Kontrarian Korner's Ben Kelleran on Sable Offshore $SOC

Summary

• Ben Kelleran’s bull case is that Sable Offshore ($SOC) can turn the Santa Ynez Unit into “the closest thing to Saudi economics in the US,” with low decline, perhaps 50–70 years of reserves in place, and lifting costs potentially below $10 per barrel. At 70,000 barrels per day, $70 Brent, and $5 gas, he estimates roughly $1.2 billion of annual EBITDA; Andrew Walker independently lands near $1 billion. That would make today’s roughly $3–3.5 billion enterprise value look inexpensive if operations normalize.

• The decisive catalyst is an 8-K announcing that California’s State Fire Marshal has issued the certificate of operation. Sable says repairs and hydrotesting are complete, the first platform is producing into the onshore processing facility, and the Fire Marshal’s final regulatory signoff separates that activity from oil sales. Kelleran calls the asset “on the goal line,” although current litigation seeks to prevent the Fire Marshal from signing off.

• Kelleran rejects the conventional zero-downside framing, arguing that a permanent regulatory block could support a $7–10 billion takings claim—roughly $75–100 per share, give or take—but Walker presses hard on whether delays and lawsuits constitute a taking while Sable still owns the asset. Kelleran expects any claim to run primarily against the California Coastal Commission and ultimately the state; he also acknowledges that he is “obviously not a lawyer.” His base case remains production, not litigation proceeds.

• ExxonMobil’s sale does not prove the asset is poor, Kelleran argues, because Santa Ynez was too small to matter beside Guyana and the Permian while costing an estimated $50–70 million annually to maintain without production. California’s effort to regulate operators’ activities beyond the state made ownership an additional corporate burden. Sable is therefore partly a “bet the jockey” investment in CEO Jim Flores, who could own roughly 30 million shares—more than a quarter of the company—after options and founder warrants vest.

• The valuation debate turns on whether investors compare Sable with cheap energy equities or with unusually long-lived reserves. Walker notes that other producers can trade near 20% cash yields without California litigation or single-asset pipeline risk. Kelleran counters that Sable’s stated 646 million recoverable barrels—and his view that the total may exceed one billion—imply only about $3–5 per barrel in the ground versus $10–15 for some competitors.

• Walker initially identifies a roughly $256 million equity offering two days after Sable advertised future dividends, but Kelleran corrects the raise to $189 million and sees it as liquidity insurance rather than a broken thesis. Cash had fallen to around $190 million at Q1 while standby pipeline crews were reportedly burning about $4 million weekly and legal costs were elevated. The raise also improves the odds of refinancing roughly $830–840 million of Exxon PIK debt before its January 2026 deadline; Kelleran expects an $800 million–$1 billion refinancing around 8–9%, likely in September or October.

• Walker’s largest practical objection is information asymmetry: specialists “know the next card five minutes before the market does,” making short-term trading potentially negative-EV for everyone else. Kelleran admits that options are “burning matches” and offers the cleaner alternative: wait for the Fire Marshal’s approval, even if that means buying at $30 or $40 instead of roughly $25. Walker disclosed only a small tracking position, while Kelleran expects approval to bring new investors, shorts, and others “rushing the entrance,” with roughly 13.8–13.9 million shares short—about 14% short interest.

Deep dive

1. Sable pairs exceptional geology with almost every imaginable red flag

• Kelleran’s opening claim is deliberately maximalist: Santa Ynez is “the best oil and gas asset in the US over the last several decades” and may deliver “the closest thing to Saudi economics in the US.” Unlike Permian production, he describes it as low-decline, long-lived, and cheap to lift, with perhaps 50–70 years of reserves in place.

• Walker’s skepticism starts with the transaction wrapper: a pre-revenue California oil company emerged from Flame Acquisition Corp., bought long-idled assets from ExxonMobil, and missed the Q1 2024 production timing associated with its SPAC deal. “I can’t imagine a worse set of things for getting my face absolutely ripped off.”

• The asset itself spans about 76,000 acres, or 118 square miles, with three fixed offshore platforms. Sable controls the chain from wells through the onshore processing facility, then an approximately 11-mile segment and a further roughly 110-mile pipeline carrying oil toward refineries.

• Kelleran says the narrative is shifting from “will it ever restart?” to “what is it actually worth?” The obstacle is what one of his friends calls “the case of compounding lawsuits”: operational work is substantially complete, but every apparent finish line has produced another regulatory or judicial challenge.

2. Exxon’s exit and Jim Flores’s incentives explain the unusual ownership transfer

• Walker’s core adverse-selection question is why ExxonMobil, among the world’s most sophisticated oil operators and lobbyists, would hand Sable a potential ten-bagger. Exxon also provided substantial financing, making the approximately $300 million equity consideration look especially small beside Kelleran’s claimed upside.

• Kelleran’s answer begins with materiality: even a great Santa Ynez asset would not move Exxon’s results like Guyana, the Permian, or its broader international portfolio. Meanwhile, an idle operation reportedly consumed $50–70 million annually for monitoring, maintenance, and compliance.

• California ownership was also an “active drag,” in Kelleran’s telling, because the state sought oversight touching operators’ international conduct. He places Exxon’s sale alongside other producers leaving California, Chevron moving its headquarters, and refinery closures: companies may rationally abandon valuable local assets to reduce wider regulatory exposure.

• The counterweight is CEO Jim Flores, whom Kelleran has heard described as “the only guy in Houston who could pull this off.” Flores’s Freeport-McMoRan Oil & Gas team operated platforms immediately west of Santa Ynez, while current shares, options exercisable over as many as nine years, and SPAC founder warrants could eventually give him roughly 30 million shares—“over a quarter of this thing.”

3. Production has begun inside the system, but commercial flow awaits one certificate

• Kelleran corrects Walker’s assertion that Sable is not producing: the first platform is producing oil into the onshore processing facility. That is distinct from full commercial operation and refinery sales, because the remaining regulatory approval is the State Fire Marshal’s certificate of operation.

• Sable had announced that repairs, control technology, check valves, shutoff valves, and hydrotesting were complete, thereby satisfying its side of the consent decree. Kelleran therefore treats the remaining Fire Marshal approval as a compliance signoff, not a discretionary review of whether California likes offshore oil.

• Updated guidance moved from 20,000–25,000 to 40,000–50,000 barrels per day for the second half. The first six wells reportedly produced about 6,000 barrels daily, and Sable planned to add the second platform in July and the third in August; Kelleran would not be surprised by 60,000 barrels per day or more by year-end.

• His hedge matters: 60,000 is Kelleran’s expectation, not company guidance. The stated ramp still provides the tradeable sequence—Fire Marshal approval, refinery sales, additional platforms, and then enough reported operating data for “the numbers to speak for themselves.”

4. Fixed costs create the operating leverage—and the relative-value dispute

• Guided lifting expense is $11–13.50 per barrel, with roughly 80% fixed. Kelleran expects volume growth to push that figure below $10, before gathering, processing, transportation, G&A, and a 16.4% royalty; that fixed-cost absorption is the mechanism behind his “Saudi economics” comparison.

• At 70,000 barrels per day, $70 Brent, and $5 California gas pricing, Kelleran’s rough model produces $1.2 billion of annual EBITDA. Walker gets approximately $1 billion and observes that, against a $3–3.5 billion enterprise value, investors could be paying three to three-and-a-half times EBITDA or around five times unlevered free cash flow. At sufficient scale, Kelleran sees room for the stated $4 annual dividend followed by buybacks.

• Walker’s pushback—worth keeping—is that “all energy companies are really damn cheap.” Other small producers can trade at PV-20-type valuations or 20% yields without California hostility, a decade-long interruption, one pipeline as a single point of failure, or the possibility that future repairs become exceptionally expensive.

• Kelleran answers with reserves: Sable cites 646 million recoverable barrels, while he would “take the over on a billion,” against roughly 15 billion barrels said to be in place. His comparison is $3–5 per barrel in the ground for Sable versus $10–15 elsewhere, while conceding that California and single-asset concentration deserve discounts.

5. The equity raise bought time for operations and an Exxon refinancing

• Walker highlights a credibility problem: Sable’s May 19 announcement paired anticipated July oil sales with objectives for refinancing, hedging, fixed dividends, and opportunistic repurchases—then the company sold what he initially described as approximately $256 million of equity two days later. Kelleran corrects the raise to $189 million. “Management’s actions don’t match their words” is Walker’s red flag.

• Kelleran points to around $190 million of cash at Q1, reportedly around $4 million of weekly burn for pipeline crews kept on standby, unexpectedly high legal bills, and several months before July sales become August cash receipts. Early production would also ramp gradually rather than immediately producing full revenue.

• He interprets the financing as “kind of the last stop for share issuance”: repairs and hydrotesting are finished, but management could not risk a cash crunch while bringing three platforms online and defending multiple cases. The stock’s recovery from an approximately 10% intraday decline to six cents down also suggested the market accepted that explanation.

• Production triggered a 240-day springing maturity on roughly $830–840 million of Exxon PIK debt, putting the outside repayment date around January 9, 2026. Based on his conversations, Kelleran expects an $800 million–$1 billion refinancing, likely priced around 8–9% and completed in September or October; these are his estimates, not firm terms.

6. Appeals, not the July hearing, may determine the immediate legal timetable

• In the California Coastal Commission matter, an injunction arrived after repairs and hydrotesting had already been completed, prompting Kelleran to ask what practical work remained to stop. He says that injunction does not itself affect the Fire Marshal signoff or stop operations. Separately, the Environmental Defense Center and Center for Biological Diversity sued Sable and the State Fire Marshal over waivers and sought a temporary restraining order preventing approval.

• A June 4 CCC case-management hearing was another near-term checkpoint. July 18 was the next hearing date for the EDC and Center for Biological Diversity case, but Kelleran expects an appeal to proceed sooner; he cites a prior CCC appeal resolved in roughly a week.

• Kelleran’s case against the order is that waivers issued about six months earlier cannot suddenly create “imminent harm,” and the relief granted was broader than the waiver-focused complaint. He says he is not a lawyer, but expects that if an appellate court vacates the order, Fire Marshal approval could follow “the next day” because the physical work is complete.

• His legal fork is blunt: if an appellate court vacates the order, Fire Marshal approval could follow quickly. If the order survives, “then the fix is in,” and he expects rapid movement into federal court—an outcome he considers possible but unlikely.

• Walker responds with the accumulated docket: Water Board notices, litigation following a State Parks right-of-entry permit, a reported $32 million CalGEM bonding demand, and still more disclosed cases. Kelleran says the consent decree requires participating agencies to issue necessary approvals within a reasonable period; after certification, later disputes might burden Sable but should not stop operations.

7. The takings backstop and information edge make position sizing the real debate

• Kelleran argues that a permanent block could support a $7–10 billion regulatory-takings claim, approximately $75–100 per share, rather than a zero. The claim would target the CCC and, if large enough, financial responsibility would fall at the state level; Kelleran says the commission lacks the pockets for a $500 million or $1 billion bond. Others, he notes, estimate still more.

• Walker challenges the mechanism: Sable retains the property, while environmental organizations and regulators are litigating permits rather than formally confiscating it. Kelleran discusses the difference between delay damages and what could happen if production begins, mentions personal-liability claims and potentially revealing depositions, but expects the likelier endpoint to be a settlement after oil flows in exchange for regulatory peace—not necessarily a multibillion-dollar payout.

• For non-specialists, Walker fears “every trade I make is going to be negative EV” because investors burning down the phones can trade each legal card before everyone else. Kelleran’s answer is horizon and instrument: options are “burning matches,” whereas a shareholder who believes in eventual certification can stomach volatility—or simply wait until the all-clear 8-K.

• The institutional absence is itself part of the setup: “the whole market hates energy and even the energy people hate California,” leaving Sable in many funds’ “too hard pile.” Beyond certification, Kelleran watches roughly 14% short interest, platforms two and three, his estimate of Q4 output above 50,000 barrels daily, and $834 million of Q1 NOLs that he thinks could shelter two to three years of future income.