《Kontrarian Korner》Ben Kelleran 谈 Sable Offshore（$SOC）

You’re about to listen to the Yet Another Value Podcast with your host, Andrew Walker. Today’s podcast is about a company that I have been completely torn on since it first emerged as a SPAC buying a bunch of oil and gas investments from ExxonMobil a few years ago. I know those words are huge red flags, and that’s why I’ve been so torn. You can see multibagger upside; you can see zero downside. It’s really interesting.

My guest today is Ben Kelleran from Contrarian Corner. He has done a lot of work on it and is talking to a lot of people. He’s very up to speed on the process. We start with a broad overview, dive deep into the minutiae of the case, and everything in between. Full disclosure: I have a small tracking position in it. Please listen to the disclaimer at the very end of this podcast.

We’re going to the podcast with Ben on SOC. But first, a word from our sponsor. Today’s podcast is sponsored by DUPA. Are you still manually updating your financial models after earnings? Ask yourself why. Every quarter, analysts lose hours copying numbers from filings, adjusting templates, and double-checking for errors. It’s tedious, it’s time-consuming, and it’s a terrible use of your time. DUPA changes that. They automate your model updates with near-real-time precision using AI that’s been trained on thousands of company filings across every sector. The result: you get a fully updated model in your format with your logic, faster than ever before. Every KPI, every footnote, every guidance figure exactly where you need it, with source links built in. So stop wasting time on data entry and start focusing on what really matters: analysis, insights, and alpha generation. DUPA doesn’t just save your time; it gives you time back where it matters most. Book a demo with the DUPA team today at dupa.com/demo. That’s dupa d-o-pa.com/demo. All right. Hello and welcome to the Yet Another Value Podcast. With me today, I’m happy to have Ben Kelleran from Contrarian Corner. Ben, how’s it going?

Yeah, thanks for having me on. I’m a longtime listener, first-time caller, so I appreciate you having me.

I was so excited to say “Contrarian Corner,” I forgot to say I’m your host, Andrew Walker, and everything. I’m way out of sorts. We’ve got a really interesting podcast. I will tell you, this is a stock that I’ve been—it’s one of the stocks I’ve been most torn up over the past year or more. We’ll get to the stock in a second.

Before I get there, a quick disclaimer: Nothing on this podcast is investment advice. That’s always true, and particularly true today, maybe because there is a little bit of binary risk here. I’ll disclose that we have a tracking position in it, so it won’t kill us one way or the other. If it goes to $1,000, we’ll be kicking ourselves for having a tracking position. If it goes to zero, we’ll be kicking ourselves for having a tracking position. So that’s my disclosure.

Ben, the company here is Sable Offshore. The ticker is SOC. It’s probably—definitely—the most popular energy stock on retail FinTwit out there. As I said, I’ve been following it for a long time, and I’ve been torn every which way on it. I’d love to start with you: What is Sable, and why is it so interesting?

The short version on Sable is that they are in the process of bringing online the best oil and gas asset in the U.S. over the last several decades. It’s called the Santa Ynez Unit, and I think it’s going to be the closest thing to Saudi economics in the U.S. once they ramp production. That’s the reason I think a lot of people are bullish. There are a lot of legal and regulatory hoops they’ve had to jump through, and a lot of complications. We even saw some of that today as we’re recording.

The short version is that it’s basically the exact opposite of assets in the Permian, where it’s a low-decline-rate asset with a long reserve life and a very low cost to produce. I think they have 50, 60, maybe 70 years of reserves in place, and I think they’re going to be producing for a long time once they weave their way through the legal and regulatory hoops. I know a lot of people look for high-quality businesses and basically avoid energy altogether for that reason. But if you look at an asset like this, I think there’s a lot of reason to believe that it can be a very high-quality business for a very long time.

I think one of the most important things here is the background. If I’m remembering my dates correctly, Sable comes out of Flame Acquisition Corp., a SPAC, and they announced a deal to buy the assets you were talking about from ExxonMobil in—I think it was late 2023 when they announced the deal—and the SPAC deal closes in 2024.

If we threw these into 3 buzzwords, I would have California oil drilling, former SPAC, and bought from ExxonMobil. You might as well throw in pre-revenue while you’re at it. If you just said pre-SPAC California energy drilling, pre-revenue, and bought from ExxonMobil, you’d be like, “Cool. I can’t imagine a worse set of things for getting my face absolutely ripped off.”

When you hear that history, why is this not a run-for-the-hills situation?

I think part of it is a little bit of a bet-the-jockey play with the CEO, but it’s also—if you look at the quality of the asset, the regulatory hoops that they’ve jumped through, and the process they’ve gone through here—if your base case is that this thing restarts and gets to a regular production level, the upside here is massive.

It’s always been framed as a binary outcome, where it either restarts or it doesn’t. I’ve been talking about that with the narrative shift, where it’s going from, “Will it ever restart?” to, “What is it actually worth?” The biggest thing holding that back is that you have lawsuits flying everywhere. It’s kind of the “case of compounding lawsuits,” as one of my friends called it.

But basically, I think they’re going to be producing. I think it’s going to be fully operational here in the near future. I think the upside when that happens, even if oil stays at $65 to $75 Brent, is significant multibagger potential.

As we’re talking, oil is $65. I know a lot of people like this because it’s low cost and they think oil is going to $200, but you’d probably be better in a high-cost oil play if you believe oil is going to $200. Let’s just quickly talk: How do you look at the fair value of this company?

Well, I think the binary side, as far as looking at the downside, is where a lot of people assume that it’s a zero if you end up going into a takings claim, end up in court, and jump through those hoops. In reality, I think they have a very strong case for $7 billion to $10 billion—aka $75 to $100 a share, give or take—in damages for what the asset is worth if it does end up in court. I think that is unlikely at this stage in the game, but I just want to make sure we lay that out.

So the takings claim would be—and you can tell me if I’m wrong or dive into it further—they bought these assets from Exxon, and I want to talk more about why Exxon sold them and everything. But the takings claim, just so people know what’s being held up here—this is a broader view—these assets are good.

There was an issue in, I think it was 2015, with these assets, right? These assets were basically paused. The assets are ready to run again, but the state regulator is refusing to allow them to make the final necessary repairs or just put oil through them. So that’s the huge binary that’s happening here.

What you’re saying is, on the downside, a lot of bears say, “Hey, California will never let these guys run oil and gas through these pipelines again.” And you’re saying, “Hey, that’s fine if that happens.” You’re not the only one. I know multiple people who’ve told me this: If that happens, they’re going to sue the state of California for a takings claim and say, “Hey, these assets—the fair market value of them was $7 billion, $10 billion, take your number. You owe us $10 billion plus interest from when you illegally took it, and we will happily collect that and pay our shareholders $100 per share.” Am I summarizing that correctly?

Yeah, I think at a high level that basically sums up the takings claim. People have talked about the difference between delay damages, what could happen if this thing gets to production, and what the court proceedings look like at that point. But at a high level, if they’re not able to restart, you have a very good case for $10 billion.

Some people think more, but basically, it’s a lot of money, and the state will eventually be on the hook for a massive takings claim. That means a bond and all these different things they would have to do, which I think the state would like to avoid. I can jump right into—you’re mentioning Exxon—why would they get rid of it? I can jump right into that next.

Yeah, because that’s the other thing, right? I think one of the big issues here is people look at that and say, “Look, ExxonMobil is about the most sophisticated buyer and seller of oil and gas properties you can imagine. If there’s any politics to getting this over the finish line or nudging the people in the right direction, ExxonMobil’s probably the best lobbyist out there, short of maybe the pharma or the NRA lobbies.”

So you have ExxonMobil saying, “Hey, this property’s been shut for 7 years.

Sable, we will take your—what was it?—$300 million in equity. We’ll give you a lot of financing and go with God. Have this property for what was a SPAC, a $10-per-share SPAC, and you’re tossing around a takings claim. They’re going to get $100 per share after a decent bit of dilution, since they went the SPAC route, too. So why would Exxon willingly give over a 10- to 20-bagger, depending on how many shares you had outstanding?

I think the first thing to look at from Exxon’s side is that, for the size of their business, this is a great asset, but it really doesn’t move the needle for a company the size of Exxon compared to their Guyana assets, what they have in the Permian, and their international operations. Secondly, with California regulations on oil and gas, they have it set up so that not only do they want to regulate operations in the state of California, they want to regulate international operations as well. That’s a big landmine for a company the size of Exxon.

Just to make that clear, I’ve heard this from other people, too: California says that if you operate in California, all of your international operations must subscribe to California law. If you’re Exxon, which is operating in Guyana, you might not be operating with the environmental standards that California would feel comfortable with. You could imagine there are some parts of the world where bribes need to be made. I’m not accusing Exxon of making bribes, but if they get caught—and I’m sure it’s happened before—and they’re subject to California regulations, that’s going to be an issue.

So, you’re saying it wasn’t just that they were giving Sable a gift. This asset was actually an active drag on the rest of Exxon’s multihundred-billion-dollar portfolio.

I think they were spending somewhere in the tune of $50 million to $70 million a year when this thing wasn’t producing, just to monitor it, maintain it, and do all that stuff. It’s actually a drag in that way as well. There’s a reason other oil companies have basically sold or spun off a bunch of their California assets.

You see Chevron moving its headquarters out of state. You see refineries shutting down and all these different things. Whether it’s emissions standards or different gasoline types for the refineries, there are a lot of reasons for energy companies to say, “Look, we want nothing to do with the state. We’ll find a better environment to operate in.”

Perfect. You mentioned this was a bet on the operators, right? I’d love to dive deeply into that a little bit, because one of the big pushbacks you hear is, “Exxon sold, and they sold into a SPAC.” I can’t imagine a worse set of overarching circumstances for an investor. I’d love to dive deeply into the management team and what you’re seeing here.

The CEO—I’ve heard from a couple of people that they think he’s the only guy in Houston who could pull this off. His name is Jim Flores, and when you look at his ownership between what he currently has, his stock options at best over the next 9 years, and the founder warrants from the SPAC, I think he’s going to end up with roughly 30 million shares. He’s going to own over a quarter of this thing pretty quickly, so there’s definitely some alignment there.

If you look at his experience, he goes back to Freeport-McMoRan Oil & Gas. They operated the platforms that are just to the west of the Santa Ynez Unit, so they have experience in that region of the world. They know what they’re doing as far as these assets, and they have a pretty good idea of what’s down there in terms of the actual resources.

When you look at the operating team and the people who have experience with it, I think that’s a big reason to be confident that they can weave their way through the legal stuff and then, once it’s up and running, operate this thing to the best of their ability.

So, if he ends up with 30 million shares and the takings claim is, let’s say, $100, you do the math pretty quickly: This man is going to be a California oil billionaire.

He stands to make billions if he gets it right, and the upside is what I see. Let me ask about the other big thesis here: California is never going to let them produce oil. You’ve already talked about the takings claim as downside protection if that happens, but let’s explore the idea that California will never let them produce oil.

You and I are talking in June—what is it, June 3rd? There was, as there is almost every week with Sable at this point, legal news today. We’ll dive deep into the legal news at the end of the podcast, but I want to understand the overall path for California to let them start producing. They did the de-SPAC expecting first oil to be produced in Q1 of 2024, right? We’re talking June 2025—it’s June 3rd, 3 p.m. Eastern—and they haven’t even started producing oil yet.

We’re already almost 18 months past when they said it would happen, and we’re still not there. The bears would say, “You’re 18 months behind, and it’s just California stuff. We’re never going to let it happen.” How would you respond to that thesis drift, and how would you respond to the idea that oil will eventually be produced here?

One thing I guess to clarify before I answer it: They are actually currently producing oil and filling the onshore processing facility. I can back up a little bit and talk about the actual asset itself.

They have 3 fixed platforms in place. The Santa Ynez Unit is basically a block that Exxon consolidated, and it’s 76,000 acres—about 118 square miles, so it’s massive. They have a pipeline from the platforms to the onshore processing facility, which they’re in the process of filling now. Then they have an 11-mile pipeline, give or take, and a 110-mile pipeline from there out to where they send it off to refineries.

Basically, they own the whole process, from pulling it out of the ground to sending it off. They’re filling the processing facility right now, and the last piece they’re waiting on is regulatory approval from the fire marshal to sign off and say, “Yep, you guys have fulfilled your end of the consent decree, made all the repairs, taken care of the pipeline, basically done everything you need to do, and we’re ready to sign off.”

That’s where some of the legal question marks and legal cases that have been going on lately come into play. The hydrotesting is done. All the different things that Sable needs to do to be ready for full operations have been completed. It’s basically on the goal line, and the legal stuff is what’s making the situation cloudy right now. I don’t know if you have a different direction you want to take it from there, but I can take it wherever you want.

No, yeah. Let’s say they get the units online and start processing. We’ll talk about the full legal situation and where we stand today, but let’s say they get the units online. What do the economics look like?

That’s where I think the bull case gets pretty interesting. If you had a chance to look at the production guidance they put out when they announced first production, they went from 20,000 to 25,000 barrels a day for the second half of this year to 40,000 to 50,000 barrels a day, and they dropped the lease operating expense—the lifting cost—to $11 to $13.50 a barrel. Eighty percent of that is fixed.

What I think is going to happen over the next 18 months or so is that you’re going to see production ramp, and the lease lifting costs will basically go below $10 a barrel. They obviously have other costs in there for gathering, processing, transportation, and general and administrative expenses, but the actual cost to get the oil out of the ground is going to be pretty similar to what you see in places like Saudi Arabia and Guyana.

You have a setup where the actual cost is going to come down. I think they’re being pretty conservative with their production guidance for the second half, because they basically doubled it with just 1 platform coming online, and the first 6 wells they tapped were producing 6,000 barrels a day—1,000 barrels per well per day.

If you look at the other platforms and do the math on where that leaves them for the second half, they’re planning to bring on the second platform in July and the third one in August. I wouldn’t be surprised if they updated their production guidance again in the next several months. We’ll see what that means for the end of this year, but I wouldn’t be surprised at all if they’re producing 60,000 barrels a day or more by the end of this year.

If they’re doing 50,000 to 60,000 barrels per day at a $10 lifting cost, and they have, I think, around a 15% royalty—I can’t remember the exact number—what does that translate into in terms of EBITDA, free cash flow, and all those types of things that people would be thinking about?

I’ll pull up the royalty here. It is a 16.4% royalty. As far as what that turns into in terms of operating results, I’ve basically looked at it and said, “Hey, for a full year, say they’re going to do 70,000 barrels a day at $70 Brent and natural gas at, call it, $5, because you get California gas pricing.”

These are all rough numbers. You say, “Okay, lease operating expenses: $10.” You have other costs in there.

You’re looking at $1.2 billion in EBITDA for a full year, which I think, compared to the current stock price, is pretty attractive. Obviously, there’s going to be capex. Next year, I think, is going to be a little bit heavier on the spend there, but I think it’s one of those things where it turns pretty quickly into a capital-return story once they ramp to a certain production level where they can pay out the $4 annual dividend, which is what they’ve said, and then basically buy back the stock from there and fund operations with plenty of headroom at that point.

So, let me put it this way. I don’t even know if this is pushback, but my numbers came out pretty similar to yours, right? I had about $1 billion versus $1.2 billion. What’s $200 million among friends? I had it coming out to about $1 billion of EBITDA at those numbers. I think it was a little lower on oil, but whatever. What’s $100 million among friends?

The enterprise value today is between $3 billion and $3.5 billion, right? So you’re talking about buying this for 3 to 3.5 times EBITDA. The capex, as you said, there might be some, but this is a platform that’s been operating for kind of 30-plus years, despite the past 10 years. There shouldn’t be a lot of capex once this comes online. So this should be really gushing cash flow. I don’t think it’s a stretch to say 5 times unlevered free cash flow is kind of what you’re paying, which sounds great, right? Five times unlevered free cash flow, 20% cash flow yield.

I think one pushback that I’ve had is, hey, that sounds really cheap, but guess what? All energy companies are really damn cheap, right? This is in a California jurisdiction that has shown over the past 18 months that they don’t want oil being produced here. This was shut down for a while, it’s going to be really expensive to do repairs if there are any issues, and they’re going to throw up red flags. You can go buy a lot of other energy, oil and gas companies at similar or maybe even cheaper valuations. It’s not unheard of for small energy companies with pristine assets to trade for PV-20s or 20% yields. So, one pushback I would have is: In an absolute sense, yes, this is cheap, but in a relative sense versus some of the peers, aren’t you kind of paying a peer-like multiple for something that does have binary risk?

Yeah, I guess the response there is, if you look at the reserves too and factor that in. I know they put in their investor deck, I think, 646 million barrels recoverable. I’ve heard a lot of different people talking, and I think the way I’d put it on reserves is I would take the over on 1 billion barrels of recoverable reserves. I think they were saying there’s 15 billion barrels of oil in place. So, what you’re going to see over time is the reserves will step up.

Big picture, I look at it as, okay, you’re buying Saudi economics in the U.S. for about $3 to maybe $5 a barrel in the ground. If you look at other competitors on a reserve basis, their valuations are going to be anywhere from $10 to $15 a barrel. There’s obviously single-asset risk that plays into it, where it’s like, okay, you’ve got single points of failure with the pipeline, like you saw in 2015, and you have other things where it’s California, so maybe that gets a discount. But if you also factor in what their margins will probably be after ramping, that factors into the valuation as well. I think there are a lot of different moving pieces that will get simpler over the next 12 to 18 months as this thing comes online, ramps production, and the numbers start to speak for themselves.

Two last questions, and then I want to talk about the up-to-date risks. I know this is a frequent one I got from people who are bearish or skeptical here, right? They kind of put out a press release that says, “Sable Announces Restart of Oil Production at the Santa Ynez Unit and Anticipated Oil Sales in July 2025.” They put out that press release on May 19. They have an investor deck that goes alongside it with all the updated guidance and everything we’re talking about here.

In that investor deck, I’m looking at it right now, on page 14, under “Financial Objectives”: refinance a first term loan, implement a hedging program, institute an aggressive shareholder-return program, targeted fixed quarterly dividend, and opportunistically repurchase shares. That sounds great. That’s everything you want to hear. Two days later, they come out and the stock pops into that, and two days later they do a pretty sizable equity offering. I think it was $256 million worth of stock.

I know a ton of bears—and, again, myself as a skeptical person who’s gone from, “I want to YOLO Sable,” to, “Oh my God, I’m so scared of everything”—you look at them and say, hey, literally two days after saying oil’s coming, the gusher is finally here, we’re ready to start paying the dividend, and we’re ready to start returning capital to shareholders, they do this massive equity offering. You’re just like, wow. When management’s actions don’t match their words, it’s a big red flag to me. So I’d love to talk to you about why that’s not a big red flag—that they came out and did this enormous offering right after saying, “We’re almost to the capital-return program.”

Yeah, so I think the main reason they did the equity raise, when you look at their cash balance—if I remember right, I’ll be in the right ballpark—I think they were down to around $190 million in cash at the end of Q1 of this year. The equity raise was 6 weeks after that, and obviously it was $189 million.

Good sir, I’ll be taking the L again on that, I guess.

But basically, they were running lower on cash at that point because, to get into the park to repair the last section of the pipeline, they had pipeline crews on standby. I think that was about $4 million of cash burn a week. They had higher legal expenses than expected for obvious reasons, and so they were getting to a point where it was like, okay, if our timeline to first sales is in July, that revenue starts to show up in August, and it’s going to be early flow rates. It’s not like you turn on the taps and you’re getting a massive amount of revenue right away.

Then it basically was something where I can understand why they didn’t want to run into a cash crunch. They had to make it another 4 months, try to bring all these platforms online, and make sure they could navigate the legal side of things and do whatever that requires. I think it basically says a lot that the stock was down like 6 cents on the day. I think it basically took like a 10% haircut in the morning and ended the day down 6 cents on the equity raise.

The big picture is that, okay, we’re diluting here, but this is kind of the last stop for share issuance because we’ve finished all our repairs, all the hydrotesting is done, and we’re at the stage of the game where we don’t want to run into issues that would potentially cause problems with the refinance and operations and other things. The equity raise also puts them in a stronger position to refinance the Exxon debt, which, once they started production, has a springing maturity of 240 days. I think it’s like January 9, 2026, is the absolute latest they could pay Exxon back.

And, if I remember, has that started now that they put out that press release on “First Oil”? So the spring has started.

Yeah. So, okay, from what I’ve heard, it sounds like they’re shooting for a refinance in September. I think at the end of Q1, it was like $830 million or $840 million outstanding on the PIK debt for what they have to pay back. Now they’re basically in a position where they’re cashed up, they’re not going to run into a cash crunch as far as operations, and they could potentially refinance with a lower amount.

I think the numbers that I’ve kind of talked about with other people are, okay, is the refinance $800 million? Is it $1 billion? I think it’s going to be somewhere in that ballpark. I think it’s probably going to price at 8% to 9%, and we’ll kind of see where that goes. My guess is they get that sorted sometime around September or October, from what they’ve been saying.

That makes total sense. Is there risk in your mind—I don’t want to dive into legal spend, and I’ve got one and a half more questions—but is there risk in your mind that they’re actually not producing before then, given the state of the court cases right now?

Well, I think the timeline for the court cases and the actual facts in the case basically put Sable in the driver’s seat, whether that ends up in federal court or gets sorted in appeals. The way I’d put it is, I don’t think the legal uncertainty is dragging for months. I think there’s going to be some resolution here pretty quickly.

We can obviously get into that in more detail, but I don’t see an outcome where they spend 6 or 9 months or a full year in legal limbo, have the processing facility full of oil, and have to figure out, hey, do we put a tanker out there to get the oil to market? Do we try and do something with trucks? I don’t see that happening at this stage. I think the legal side will get resolved pretty quickly.

Okay, let’s transition to the legal side after this one last question, which I think will serve as the last question. I’ve mentioned I’ve been all over the place on this, and I think the last risk I’ve had in my head is that this is a highly volatile stock. You and I have really smart friends who are in this name, and I worry that if you are not singularly attuned to this stock—and I don’t mean this in terms of following the up-and-down price action every day, but I mean this in terms of burning the phones down, talking to people around the court case, talking to regulators, talking to whoever it is, probably reporters, politicians, whatever it is—you’re definitely watching the local environmental stuff, which can get pretty interesting, right? People are bringing in inflatable balloons, and Julia Louis-Dreyfus, I think, makes an appearance.

But one of the things I worried about, as someone who runs more than a fund of one, is that if I got involved, every trade I make is going to be negative EV, right? The game selection goes really against me because my friends who are following this—and I'd include you in this, having read your stuff on it—they know the next card. Five minutes before the market does, they know what the next card is going to be dealt. If it's a delay, I know friends who are long and short, just whipping this all over the place, and I think they're making huge money. That's awesome work. They're getting paid for doing great due diligence, but I worry that if I'm not doing that work and I just sat here and said, let's say, "I think this is going to come online. Ben's right. Sable's economics in the United States—$75 stock once this comes online. I'm going to buy," then it's going to be down. I'm just worried I'm going to get my face ripped off by somebody who's got better information.

If they know that it's not going to happen, they're going to short the shit out of this thing, and then I'm going to get a press release from Sable, 4 hours later, that says, "Hey, we lost the court case." And I'm going to be like, "Oh my God, the people who knew knew ahead of time." But anyway, I'm worried I'm buying into a negative-EV game if I'm trading this and not wholly focused on this, which is not a bad thing, right? It means there's a lot of alpha for someone. But that's my big worry here. What would you say to that?

Yeah, I think it kind of depends on your view of the long-term value and if you're playing with options, like buying burning matches, like I have in the last week. That didn't feel good today. But with shares, I just have to disclose—remember, nothing is investment advice. You can listen to the disclaimer at the end. Options are super risky. I just always have to disclose that when options get mentioned.

Basically, if your view is that fair value is much higher than the current share price, then, if you're just buying shares and you can stomach the volatility, I think that's where it's like, okay, if you think oil is going to come online, if you think the fire marshal signs off, if you think the court cases come to a point where you get more clarity there, then could it be $23 tomorrow? But when you get fire marshal sign-off, I think the market is going to reprice it very quickly because you have a setup where, at that point, you have a fully operational Santa Ynez Unit.

I've talked to people where it's like, look, I don't want the brain damage of dealing with this thing. Tell me when the fire marshal signs off and I'll buy it, because with what I've explained to them, they're like, "Yeah, sounds cheap at $30 and $40." And so, why not just wait until it's a little more clear there?

I mean, that actually might be the right thing, because you start gaming it out and you're like, as we're talking—June 3, 3 p.m.—at $25, it's like, hey, if the stock's going to be $35 but the fire marshal's approval is 100%, that actually might be a better risk-reward. So let's talk about that. We're talking here June 3, 2025, 3:30 p.m. Eastern. As I mentioned, in late May, they put out that, hey, first production. What's going on today? What's the state of play? What's the legal situation? What does it take for this to actually get production going? When are we going to know if real production and everything's going on, or if they're going to have to go to court to get this?

Yeah. So I guess over the last couple weeks, starting with production, right now they're filling up the processing facility, and they announced on Wednesday, before the court hearing involving the suit against the CCC, that all repairs were done and all hydrotesting was complete. I'm paraphrasing, but that satisfies their end of the consent decree, and that basically it's ready for full operations.

And then, on Tuesday night, there was a temporary injunction put in place, the night before the Wednesday hearing. On Wednesday, they kept the injunction in place, and that's where I think the stock got whacked pretty good on that news. It's like, okay, what does this mean? Why are they putting an injunction in for repairs and hydrotesting that's already been completed?

So that's part of the gymnastics from last week, where it's like, you have to figure out, okay, what does it mean? Why are they doing this? It seems a little bit ridiculous to try and do something at that stage after the work has already been done. And when you kind of go through the mental math on that, it's, okay, that part of what the CCC does doesn't impact the fire marshal sign-off. So my view was that sometime this week we'd hit fire marshal sign-off, and that was before the hearing with the EDC, but I'll get into that separately.

It's like, okay, everyone's panicking because there's an injunction. What does it mean? But my view was, okay, if Sable did their side of the consent decree—installing the best available control technology, the pipeline check valves, shutoff valves, doing the hydrotesting, basically the whole nine, as far as making sure the pipelines are repaired and safe for operations—then the fire marshal signs off. It's not a discretionary decision of, oh, there are some legal question marks going on, so we have to wait and withhold the certificate of operation, or there's kangaroo court proceedings going on and we have to make sure that gets resolved first. It's really, okay, we're the state and federal regulator. You guys did what was said in the consent decree. We're going to sign off.

So that was what I was expecting this week. Instead, what happened is why the stock is down—what, 15%, 16% today? The EDC is suing the state fire marshal and Sable, I think along with the Center for Biological Diversity. They're suing basically to stop the fire marshal from signing off, which is going to be an interesting case to try and win for them.

But basically, what's going on there, if you look at the case at the highest level? The fire marshal—in the California state constitution, the fire marshal is the regulator for all pipelines in the state, right? So they're basically coming in and saying, actually, you guys can't perform what it says in the state constitution. It's a massive overreach, saying we don't want you guys to sign off because we don't want the company pumping oil, and so on and so forth.

And even though, right, consent decree and all this other stuff, they're—I mean, suing—they basically had what I would call a home-court advantage, and I think it'll end up getting appealed pretty quickly. I'm obviously not a lawyer—I'm a former CPA—but I don't think it'll survive appeal because there's no imminent harm. If you have waivers that were issued 6 months ago, to say, oh, there's imminent harm 5½ months later because they're pumping oil now, doesn't make a whole lot of sense. And they got an expansive TRO—temporary restraining order—even though the lawsuit is just for waivers. You can't really stop the fire marshal from doing their job as the regulator in the state. In theory, they would be forced to refile a broader lawsuit, basically to target everything.

And I think if it goes to appeals and gets overturned, the fire marshal approval is coming shortly after that. And if it goes to appeals and doesn't get overturned, then the fix is in and it ends up in federal court in pretty short order. So the uncertainty and all the stuff is like, okay, the Greens, like EDC, CCC, all these alphabet-soup types, are going to keep throwing lawsuits to see if anything will stick. But if you look at the consent decree, look at the different agencies involved and who actually has oversight, I think the lawsuit will be a bad memory in 3 months or 6 months or whatever it may be.

So we might—I mean, let me just make sure I understand. The fire marshal has a sign-off; they cannot give the sign-off until this current lawsuit is resolved. And I think there's a temporary TRO until July 18, if I'm remembering correctly. So July 18 is kind of the earliest that you can get the sign-off at this point.

Well, that was the next hearing for—excuse me—the next hearing for the EDC and Center for Biological Diversity case, but in appeals court that'll happen quicker. I think that they had an appeal in the CCC case, and that was resolved in, I think, about a week. So it's not something that's going to be, oh, we're waiting for 6 weeks and then the next hearing and same judge. There are going to be other factors in play.

I think it's going to happen quicker. It's like, okay, you have a different judge and you have the appeal laid out, where it's, okay, this is a state regulator that also happens to be the federal regulator on this case, and they're well within their purview to give the certificate of operation, to give waivers, basically perform like a regulatory agency in the United States. And that's where it kind of lines up, and it's like, okay, if something goes wrong in appeals, yes, it's complicated, but it goes to federal court.

And I think there are interested parties that don't want this thing to end up in federal court, because you can go back to the takings claim and delays and what that would mean for Sable and operations. If they have to fight this out in court and it turns into some 6-month or 1-year-type circus, then it's going to be something where the damages keep stacking up.

Well, let me ask about the takings claim, right? I've consistently heard over the past year that the ultimate endgame is, if Sable keeps getting denied, they will hit a bunch of boards with a takings claim for $10 billion, and then the boards are kind of screwed, because none of these boards—you know, they can use funny money when they're hiring lawyers and charging it to the citizens.

Like, that's funny. But with a $10 billion claim, they can't, either. In a takings claim, I guess my 2 questions would be: Who are they bringing the takings claim against? Because they continue to own it. They're just not getting all the permits to operate it.

Are they hitting one of the environmental boards? Because the environmental board says, “Hey, you need to win the lawsuit,” right? How can you have a takings claim if they're suing to prevent you from doing something?

The takings claim would basically be against the CCC. They don't have the pockets to put up a $500 million or $1 billion bond, or whatever it'd be. So, basically, the financial responsibility would end up at the state level if the takings claim is big enough.

I think when they sued the CCC, they also included a suit for personal liability. So I think there's going to be a lot of stuff that comes out in depositions and all these different things before they go to trial that makes it pretty interesting.

But my view is that the case will get settled after oil is flowing, after the Santa Ynez Unit is fully operational. It turns into, “Okay, as long as the CCC and these other environmental regulatory agencies, nonprofits, and different groups go away from now until the end of time, then we'll settle with you guys.”

It's not going to be like, “We're still going to go after the state for $250 million, $300 million, or $500 million if operations are ongoing.”

Let me ask another question. What would the all-clear date be? If I were a listener to this, I might say, “Hey, Ben's got an interesting thesis, but I want to invest. You mentioned earlier that there are people who want to do it when the all-clear is clear.” What is the all-clear? When is all of this legal liability in their past, and when can you just say, “Hey, I want to underwrite this on the economics that Ben described: Saudi Arabia in America, with a pipeline in California”? When is the all-clear date? What would the signal of that be?

Basically, when the 8-K drops saying that the fire marshal has given them a certificate of operation. At that point, there's no stopping it. They're ready to pump oil, send it through all the pipelines, and send it out to refineries.

At that point, you'll have the legal case going on in the background. I think they were saying that the CCC case might drag out sometime into 2026, so that'll be ongoing depending on how quickly that resolves, settles, or whatever the outcome may be.

It'll basically be background noise. They have this operating business, and its lifting costs are $10 a barrel or lower. They're ramping production and producing 60,000 or 70,000 or more barrels a day sometime in 2026. You do the math on that, and it's a lot of dividends and a lot of buybacks, and I think a much higher share price.

The short version of the all-clear is that once the fire marshal signs off, the whole Santa Ynez Unit is ready for full operations. The court stuff can be going on in the background, but that won't just evaporate when the fire marshal signs off.

I guess the last question: The fire marshal overrides everything, and they can operate while getting sued? One thing that jumps out to me is that you read the prospectus—the most recent prospectus and the recent events and legal liabilities. I've seen longer, probably, but I can't remember off the top of my head.

They just keep disclosing more and more lawsuits coming in, right? In the prospectus, I believe it's the first time the Water Board is suing them and issuing them notices of violation. There's a State Parks matter, where State Parks gives them the right-of-entry permit, and they immediately get sued by the EDC and Get Oil Out and all this sort of stuff.

Let's see what else. CalGEM says, “Hey, you've got to post a bond of $32 million and submit to certain contingencies.” It just goes on and on. I guess the fire marshal is the be-all and end-all to you. You don't think that once that's done, any of these other agencies—the Water Board, for example—can come in and do something to slow them down?

They do, but they can't stop it. I think, as far as whether agencies can stop actual operations, the point is basically that they can't. If, in the future, something pops up with lawsuits and other state agencies, like the Water Board, which is on the consent decree, and permits or approvals are required, then they have to grant those in a reasonable amount of time.

I'm paraphrasing that, obviously, but basically they can't just withhold them because they have the Environmental Defense Center calling them up and saying, “Hey, you can't let these guys in to repair.” I think that was part of the delay with Parks: There was outside pressure not to let them in to finish those repairs that were done 3 or 4 weeks ago.

The big-picture view is that once it's fully operational, there may be issues in the future, but I don't think it stops operations.

Let me ask one more question. I'd be remiss if I didn't ask this. I don't think this is purely accurate, but I had a few friends lob in questions when I said we were doing the episode on Sable. It's been long, long requested, but a few friends lobbed in: “Hey, if this is such good value, why aren't more people interested? Why is it mainly generalists and retail-focused people who like this? Why aren't you seeing lots of oil and gas funds piling into this on the relative value?”

I don't think that's quite fair, because I do know 1 or 2 oil and gas funds that are interested in this. But I think they are right that, in general, of the 100 oil and gas funds out there, only a handful are interested in it. So I propose to you: Why do you think it's more generalist- and retail-focused than dedicated oil and gas funds that are interested in looking at this?

I think the biggest thing is the California risk, right? The state of the market right now is that the whole market hates energy, and even the energy people hate California. So you have that double whammy: You're not going to get as many eyeballs for the energy sector in general, but even the guys who have a focus on energy or are dedicated to it have to deal with the mental gymnastics required to own this thing ahead of a fire marshal sign-off.

I've talked to a bunch of people, and they've talked to funds and different groups, where it's like, “Yeah, just call me when the fire marshal gives a green light, and then we'll definitely buy it. But for now, it's just in the too-hard pile for a lot of different investors,” especially given the position size they might be willing to put on.

No, I think you hit the nail on the head. Oil and gas investors tend to be more on the libertarian side, let's say, and they generally hate California. Anything that has assets in California, I think they reflexively vomit.

Then you say, “Hey, not only are the assets in California, but California is actively trying to stop them from doing this, and it's been 10 years.”

You know that bell curve where there's the guy drooling out of his mouth and the super-genius on one end, and then there's the guy in the middle? I think they would say maybe they're the drooling ones, and they're saying California oil and gas never works. Maybe ExxonMobil is the super-smart one saying California oil and gas never works, and everyone's in the middle saying, “No, look at the upside.”

I think that's what they would say, and it does resonate with me a little bit. But then you're like, “Hey, the takings claim would be pretty big.”

Ben, I think we've summarized and covered everything pretty well. Any last thoughts, or anything you're looking for that listeners should be thinking about? We're recording this on June 3. I'm sure there'll be 5 8-Ks dropped between now and when I release this, June 6 or June 9, but is there anything listeners should be looking forward to going forward?

I think the biggest thing is there's a case-management hearing tomorrow, on June 4, for the CCC. We'll see what happens with the injunction there. I'm not sure if there will be any movement, but again, the pipeline was just repaired, and the injunction doesn't actually stop operations.

Regarding the TRO and the fire marshal, I think it's most important to see whether it ends up in appeals court. It probably will; I think that's a safe bet. They're not going to wait until July 18 for the next hearing date with the same judge.

What is the process in appeals court? How quickly does it end up there? What is the result? If the TRO gets tossed out, then I would expect a fire marshal sign-off in short order after that.

I wouldn't be surprised if it's, “Okay, the TRO is gone,” and the fire marshal signs off the next day, because all the stuff they've needed to do, from repairs to hydrostatic testing, is complete. So those are the next checkpoints.

From there, I'm interested to see how things line up for the next 6 months. We've got the first platform online, and the fire marshal sign-off should be happening relatively soon after the TRO gets tossed. If not, it ends up in federal court, and that's a whole other can of worms. I think that's unlikely, but it's possible.

So, fire marshal sign-off. You've got other things that I think are pretty interesting.

I think the short interest is 13.8 or 13.9 million shares, around 14% short interest somewhere in there. If the fire marshal signs off, then you're going to see new investors, shorts, and a bunch of people rushing the entrance. Then you've got a bunch of different catalysts farther out: the second platform online, the third platform online, and, in Q4, it's fully operational. My guess is they're producing over 50,000 barrels a day at that point, and then the numbers really start to show up.

The last little tidbit as far as operations I'll throw in is that, at the end of Q1, they had like $834 million worth of net operating losses. That's a little kicker, and I'm assuming after Q2 they'll have another $100 million or $150 million to tack onto that. So there's a little bit of extra juice. Not that the valuation needs it, but they had so many operating losses in a SPAC shell.

Basically, in 2022, I think it was $2.5 million, and then it was $93 million in 2023. 2024 is a big year. They had almost $630 million of NOLs, and then for the first quarter this year they had like $110 million. Between legal expenses, repair work, and all the different things, that adds up over time.

With the pipeline crews on standby, legal expenses, and all the stuff that's happened in Q2, you compare that—there's still no revenue. I wouldn't be surprised if the operating loss for Q2 is somewhere in the ballpark of $150 million, if I had to guess. But those are rough estimates. I don't think it's going to be a huge issue. Basically, I would guess at least 2 to 3 years of NOLs. That'll be a nice bonus at some point down the line.

And as we said, both of us were triangulating around a billion dollars. You've got a billion dollars of tax shields that saves a pretty penny for a year or two.

Cool. Ben Kelleran from Contrarian Corner—I’ll include a link in the show notes. This has been great. Again, I think my biggest worry about Sable is I buy it and then I'm just getting my face ripped off by someone like you who's just burning the phones down, and every trade is the wrong one. But this has been awesome. You're obviously super deep in the weeds here, and thanks for coming on. I'm looking forward to having you on again, maybe in a month or two, once the oil starts flowing.

Yeah, thanks for having me. I'm definitely looking forward to that fire marshal sign-off. Hopefully we can do a recap and get more into the weeds on valuation and potential upside there.

A quick disclaimer: Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.