As the E&P MLP/LLC's added assets they borrowed, issued private equity (which turned out to be time bombs) and placed hedges as they made the purchase. If oil and gas remain low for a number of years lowering the value of the assets and forward hedging prices, would they not then be required to pay down this borrowing base while at the same time having revenue drop? LINE being able to pay down some of their debt might be in a much better position then the others if prices don't recover some.
If you want to see a good Fred Thompson clip google "theo spark thompson" it's sadly funny.
CEP's problems are high costs, coalbed production, market with weak prices. At $4/mcf NG, its reserves are almost not worth recovering. Some people also think management is not very capable.
Another CEP problem was that its initial distribution was way too high. Part of that was because CEP created a drilling fund from which it took money for ordinary drilling expenses. To my eye, CEP didn't disclose that very well, and the way they reported the DCF ratio didn't make an adjustment for the fact that the fund reduced drilling expenses. As soon as the fund ran out, DCF was under 1.0x.
When the 10K comes out, look at the PV-10 value compared to last year's number. That will give you an idea of the impact of lower prices on the value of cash flow.
Agree with you but as already stated, Line did well to repay debt. I personally would rather see them buy assets rather than buy back stock. One addrs to reserves at low prices and the other does little for shareholders. Buybacks sound good but do not generally work well- especially when you are looking at high yielding assets held more for income than appreciation. SC4
I checked out CEP based on your post. I was surprised to find it to be a reasonably well capitalized company, for a company trading that low. As a speculative holding the risk appears to be relatively modest. I'm in.
I agree with virtually everything you say.
The good news is that borrowing bases can be raised by adding additional hedges.
The effect of current market prices on proved reserves is likely to be dramatic. CEP announced that its reserves had dropped from 342 BCF 223 BCF between the second and third quarters of 2008 due to the low prices for natural gas. That reserve number may be better at year-end, because it was using a gas price of $3.68 as of September 30. Midcontinent prices have rebounded a bit since then.
I don't know whether LINE has immediate plans to repurchase units. However, the fact that it applied the proceeds from its Woodford sale is what would be required under the credit agreement and good cash management. All cash from such a transaction has to be applied to reduce debt. Of course, since the credit line allows the money to be withdrawn for a unit repurchase, it really has no effect. The unit repurchase will require a fair amount of time to complete since repurchases are limited based upon a percentage of average daily volume was over time. Acquiring 8 million units will take LINE awhile to complete. Of course, management could well reconsider the repurchase and look for an accretive acquisition given the likelihood that some producers are struggling and there may be bargains to be had.
On Friday I bought some CEP units as a speculation. However, until I see CEP's fourth-quarter results, I am not really sure that CEP can manage even the reduced distribution beyond 2008.
And there's those who believe that what is, will always be, and don't want to lose any more than they have, whether they hold this directly, or create the same effect through fund redemptions. Fear and despair cloud logic.
Even if you're a vulture by nature, like me, there's still doubt, as a stock you figured was ultra cheap turns out to be even cheaper while you're holding it. Just human nature.
There is probably a lot of tax-loss selling right now. E.g. you buy some Call options a month or two out; or you buy some other MLPs. Then you sell the LINE for a loss and buy it back next year.
Then there are the "technical analysis" sellers, who tend to sell things just because they've gone down, rather than for any rational reason.