Intrinsic value of Sanchez Production Partners - SPP

Previous Close

$14.00

  Intrinsic Value

$6.72

stock screener

  Rating & Target

str. sell

-52%

  Value-price divergence*

+241%

Previous close

$14.00

 
Intrinsic value

$6.72

 
Up/down potential

-52%

 
Rating

str. sell

 
Value-price divergence*

+241%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of SPP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  4.41
  13.00
  12.20
  11.48
  10.83
  10.25
  9.72
  9.25
  8.83
  8.44
  8.10
  7.79
  7.51
  7.26
  7.03
  6.83
  6.65
  6.48
  6.33
  6.20
  6.08
  5.97
  5.88
  5.79
  5.71
  5.64
  5.57
  5.52
  5.47
  5.42
  5.38
Revenue, $m
  71
  80
  90
  100
  111
  123
  135
  147
  160
  173
  188
  202
  217
  233
  249
  267
  284
  303
  322
  342
  363
  384
  407
  430
  455
  481
  507
  535
  565
  595
  627
Variable operating expenses, $m
 
  226
  254
  283
  313
  345
  379
  414
  451
  489
  528
  569
  612
  657
  703
  751
  801
  853
  907
  963
  1,021
  1,082
  1,146
  1,212
  1,282
  1,354
  1,429
  1,508
  1,590
  1,677
  1,767
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  97
  226
  254
  283
  313
  345
  379
  414
  451
  489
  528
  569
  612
  657
  703
  751
  801
  853
  907
  963
  1,021
  1,082
  1,146
  1,212
  1,282
  1,354
  1,429
  1,508
  1,590
  1,677
  1,767
Operating income, $m
  -26
  -146
  -164
  -182
  -202
  -223
  -244
  -267
  -291
  -315
  -341
  -367
  -395
  -424
  -453
  -484
  -516
  -550
  -585
  -621
  -659
  -698
  -739
  -782
  -827
  -873
  -922
  -973
  -1,026
  -1,081
  -1,140
EBITDA, $m
  10
  -115
  -130
  -144
  -160
  -177
  -194
  -212
  -230
  -250
  -270
  -291
  -313
  -336
  -359
  -384
  -409
  -436
  -463
  -492
  -522
  -553
  -586
  -619
  -655
  -692
  -730
  -771
  -813
  -857
  -903
Interest expense (income), $m
  4
  5
  6
  7
  8
  9
  10
  11
  12
  13
  14
  16
  17
  18
  20
  21
  23
  24
  26
  27
  29
  31
  33
  35
  37
  39
  42
  44
  46
  49
  52
Earnings before tax, $m
  19
  -151
  -170
  -189
  -210
  -232
  -254
  -278
  -303
  -328
  -355
  -383
  -412
  -442
  -473
  -505
  -539
  -574
  -611
  -649
  -688
  -729
  -772
  -817
  -864
  -912
  -963
  -1,017
  -1,072
  -1,130
  -1,191
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  19
  -151
  -170
  -189
  -210
  -232
  -254
  -278
  -303
  -328
  -355
  -383
  -412
  -442
  -473
  -505
  -539
  -574
  -611
  -649
  -688
  -729
  -772
  -817
  -864
  -912
  -963
  -1,017
  -1,072
  -1,130
  -1,191

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  540
  608
  682
  760
  843
  929
  1,019
  1,114
  1,212
  1,314
  1,421
  1,531
  1,646
  1,766
  1,890
  2,019
  2,153
  2,293
  2,438
  2,589
  2,747
  2,911
  3,082
  3,260
  3,446
  3,641
  3,844
  4,056
  4,277
  4,509
  4,752
Adjusted assets (=assets-cash), $m
  539
  608
  682
  760
  843
  929
  1,019
  1,114
  1,212
  1,314
  1,421
  1,531
  1,646
  1,766
  1,890
  2,019
  2,153
  2,293
  2,438
  2,589
  2,747
  2,911
  3,082
  3,260
  3,446
  3,641
  3,844
  4,056
  4,277
  4,509
  4,752
Revenue / Adjusted assets
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
Average production assets, $m
  268
  303
  340
  379
  420
  463
  508
  555
  604
  655
  708
  763
  820
  880
  942
  1,006
  1,073
  1,143
  1,215
  1,290
  1,369
  1,450
  1,536
  1,625
  1,717
  1,814
  1,915
  2,021
  2,131
  2,247
  2,368
Working capital, $m
  6
  6
  6
  7
  8
  9
  9
  10
  11
  12
  13
  14
  15
  16
  17
  19
  20
  21
  23
  24
  25
  27
  28
  30
  32
  34
  36
  37
  40
  42
  44
Total debt, $m
  151
  174
  199
  225
  252
  281
  311
  343
  376
  410
  445
  482
  521
  561
  602
  645
  690
  737
  785
  836
  888
  943
  1,000
  1,060
  1,122
  1,187
  1,255
  1,326
  1,400
  1,477
  1,558
Total liabilities, $m
  180
  203
  228
  254
  281
  310
  340
  372
  405
  439
  474
  511
  550
  590
  631
  674
  719
  766
  814
  865
  917
  972
  1,029
  1,089
  1,151
  1,216
  1,284
  1,355
  1,429
  1,506
  1,587
Total equity, $m
  360
  405
  454
  506
  561
  619
  679
  742
  807
  875
  946
  1,020
  1,096
  1,176
  1,259
  1,345
  1,434
  1,527
  1,624
  1,724
  1,829
  1,939
  2,053
  2,171
  2,295
  2,425
  2,560
  2,701
  2,849
  3,003
  3,165
Total liabilities and equity, $m
  540
  608
  682
  760
  842
  929
  1,019
  1,114
  1,212
  1,314
  1,420
  1,531
  1,646
  1,766
  1,890
  2,019
  2,153
  2,293
  2,438
  2,589
  2,746
  2,911
  3,082
  3,260
  3,446
  3,641
  3,844
  4,056
  4,278
  4,509
  4,752
Debt-to-equity ratio
  0.419
  0.430
  0.440
  0.440
  0.450
  0.450
  0.460
  0.460
  0.470
  0.470
  0.470
  0.470
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.480
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
Adjusted equity ratio
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666
  0.666

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  19
  -151
  -170
  -189
  -210
  -232
  -254
  -278
  -303
  -328
  -355
  -383
  -412
  -442
  -473
  -505
  -539
  -574
  -611
  -649
  -688
  -729
  -772
  -817
  -864
  -912
  -963
  -1,017
  -1,072
  -1,130
  -1,191
Depreciation, amort., depletion, $m
  36
  30
  34
  38
  42
  46
  51
  55
  60
  65
  71
  76
  82
  88
  94
  101
  107
  114
  121
  129
  137
  145
  154
  162
  172
  181
  192
  202
  213
  225
  237
Funds from operations, $m
  37
  -121
  -136
  -151
  -168
  -185
  -204
  -222
  -242
  -263
  -284
  -307
  -330
  -354
  -379
  -405
  -432
  -460
  -489
  -519
  -551
  -584
  -619
  -654
  -692
  -731
  -772
  -815
  -859
  -906
  -955
Change in working capital, $m
  -3
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
Cash from operations, $m
  40
  -121
  -136
  -152
  -169
  -186
  -204
  -223
  -243
  -264
  -285
  -308
  -331
  -355
  -380
  -406
  -433
  -461
  -490
  -521
  -553
  -586
  -620
  -656
  -694
  -733
  -774
  -817
  -861
  -908
  -957
Maintenance CAPEX, $m
  0
  -27
  -30
  -34
  -38
  -42
  -46
  -51
  -55
  -60
  -65
  -71
  -76
  -82
  -88
  -94
  -101
  -107
  -114
  -121
  -129
  -137
  -145
  -154
  -162
  -172
  -181
  -192
  -202
  -213
  -225
New CAPEX, $m
  -6
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -51
  -53
  -55
  -57
  -60
  -62
  -64
  -67
  -70
  -72
  -75
  -78
  -82
  -85
  -89
  -93
  -97
  -101
  -106
  -110
  -115
  -121
Cash from investing activities, $m
  -139
  -62
  -67
  -73
  -79
  -85
  -91
  -98
  -104
  -111
  -118
  -126
  -133
  -142
  -150
  -158
  -168
  -177
  -186
  -196
  -207
  -219
  -230
  -243
  -255
  -269
  -282
  -298
  -312
  -328
  -346
Free cash flow, $m
  -99
  -183
  -204
  -225
  -248
  -271
  -296
  -321
  -348
  -375
  -404
  -434
  -464
  -496
  -530
  -564
  -600
  -638
  -677
  -718
  -760
  -804
  -850
  -899
  -949
  -1,001
  -1,056
  -1,114
  -1,174
  -1,237
  -1,302
Issuance/(repayment) of debt, $m
  46
  23
  25
  26
  28
  29
  30
  31
  33
  34
  36
  37
  38
  40
  41
  43
  45
  47
  49
  50
  53
  55
  57
  60
  62
  65
  68
  71
  74
  77
  81
Issuance/(repurchase) of shares, $m
  96
  197
  219
  241
  265
  289
  314
  341
  368
  397
  426
  457
  488
  521
  556
  591
  628
  667
  707
  749
  793
  838
  886
  936
  988
  1,042
  1,099
  1,158
  1,220
  1,285
  1,353
Cash from financing (excl. dividends), $m  
  137
  220
  244
  267
  293
  318
  344
  372
  401
  431
  462
  494
  526
  561
  597
  634
  673
  714
  756
  799
  846
  893
  943
  996
  1,050
  1,107
  1,167
  1,229
  1,294
  1,362
  1,434
Total cash flow (excl. dividends), $m
  38
  37
  40
  42
  45
  47
  49
  51
  53
  55
  58
  60
  62
  65
  67
  70
  73
  76
  79
  82
  85
  89
  93
  97
  101
  105
  110
  115
  120
  126
  131
Retained Cash Flow (-), $m
  -216
  -197
  -219
  -241
  -265
  -289
  -314
  -341
  -368
  -397
  -426
  -457
  -488
  -521
  -556
  -591
  -628
  -667
  -707
  -749
  -793
  -838
  -886
  -936
  -988
  -1,042
  -1,099
  -1,158
  -1,220
  -1,285
  -1,353
Prev. year cash balance distribution, $m
 
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -159
  -179
  -199
  -220
  -242
  -265
  -290
  -315
  -341
  -368
  -397
  -426
  -457
  -488
  -521
  -556
  -591
  -629
  -667
  -708
  -750
  -793
  -839
  -887
  -936
  -989
  -1,043
  -1,100
  -1,159
  -1,221
Discount rate, %
 
  5.90
  6.20
  6.50
  6.83
  7.17
  7.53
  7.91
  8.30
  8.72
  9.15
  9.61
  10.09
  10.60
  11.13
  11.68
  12.27
  12.88
  13.52
  14.20
  14.91
  15.65
  16.44
  17.26
  18.12
  19.03
  19.98
  20.98
  22.03
  23.13
  24.29
PV of cash for distribution, $m
 
  -150
  -159
  -165
  -169
  -171
  -172
  -170
  -166
  -161
  -153
  -145
  -134
  -123
  -112
  -99
  -87
  -75
  -64
  -54
  -44
  -35
  -28
  -22
  -16
  -12
  -9
  -6
  -4
  -3
  -2
Current shareholders' claim on cash, %
  100
  56.1
  31.6
  18.0
  10.3
  5.9
  3.4
  2.0
  1.2
  0.7
  0.4
  0.2
  0.1
  0.1
  0.1
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0

Sanchez Production Partners LP engages in the acquisition, development, ownership, and operation of midstream and other energy production assets in the United States. The company’s Exploration and Production segment explore for and produces crude oil and natural gas. It owns producing reserves in the Eagle Ford Shale in South Texas, the Gulf Coast region of Texas and Louisiana, and across various basins in Oklahoma and Kansas. As of December 31, 2015, this segment had proved reserves of approximately 11.6 million barrels of oil equivalent. Its Midstream segment engages in the gathering, processing, and transportation of crude oil, natural gas liquids, and natural gas. This segment owns an oil and natural gas gathering and processing system with approximately 150 miles of gathering lines, compressors, tanks, vessels, and other miscellaneous production infrastructure in the Eagle Ford Shale in Dimmit and Webb Counties, Texas. Sanchez Production Partners GP LLC serves as the general partner of the company. The company was founded in 2005 and is headquartered in Houston, Texas.

FINANCIAL RATIOS  of  Sanchez Production Partners (SPP)

Valuation Ratios
P/E Ratio 9.9
Price to Sales 2.7
Price to Book 0.5
Price to Tangible Book
Price to Cash Flow 4.7
Price to Free Cash Flow 5.5
Growth Rates
Sales Growth Rate 4.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 200%
Cap. Spend. - 3 Yr. Gr. Rate -17.8%
Financial Strength
Quick Ratio NaN
Current Ratio 0.6
LT Debt to Equity 41.9%
Total Debt to Equity 41.9%
Interest Coverage 6
Management Effectiveness
Return On Assets 4.5%
Ret/ On Assets - 3 Yr. Avg. -10.2%
Return On Total Capital 5%
Ret/ On T. Cap. - 3 Yr. Avg. -19%
Return On Equity 7.5%
Return On Equity - 3 Yr. Avg. -30.6%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 59.2%
Gross Margin - 3 Yr. Avg. 63.8%
EBITDA Margin 83.1%
EBITDA Margin - 3 Yr. Avg. -17.6%
Operating Margin -36.6%
Oper. Margin - 3 Yr. Avg. -68.2%
Pre-Tax Margin 26.8%
Pre-Tax Margin - 3 Yr. Avg. -53.9%
Net Profit Margin 26.8%
Net Profit Margin - 3 Yr. Avg. -53.9%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 231.6%

SPP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the SPP stock intrinsic value calculation we used $71 million for the last fiscal year's total revenue generated by Sanchez Production Partners. The default revenue input number comes from 2016 income statement of Sanchez Production Partners. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our SPP stock valuation model: a) initial revenue growth rate of 13% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.9%, whose default value for SPP is calculated based on our internal credit rating of Sanchez Production Partners, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Sanchez Production Partners.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of SPP stock the variable cost ratio is equal to 281.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for SPP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Sanchez Production Partners.

Corporate tax rate of 27% is the nominal tax rate for Sanchez Production Partners. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the SPP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for SPP are equal to 377.5%.

Life of production assets of 10 years is the average useful life of capital assets used in Sanchez Production Partners operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for SPP is equal to 7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $360 million for Sanchez Production Partners - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 13.395 million for Sanchez Production Partners is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Sanchez Production Partners at the current share price and the inputted number of shares is $0.2 billion.

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Stock chart of SPP Financial statements of SPP
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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