Goodrich Petroleum (GDP) looks capable of paying down its debt significantly in 2021. Natural gas strip prices for 2021 have improved to around $2.90, and Goodrich believes that it can hold production flat year over year with a lower capex budget than 2020. This results in the potential for the company to generate close to $40 million in positive cash flow in 2021 if it goes with a maintenance capex budget. The improved outlook for debt paydown increases the estimated value of the stock to $10.

2021 Outlook At Current Strip Prices

NYMEX natural gas strip prices are currently at around $2.90 for 2021, which is an excellent price for Goodrich. If the company held 2021 production flat year over year versus 2020, it would generate around $133 million in revenues after hedges, assuming a negative $0.20 natural gas differential versus NYMEX.

Goodrich has a bit over half of its 2021 production hedged in this scenario at approximately $2.55.

Type

Barrels/Mcf

Realized $ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

120,000

$46.00

$6

Natural Gas [MCF]

50,380,000

$2.70

$136

Hedge Value

-$9

Total

$133

The company indicated that it could hold production flat year over year in 2021 with a lower capex budget than the $40-50 million it budgeted in 2020. If Goodrich can maintain production with $40 million in capital expenditures, then it would be able to generate $39 million in positive cash flow in this scenario. This is 36% of the company’s $109 million in debt at the end of Q2 2020.

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$ Million

Lease Operating Expense

$12

Production and Other Taxes

$5

Transportation and Processing

$18

Cash G&A

$14

Cash Interest

$5

CapEx

$40

Total Expenses

$94

2021 Outlook With Increased Production

If the outlook for natural gas prices remains strong for 2021, Goodrich could increase its production. A 10% increase in year-over-year production may be achieved with a $60 million capex budget.

In this scenario, the company would generate $147 million in revenues after hedges at $2.90 NYMEX natural gas.

Type

Barrels/Mcf

Realized $ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

120,000

$46.00

$6

Natural Gas [MCF]

55,490,000

$2.70

$150

Hedge Value

-$9

Total

$147

With a $60 million capex budget in this production growth scenario, Goodrich may still be able to generate $30 million in positive cash flow. Thus, it appears plausible that it can generate both production growth and significant positive cash flow in 2021. The company’s well-level economics appear to be quite excellent at $2.75-3.00 natural gas, although I do not expect that to be a sustainable natural gas price beyond 2021, and $2.50 appears to be a more reasonable longer-term natural gas price.

$ Million

Lease Operating Expense

$13

Production and Other Taxes

$5

Transportation and Processing

$20

Cash G&A

$14

Cash Interest

$5

CapEx

$60

Total Expenses

$117

Valuation And Other Notes

I am increasing my valuation estimate for Goodrich from $9 to $10. This increase is due to the improved debt paydown that it is now expected to achieve by the end of 2021. A value of $10 per share is less than 3.0x the company’s EBITDAX using $2.50 NYMEX natural gas and its projected year-end 2021 debt.

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Goodrich has also increased its inventory a bit with a deal to develop acreage near its Bethany-Longstreet position. The company noted that it has added 2,000 net acres in 2020 on a drill-to-earn basis, without any upfront cash outlay.

Conclusion

The improved outlook for natural gas prices in 2021 has Goodrich on track to reduce its debt by a substantial amount. It would probably be wise for Goodrich to add some additional hedges in the upper-$2 range, as that is a price that works quite well for the company given its Haynesville Shale wells can generate over 100% IRRs at that price.

Longer-term natural gas prices are unlikely to be quite as high, but Goodrich appears capable of generating solid returns with as low as $2.00 NYMEX gas now. The projected debt paydown over the next year will allow the company to maintain a healthy amount of liquidity and makes its stock worth an estimated $10.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GDP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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