny and potential future environmental risks could lead to further liabilities or operational restrictions.
Amplify Energy is a component of the Zacks Oil and Gas - Exploration and Production - United States industry, which currently ranks in the bottom 17% out of more than 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next few months.
The gloomy outlook for the short term has pushed the AMPY stock lower.
It’s Not All Gloom and Doom for AMPY
Even though the weak quarterly results caused a post-earnings share plunge, there are, however, positives.
Amplify Energy’s successful development of the A50 well in the Beta field, which exceeded production expectations, highlights the untapped potential of this asset. Then, the company’s strategic decision to participate in high-return non-operated wells in East Texas and the Eagle Ford is poised to enhance cash flow in early 2025. Finally, Amplify Energy’s continued focus on reducing lease operating expenses should improve profitability.
Is Amplify Energy Cheap?
From a valuation perspective, while Amplify Energy might appear attractive relative to the industry, it is still trading above its 5-year median. Going by the price/earnings ratio, the company is trading at forward earnings multiple of 4.93, higher than its 5-year median of 4.65. We don’t think that this premium is justified given the company’s unexpected production disruptions and elevated capital allocation.
Takeaway
On the horizon, Amplify Energy looks cheap but the company could end up being a value trap as its EPS outlook continues to weaken. The fact that AMPY is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns.
Therefore, based on the current setup, Amplify Energy’s stock is one to avoid.
AMPY currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.