To get a better handle on current valuations, we ran a discounted cash flow model on EVEP assuming the Utica monetization as above into producing assets (e.g., mid year 2013 for the first tranche) and the coming of age of their ORRI and midstream assets over the course of the next few years. For example, ORRI is expected to produce $50mn in annual EBITDA but not for a few years. Similarly, it will take time to ramp up midstream production, which the company recently gave guidance on. We incorporated IDR rights, which are currently out of the money, as well as likely share issuance, in the future, to fund further distribution growth and keep leverage constrained. Capital expenditures are based on company guidance and historical measures of maintenance capex as a percentage of production. All told, we feel we are conservative in our assessment and do not see any significant distribution growth until 2014. That said, we see significant distribution growth into 2015 with $5/unit being achievable. Running our model at a 15% required IRR, produces fair value at about $56/unit.
rlp what was their price deck and why did they use 15% DR. That is too high based on a current weighted cost of capital when assessing the value of a companies assets. Usually 15% would be used for projects selection
And the SA author doesn't give valaues to the formulas he his using. He takes into account future share issuance and capital expenditures. Well those are pretty important things to take into account for sure. But we have to trust that he's using real numbers and not just guessing. And as for "future share issuance", the whole point of the Utica transaction is to postpone/eliminate the need for future share issuance..
I actually thought it was a decent article until he started with his valuation analysis. When you develop a model, sometimes it helps to step back and see if the answer returned makes much sense. Here, start with dropping down over $1 Billion of producing assets into EVEP without any share issuance and is the result a $4 increase in Unit price?
If your model is producing results like that after the way EVEP has performed in the past 12 months, it should indicate you might want to reexamine your assumptions. Unfortunately his "model" is opaque and we can't see where it is coming up short.
Why am I not surpised that RLP brought us this "analysis" minutes after it's release?