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Atlas Resource Partners, L.P. Message Board

  • bosox_pats bosox_pats Jul 3, 2013 12:11 PM Flag

    Linn Accounting

    Linn accounts for it's derivative hedges by amortizing the cost of implementing the hedges over the life of the contract for P&L purposes. This approach is generally accepted under accounting principles (GAAP). However, Linn has been criticized for not applying these same amortized hedging costs to it's Distributable Cash Flow (DCF) calculation which is a non-GAAP measure. Therefore, Linn is criticized for potentially overstating it's DCF by not subtracting at least the portion of amortized hedging costs in it's DCF ca;culationand therefore it's distribution could be at risk.

    I don't believe this is an issue for ARP as it subtracts it's amortized hedging costs from it's DCF calculation. But right now it does not matter, ARP is being cast in the same light as Linn regarding accounting. I am reaching out to verify ARP's DCF calculation - can anybody on this board verify or have looked into this accounting matter?

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    • BRET JENSEN on SAs website:

      The recent rise in interest rates has negatively hit shares of high yield instruments such as dividend stocks in traditional income paying sectors such as Utilities over the past few weeks. In addition, bond mutual funds had their first weekly outflow in nearly six months last week. For the week ending June 5th, these funds suffered record outflows (~$12.5B). The hike in rates has also taken its toll on corporate high yield bond funds as well as a myriad of different high income Real Estate Investment Trusts (REITs).

      I decided to peruse these sectors and other income producing areas to see if I could find any solid high yielding entities that look like they have been oversold. This research led me back to one of my favorite income producing areas, energy Master Limited Partnerships. It also brought me back to an old friend, Atlas Resource Partners (ARP).

      I last wrote about Atlas in late 2012 when it was trading at this same $22 a share level. I sold my position this April at around ~$25 a share to raise more cash in my portfolio for a pullback in the market which still has not occurred. However, ARP has sold off ~15% since its highs earlier in the quarter on the back of the backup in interest rates and a recent large acquisition that I believe the market is misinterpreting at the moment. I took the opportunity provided by pullback to re-establish a position in Atlas Resources Partners today.

      Company Overview:
      Atlas Resource Partners is a master limited partnership active in oil and gas production in the Barnett Shale in Texas, the Appalachian Basin and in the Mississippi Lime in Oklahoma. ARP owns an interest in over 8,600 producing natural gas and oil wel

      • 1 Reply to brickerkaryn
      • Company Overview:
        Atlas Resource Partners is a master limited partnership active in oil and gas production in the Barnett Shale in Texas, the Appalachian Basin and in the Mississippi Lime in Oklahoma. ARP owns an interest in over 8,600 producing natural gas and oil wells, representing over 700 Bcfe of net proved developed reserves. This entity came public in February of 2012 and has consistently and significantly raised its distribution payouts in its short time as a public company. Like other E & P entities, it has prudently moved to raising its production ratio from oil & liquids over the last year due to low natural gas prices.
        Basic Valuation:
        Based on its last quarterly distribution payout, the shares now have a yield north of nine percent (9.25%). Analysts believe the entity will grow revenues by better than 90% in FY2013 and north of 30% in FY2014. Neither of these figures include the substantial amount of new revenues that will accrued to ARP as a result of its recently announced large acquisition - Which we will cover a bit later in this article. For a nine percent yielder, ARP is very reasonably priced at ~15x 2014's projected earnings (Again not figuring in the accretive acquisition). The seven analysts that cover Atlas have a $28 a share median price target on ARP.
        Long Lived Reserves & Hedging Policy
        Two of the reasons I believe ARP is cheap are that I think some investors believe the company is more vulnerable to resource depletion and commodity fluctuations that it actually is in reality. The company specializes in acquiring long-lived reserves in desirable energy basins with high internal rates of return (IRRs). As can be seen from the chart below, ARP is well diversified with acreage across the country. Its average reserve life is ~19 years (and this is projected using current technology which will likely improve substantially over the next two decades) and only ~50% of its acreage is developed yet.This disciplined approach has resulted in impressiv

    • Further to the question of the Linn's handling of puts for accounting purposes. First off, have a quick read of the Linn June presentation. Linn is 100% hedged thru 2017 and nearly 40% is with puts. On page 24 foot note no. 3 the following is stated:"Linn considers the cost of premiums paid for put options as an investment related to its underlying oil and natural gas properties only for the purpose of calculating the non-GAAP measures of adjusted EBITDA and DCF. The premiums paid for put options that settled during the three months ended March 31, 2013 and March 31, 2012 were approximately $43 million and $ 26 million, respectively."
      So if I understand correctly these same options are being expensed on the P&L i.e. for tax accounting whereas for DCF and adjusted EBITDA the costs are being amortized. If this is the crux of the argument for shorts then I see all of this blowing over rather quickly. I would have to agree with Mr. Cooperman that there is no there there.
      The notion has occurred to me that some parties interested in sabotaging the Linn/Berry deal might be behind this market turmoil. ARP gets pulled into the maelstrom due to the Cooperman association.

      • 1 Reply to bigearljr54
      • Friday should be thinly traded, although i thought that would occur today. Someone from ARP should make a statement on Friday before the market opens that our accounting is not in question unlike LINE. Cooperman had to have sold some because of the volume today. I have doubled my position today and will free up more capital for Friday. This will be paying over 11% this year and has a lot of wells coming in Q3 and 4

    • Bosox, I am going to dig a little deeper on this question considering the market reaction. I will send an inquiry to Atlas investor relations as well. It never seemed to me that the cost of puts, for example, was so high as to be significant to DCF or otherwise.
      Certainly, it makes sense to remain consistent in booking hedges and I don't recall reading about any changes to ARP's approach.

    • ARP has had much better coverage that Lynn Energy, It would be difficult to have the same issues as Lynn as ARP has very new properties with the big Barnett purchased when natural gas was low, Recent coal bed methane purchase has not even had time to be applied to distributions. Point with Lynn is unsustainable disributions is the implication and Ponzi sceme type cashflows.
      I find it hard to believe the last although it may be possible that the cashflows as DCF has been higher than sustainable.

      From last Q conference call.
      We distributed $0.51 per limited partner unit for the period based upon these results, representing one times coverage ratio for the quarter and 1.1 times coverage ratio on a raw and full quarter basis. Production margin for the first quarter, approximately 31 million represented an almost 130% increase compared with 30 million for the prior first quarter. Production margin during the period was negatively impacted by approximately $2.5 million to $3 million to the lingering effect of our production from storms that roll through Texas and Oklahoma. Including the financial impact from the storms, our first quarter production margin would have represented a 10% increase from the fourth quarter 2012.

      • 3 Replies to jrp1324
      • According to ARP's May 23 investor presentation, the hedge book is nearly devoid of puts. They have no crude oil puts, and only a miniscule put position on Gas for the remainder of this year. The vast majority of the hedges are swaps and collars.

        Sentiment: Buy

      • I really believe the volume is Omega, likely divesting units, perhaps a margin call.

        I think the accounting issue is a moot point. ARP's percentage of puts is minimal relative to the overall hedge book.

        We'll have to see how quickly this storm passes. Meanwhile, ARP is likely out of the market for acquisitions, which is a probably a good thing. They already funded the EP Energy deal, so now they can focus on operations.

        We should have some items in the 3rd Q, including Marcellus wells, Utica wells, Marble Falls wells as well as Mississippi Lime wells.

        Time to go back to the boring grind of optimizing their existing production.

        Fortunately, ARP has a decent hedge book, so they should be able to ride out this storm. I am curious if they still plan to meet the $2.35/unit target for '13.

      • Jim, this is not about the coverage ratio. This is about how one calculates DCF. I believe ARP builds it's calculation for DCF from GAAP net income which includes the hedging implementation costs. I believe Linn builds it's DCF calculation off of EBITDA which is a non-GAAP measure. Herein lies the difference I believe.

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