The bit about weather delays and tempering of their expectations for the full year was a real blow today in the quarterly press announcement. No wonder this pig falls daily and analysts are downgrading - I think Wachovia cut today.
It is my opinion that they should try to sell themselves rather than look for an acquisition candidate. I am personally tired of excuses and hearing about horizontal wells when you have issues with regular drilling.
Any bounce and I'll sell CEP, the distributions are having trouble keeping up with unit price decreases.
These thoughts are of my opinion and should not be considered investment advise.
I am unfamiliar with QELP, but I would hope for a suitor with operational expertise and/or enormously deep pockets. Forget that, I'll just take one that had a good snow blower and ample rock salt for winter weather :).
I would not rule out a merger of CEP with QELP. They both have huge positions in the Cherokee (QELP is #1, CEP is #2).
I am not entirely impressed with QELP management either, especially after they forcast a distribution of $2.00 and ened up at $1.74 after their last acquisition. It just seems logical that the two companies would have some synergy, and it could be a equity for equity swap, which would eliminate the need for a huge equity issuance, aside from acquiring the CEP GP, which is probably not worth much since they have little chance of boosting the distribution and if I remember correctly, the high splits is capped....
How much premium do you think a buyer would pay for CEP's assets over current unit price? Hard to say. If I were a buyer I'd have to get some return on my investment. At the current price, maybe I would buy because I would get to keep the distribution, but since the distribution is all of DCF, maybe that isn't enough. But I'd have to be very sure of the underlying assets and possible growth, that is where the risk is for a buyer.
Actually, maybe the "parental unit" would think about buying it out at this price -- it had a pretty good take from the IPO and could buy back at a lower price. That would make as much sense as anything I suppose, as long as we're all speculating.
If you believe that the assets are good, that it would be difficult for CEP to acquire and there is no room for screw ups, why not just have CEP sell itself? This would instantly unlock the so called value in this entity. The potential buyer would probably also be paying a nice distribution, so everyone wins.
I think the CEP assets are good, but the coverage ratio is lacking and they have no more room for screw ups. Due to the poor equity environment, acquisitions would be very difficult, so they must drill their way out of this problem. That will be difficult for them to grow rates appreciably in a short time period while also fighting high declines. That is why we are trading at 14%. If it trends back to the low 15's or 14's, it is a good speculative buy for income and appreciation. The real issue is this: What incentive does management have to turn the company around? Most other E&P MLPs either have a founder that owns a significant portion or a strong c-corp backer. CEP has neither. CEP is diminimus to the parent corp. I remain interested, but would like to see coverage ratio at 1.1x or better.
ATN's slowdown in Michigan was explained as frost in the CC that is directly comparable to CEP's slowdown, although they are not in the same region.
EROC had a compressor struck by lightning another example of weather problems that can pop up.
See pg 30 of 10Q for EBITDA
I believe once CEP gets beyond these startup issues in the Cherokee Basin, performance will significantly improve.
I say this because I think they may have, in their properties, the best potential for production growth as compared to the other MLP's.
Time will tell. But I think a bit of patience here, as we collect distributions, is warranted. About the potential for a distribution cut. I think it is unlikely- even with the bad quarter, they were able to cover the distribution.
Actually, ATN increased production generally but not as much as some of us expected due to a rational explanation out of management's control -- permit slowdowns for Marcellus development in Pennsylvania.
ATN's Michigan production was up very slightly from the 1st qtr in spite of less drilling activity (only 40 wells drilled vs 46 in 1st qtr) and lower well connections (only 15 connections versus 54 in 1st qtr). I have to go back and see what management's explanation for Michigan's low growth rate was but it may be partly they devoted more attention to Appalachia.
I don't think ATN is strictly comparable to CEP. I don't follow EROC, are they in the same geographic area as CEP?
In making a very brief look at CEP, it increased revenues from production. Its 2nd qtr DCF was nearly equal to the distribution but 1st qtr the dist exceeded DCF (per 1st qtr report, DCF was $8.761 or $.39/unit and the dist was $.5625). Oddly, the deduction from EBITDA for cash interest expense in 2d qtr was only $1.55 million (compared to $3.5 million in 1st qtr) when actual interest expense was over $3.0 million -- so they had accrued/unpaid int exp of $1.5 million to bump DCF to 1.0x the distribution. It looks odd -- will cash interest exp in 3d qtr be higher? And how will that affect DCF next qtr?
I think I need to look at the 10K.
I'm usually not too critical but this Heckel and Jeckel routine about the dog eating my homework is getting old. I thought I was smart for cutting my position in half early last week and It turns out I wasn't half smart I was half dumb. If this is the results with NG above the hedges what will happen if it drops below? I mean, where's the unhedged production benefit? Oh, that's right, they were still digging out of a winter storm in June. Isn't this the outfit that rotates their managers? Hopefully we'll get a handle on this thing when it's the janitors turn.
I came very close to selling my position back when the price was inexplicaably outracing all the other MLPs. I didn't because I had already collected a distribution and I didn't want to take the regular income hit. That's a good lesson about focusing too much on tax issues. Luckily this is my smallest MLP holding by far.
I too hate the "dog ate my homework" excuses -- I haven't listened to the cc yet, but it sounds like that's how it went.
Wachovia comments on their downgrade:
August 7, 2008 10:35 AM EDT
Wachovia downgrades Constellation Energy Partners LLC (NYSE: CEP) from Outperform to Market Perform, following another quarter of underperformance and a second downard revision to 2008 guidance.
The firm said, "While CEP units do look attractive to us from a valuation perspective, we expect the stock to remain under pressure until management can demonstrate an ability to execute on integrating prior acquisitions and achieve its stated production targets. Notably, even if CEP can hit the low-end of guidance, our analysis suggests that CEP will not be able to increase its distribution in 2008 and only modestly in 2009, barring additional acquisitions."
As I recall my last look at CEP at the end of last quarter, I concluded that their location meant that their NG production received relatively low prices, their costs were relatively high per mcf, they were small and I didn't like management's previous nebulous "integration issues" explanation. So I ultimately sold my units and moved on to another prospect. It doesn't sound like things have changed much, but I quit spending time studying CEP when I sold my units.
I would recommend evaluating their hedges, their realized prices, their costs to develop new production as well as continue production generally, to what extent they have grown production and reserves, and see how those factors compare to other MLPs.
That is always prudent to do for all your holdings and you might consider changing weighting. Since many MLPs are priced below a reasonable NAV at the moment, you can move between them and still have recovery potential largely built in.