Sable Offshore Corp ($2.13B market-cap) is focused on getting the Santa Ynez oil extraction unit, in federal waters offshore California, back in operation. SOC bought idle offshore oil fields off the coast of California along with some related plants and pipelines from Exxon for $643 million, and went public in February 2024 via a SPAC merger. The sale included three offshore platforms, the Las Flores Canyon processing facility, and the Plains All American Pipeline.

Sable’s oil field in Santa Barbara has a history of being very productive. In the 1990s, Exxon operated the Santa Ynez field and it was one of their most productive, to the extent that Exxon was the largest taxpayer in Santa Barbara County producing roughly 15% of all oil in California.

Sable is now planning to restart production at approximately 28,100 barrels of oil and gas per day in 1Q25. Based on the latest IR:

• Sable’s current NAV is $10B+, excluding the 1400 acre Santa Barbara real estate and the pipelines

 

• Based on the run rate of 10 million barrels of oil per year, estimated cash flow generation of $374M per year  

However, the stock currently trades at a $2.6B EV. One way to interpret this is that the market is applying a 26% likelihood that Sable receives all regulatory approvals and permits. That does not sound very optimistic, and for good reason. The site that is under question caused a huge oil spill back in 2015 and was widely covered by the local media, the pipeline has been sitting idle ever since. The California coastal commission (CCC) and the office of the state fire marshal (OSFM) rightly have safety concerns that the company needs to work through. 

Since 2015, Exxon has paid $70M a year to maintain these oil platforms, and ensued a legal battle with Santa Barbara trying to restart production. While the platforms are in federal waters, the pipeline and the holding tanks are in Santa Barbara, and local authorities have made it extremely difficult to restart operations. Since then, California has increasingly become a very unattractive regulatory landscape for major oil companies. Occidental Petroleum spun off its California assets and Chevron entirely exited operations in California.

This is where Jim Flores entered the picture, an oil and gas entrepreneur who ran an oil company called Plains Exploration and Production with a successful track record of running offshore platforms, the company was later acquired. Jim raised a SPAC, contributing $33M of his own money along with a juicy PIPE, and took the Santa Barbara operations off of Exxon’s hands to form Sable Offshore Corporation, which has two years to get the operations up and running. If it succeeds, Exxon gets $720M plus interest. If it fails, however, Exxon will get its (very valuable) property back. This sale meant an exit from California for Exxon, while a bargain purchase for Jim Flores.

However, A big overhang for Jim are the heaps of regulatory approvals and permits standing in the way of production. California isn’t a state known for being friendly to fossil fuel operators, and betting on a race against time with the regulators doesn’t sound very attractive on paper. However, things started to look up for Sable this past September. Santa Barbara approved Sable’s pipeline repair plans, after facing a lawsuit of $10B from Exxon and Sable. In October, however, the CCC issued a cease and desist for all operations to Sable, demanding more safety compliance. Later on December 17th, the OSFM also cleared the restart hinting that Sable might be getting closer to getting clearance from the CCC and a line in sight to a full restart.

While there is theoretically a risk of permanent capital loss, the potential upside following a successful restart can be immense. Jim Flores and his family own approximately 20% of the company. The pipeline has the potential to generate recurring revenue and a high free cash flow yield, exceeding conservative management projections.

Disclosure: I own shares of SOC