Spindletop Oil & Gas - SPND

Spindletop Oil & Gas operates as an explorer and producer of oil and natural gas. Spindletop's reserves are mainly located in Texas, but the company owns interests in wells spread across 15 states. The company has been producing oil and natural gas since the 70s and has existed in its current state since a reorganization in 1985. The company also owns 26.1 miles of natural gas pipelines in Texas.

The company is controlled by husband and wife Chris and Michelle Mazzini. Chris Mazzini is a successful oilman and serves as chairman of the board and president. Michelle Mazzini is a lawyer and serves as the company's chief counsel. Together they own 77% of the shares outstanding. Another 9.2% of shares outstanding are owned by Nadel and Gussman Energy, LLC, leaving only a little over one million shares in the hands of all other shareholders.

Spindletop is reminiscent of another exploration & production company I have written about before, Reserve Petroleum. Both companies have long histories of successful exploration and profits, huge cash reserves and modest valuations. Like all nearly all commodities producers, Spindletop's product is completely undifferentiated from its competitors'. Energy producers are price-takers, lacking the market power to determine the pricing of their own product. Their only hope for earning excess profits is to operate more nimbly and more efficiently than competitors through superior knowledge and execution, anticipating changes in market conditions and keeping costs down. Spindletop has this to say about its competitive strategy in the latest annual report.

"We believe that a major attribute of the Company is its long history with, and extensive knowledge of, the Fort Worth Basin of Texas. Our technical staff has an average of over 20 years oil and gas experience, most of it in the Fort Worth Basin.

...From the 1990s through 2003, the Company took advantage of the lower product prices by cost effectively adding to its reserve base through value-priced acquisitions. We found that through selective purchases we could make producing property acquisitions that were more cost effective than drilling.

During this time period, the Company acquired a large number of operated and non-operated oil and gas properties in various states.

From 2003 through the fourth quarter of 2008, we returned our focus to a strategy of development drilling with a focus on our Barnett Shale acreage. Since 2009, we split our focus by looking for value-priced acquisitions combined with development drilling prospects. In the current economic climate, we are continuing our efforts to acquire producing properties and taking a more conservative approach to development of our leasehold acreage. We are looking at growth through acquisitions and limited drilling. With current lower natural gas prices and high costs to produce, we believe that it makes sense to carefully evaluate all our options and make sure that each transaction can be supported in today’s lower price environment."

This flexible approach to reserve development and production has produced consistent profits and cash flow. The company has earned a GAAP profit in each fiscal year since 1999.

Spindletop has used its steady profits to add to its oil and gas wells and properties. At the same time, the company's cash reserves have reached $8.41 million. The company's strong reserves enable it to act opportunistically to acquire attractive new wells and properties, and also to reduce production during periods of low energy prices without jeopardizing financial stability.

The company has compounded its book value per share admirably over the past decade, going from $0.40 per share at the end of 2002 to $2.24 at present. Return on equity averaged 19.73% over the time period.

Despite consistent profits and attractive returns on its equity base, Spindletop trades at a discount to book value and at depressed multiples of earnings and EBITDA. With 7.661 million diluted shares outstanding and a recent share price mid-point of $2.02, the company's market capitalization is $15.48 million. On trailing earnings of $2.42 million, trailing P/E is 6.40, extremely reasonable for a highly profitable, well-capitalized explorer & producer.

On an Enterprise Value/EBITDA basis, the company is even cheaper. With $7.63 million in net cash, the company's enterprise value is a paltry $7.58 million. Trailing EBITDA is $2.91 million, yielding an EV/EBITDA ratio of 2.60. Any way you look at it, Spindletop is extremely cheap.

The company's valuation is supported by its assets. The company has $6.84 million in net working capital and $11.29 in net oil and gas properties and equipment, as well as over $1 million in equity in its corporate headquarters building. Non-current liabilities total just $4.08 million against this $19+ million in assets for net asset value of at least $15 million, slightly under the company's market capitalization.

Spindletop shareholders have had a rough ride in recent years. As oil prices raged higher in early 2008, the company's share rose to a peak of $10.25, giving the company a market capitalization of $78 million. Trailing P/E stood at 28.2. At the time, the company's book value was just $10.69 million. Yes, the company's assets became more valuable as energy prices rose, but 7.3 times more valuable than their stated worth? Investors must be wary of investing in commodities companies when manias lead market values to decouple from accounting values.

Since the peak, the company's book value per share has increased from $1.40 to $2.24, even as the share prices has fallen by 81%. It's strange that investors who were once willing to buy in at 7.3 times book value and 28.2 times earnings now value the same company at 90% of book value and 6.4 times earnings.

Longer-term shareholders have done well. In 1995 and 1996, Spindletop's share price bounced between $.01 and $0.10. While investors who purchased at $0.01 have made a king's ransom, even investors who bought in at $0.10 have made over 20% annualized since 1996.

Spindletop's future success will depend on the company's fortunes in adding reserves at attractive prices and managing production to realize the highest revenues. Mr. Chris Mazzini and his team have done an admirable job thus far and at only 54, Mr. Mazzini seems likely to lead the company for many more years. Investors looking for a cheap, stable exploration & production company may find a lot to like with Spindletop.

Disclosure: No position.