Actually, if $5 million were the target, CEP would have to boost 2009 cash flow by $11 million over 2008 to counter the effect of the exhaustion of the drilling fund cash. To do that, CEP will have to increase gross revenues by probably 13-15% (leashold expenses would rise as would taxes) and hold most of its other costs steady constant.
That isn't going to be easy in this price environment for even a strong MLP.
Yes, some MLPs are more liberal with defining coverage ratio. I am optimistic that they will be able to grow production enough to get to a true 1.0x coverage ratio. Keep in mind that they have 22 million units, so they really only need to boost annual cash flow by 4 or 5 million to get out of the woods.
CEP's DCF is overstated in my judgement, and this is where you have to look at the numbers more closely.
The 1.0x coverage was accomplished by adding back $1.5 million of maintenance capex which was paid from a drilling reserve fund -- take that reserve away, and CEP was under 1.0x coverage. The fund won't last forever - it was only $5.9 million and they have gone through $3.0 million so far this year.
In the first quarter, when NG prices were lower, but not as low as now, the DCF coverage was negative (even with the drilling reserve adjustment in that quarter), so CEP may be headed in the direction again in the third quarter.
I for one do not think they cut the distribution. Coverage was 1.0x, and if they can keep costs under control and get some decent production growth, they might be able to limp their way out of this hole.
The real kicker is to see who will buy the GP. A distribution cut is a step backwards.
Current management has a huge task in front of them if they want to turn this company around. A new GP might have deep pockets and do a drop down...
That share price has a 50% divy cut already priced in. I understand it's weaker than its peers but this thing has been thrown to the dogs.
You've got to make a small wager down here. like taking a long shot NFL team to make the playoffs. we all recall the Giants and Packers last year
1.3x with no other change would be a 25% distribution haircut. But that might be an appropriate move for this MLP. It cannot limp by on a 1.0x coverage and fund any growth from cash flow.
When I sold my last units of CEP, I recall concluding that it has fairly high costs, which may be an issue in growing production at the moment. Anyone considering CEP should analyze this issue -- can it grow production and sell the product profitably at $7/mcf? If not, it is in a bit of a bind.
I've learned to under stand hedging the last few months, though I'm still weak in understanding the differances of differant hedging means. In reviewing CEP's it appears at least to me, that as long as they get the NG out of the groud and into a pipe they should make current distribution goals. Of course that's been their big problem. The bright side, as long as the NG remains in the ground the longer life our assets will have.