Thanks for your thoughts on the drilling subsidy. I am glad someone else thinks $3 or a bit higher by this time next year and yes $4 will happen much faster then you would expect given the recent history. As long as Pioneer, SD and CHK have the drilling funded and APL can find the money to pay for expansion it is an easy projection getting to the $3.80 shown in ATLS presentations near current product prices.
As far as the Utica...any start with gathering or processing can lead to profitable business. ATLS has a gathering system and right of ways on the 70,000 acres of shallow rights. Yes a low pressure system like what APL had to find so much money to upgrade as in Pennsylvania but the right of ways should at least give a leg up. In Pennsylvania I am pretty sure they just added another high pressure system on top of the old low pressure system.
As far as hype in the Utica....only time will tell. The Utica that is being hyped is the Pleasant Point formation. It is just above the Utica shale and was lumped together with the Utica shale. It is a mostly limestone reservoir with about 40% shale. Not the typical shale reservoir so flow rates, recovery rates and decline rates yet to be determined. Hype may turn out to be true.
There is already a plant in the planning stage to use ethane in Ohio. I think it was targeting the ethane from the Marcellus but may end up having supply right in its back yard. Range resources has been using multiple routes to try to solve the problem of what to to with the heavier end of the natural gas stream in the Marcellus and these solutions may make processing gas much more profitable then it has been in Appalachia.
I hope the ATLS/APL combo find some way to get a foot in the door.
Jim, thank you for your thoughtful posts. Intangible drilling costs are a non-cash deduction. If this deduction is eliminated, cash flow and distributions would not be affected. However, the tax shield on these distributions would be less and the taxable portion of the distribution would be higher. Overall, this would probably cause the multiples folks are willing to pay for drilling assets to be lower as the purchase price subsidy from the US Treasury would lessen.
I agree with your comments concerning Utica. My only concern is Chesapeake has done a great job of creating hype around this play and therefore the prices may be higher than otherwise.
The arbitrage between oil and gas on a BTU equivalent basis is huge. Gas should be trading closer to $12 on this basis. These types of arbitrage will not last forever. Coal to gas in Electricity sector, shut-ins, more heating oil to gas, chemical industry expansions, namely in the fertilizer sector, and natural disasters should close this arbitrage.
This time next year I believe APL will be sporting well over a $3 annualized dividend with a visible path to $4. ATLS will be riding this on a leveraged basis and at a 1.0X payout. ATLS is a very attractive takeover candidate given it's a leveraged play on both APL and the E&P spin-off. More importantly, through ATLS, for less $$$, you get control of both assets through GP.
I expect to do very well with both APL and ATLS. The tax change that could hurt ATLS is not the MLP issue but the tax deductions that make the drilling partnership so attractive to individual investors. I am certainly not an expert but the intangible drilling cost that are or have been a target in the budget issues would make or should make the partnership model for drilling less attractive. I could not even quantify how much.
Agree completely this is the time to buy gas assets and something has been hinted at by Cohen in the last conference call. I am weighted 70/30 APL ATLS and am very happy to own both.
My wish is ATLS finds a way to get into the Utica in Ohio adjacent to the current gathering system and right of ways that ATLS currently has and throws any processing APL's way. Lots of money will be made in Ohio but you need to get a foot in the door.
Should know what they are up to in the next 6 months.
Some of the projections on IDR's to ATLS get very large very soon if this growth in APL keeps on track.
FWIW I do not believe these low gas prices will stay longer than I can wait....3 to 5 years at the most and when supply and demand cross the price should go up enough to encourage drilling, whatever that marginal cost is then.
Indeed there is more risk in ATLS regarding tax but I think the risk is remote. Take a look at the political futures market on www.intrade.com It looks like there is a high likelihood the Republicans keep the house and they capture the Senate but short of the 60 vote veto breaker. Interestingly, on Intrade, Obama is currently favored slightly over 50% (the futures pay either 100 or 0). As long as the Republicans control Congress, it really doesn't matter who is president, the MLP structure won't be touched. Actually, the sub-chapter S corporate structure is essentially the same as the MLP structure and much larger from a market size perspective. Lastly, if you do the math, the folks who own MLPs tend to be rich people and they pay the highest marginal rate. If the MLPs converted to corporate structures, tax revenues would actually decline as people and corporations change behavior in response to tax changes - something the politicians routinely forget.
Perversely, I think the low gas price is a significant positive for ATLS and the new E&P spin-off. I wouldn't be surprised if ATLS raised over $300 MM of equity in the syndication business. They will have these funds, with some modest leverage, to buy assets priced to the lower gas price. The E&P is partially hedged into 2013 at much higher gas price levels. Buy assets now on the cheap and hope the price recovers in 2013/2014.
Takeover premium. M&A in this sector is just starting. It is much cheaper to drill for oil/gas on Wall Street than in the ground. Foreign buyers and roll-ups in the US are going to be huge. I remember in the 1980's when gas, oil and coal prices got really cheap. Companies like Dupont, unexpectedly, bought Conoco and Consolidated Coal. I wouldn't be surprised if a new buyer showed up in the gas markets this year, chemical companies (fertilizer?), as a method to internalize the entire margin of the value chain associated with producing commodity chemicals. These factors will continue to support the price of the ATLS complex. Basically, under this management team, every thing they own is for sale. In this regard, they own more ATLS than APL........ I own both, weighted to ATLS.
Looking out I think there is more risks to ATLS business model then APL's if the tax code is changed. Since I try to not buy something that does not have intrinsic value going out for many years the profit that ATLS earns from its partnership program while having a very high return is also subject to a higher risk that when there is a tax change it will take a higher hit then APL.
I own both currently but on just the current growth profile APL deserves a buy and hold from me. ATLS also but with more moving parts in it's current configuration it is just not as easy to calculate gains while having greater chance of tax or regulation changes affecting operations. Fracing at risk of a slow down or temporary stoppage in populated areas or areas that have fresh water aquifers. I think APL with processing in areas that are not populated and that have salt water formations that the water can be returned to or in the case of Pioneer used in water flood projects just carries a little less regulatory risk. The easiest part of ATLS to depend on is the APL IDR's. Just those make ATLS a good investment. Just not willing to stop APL currently as an investment. Too steep of a growth profile for the next 2 years is visible with still steep possible growth after that.
Sub 5% on APL possible when the future growth is recognized. Bump in 2013 with NGL all being priced off of Mt Belvue. Cross my fingers the price of NGL's does not crater for a long time.
Good luck Earl,
thanks for your analysis of the positive developments to come in West Texas.
It seems every time we turn around there is another 10, 15 or 20 per cent improvement on the previous estimates. I do believe we are seeing the bottom right here and right now in the price of natural gas. As such all this great APL news will eventually move the stock price higher and possibly down to a 5% equivalent yield.
As regards the ATLS vs. APL question, ultimately ATLS will benefit the most due to its leveraged position. It may take another 6 months or so for the market to adjust when the full 50/50 split is fully appreciated.
I sure have a hard time with completely switching to ATLS. The APL story is so compelling in OK as discussed. The story in Texas is just as good. Pioneer sold some of its holdings in PSE the drop down MLP it is parent of in the Permian Basin. Pioneer sold stock. They did both of these actions to fund additional drilling in the Wolfcamp shale play account expiring acreage issues. They must drill 80 wells in the next 2 years. Pioneer could have chosen to slow down the vertical well increase but instead decided after just a couple of wells of their own came up with comparable economics as others with big Wofcamp wells to increase the drilling. This is first being done in the Southwest portion of Pioneer's acreage. Last year APL talked about the drilling increase in Texas causing about 40 million a day per year in increased gas gathered. This is what APL was actually seeing. What has not occurred is the coming increase in deeper completions on the same vertical wells. Pioneer is going a little deeper and completing one and sometimes 2 new zones which amount to a little less then double the production to some 80 to 100 barrels a day initial with very shallow decline. 20,000 high grade verticals well locations and at least another 10,000 more of a lessor return locations.
The Wolfcamp horizontals are 1,000 locations estimated so far and come on with close to 10 times the flow rate of the vertical so 1 well equals 10 wells on an oil equivalent basis. So far so good 80 wells = 800 more verticals in the next 2 year to add to the 1000 per year of verticals being planned as a ramp up.
It is actually much better. Some of the competitors Wolfcamp horizontals come in with up to 30% gas and 30% NGL's compared to 10% combined gas and NGL's in the Sprayberry verticals. 1000 Horizontals are worth at least another 30,000 vertical locations as far as APL getting rich gas is concerned. When I do back of napkin guesses on increases in EBITDA I usually low ball Texas contribution at $1.00 per thousand cubic feet gathered to give myself some lee way to be off and at the lower ramp up it has kept my estimates pretty close. The actual gross margin gain for APL on Texas permian gas is actually closer to $1.50 per thousand so a ramp of 50,000 per year in processing in Texas is worth more then a 75,000 ramp up in mid continent.
APL will likely beat my 50,000 a day per year ramp up estimate in Texas in the next 4 years.
I decided to add to my position by buying 2014 calls on APL. I chose the $45 strike price.
If you are going to use it for processing then it needs a little adjustment. Rough estimates using information provided by SD and APL. SD last presentation did not separate the NGLs from the natural gas so BTU's need to be adjusted from the oil equivelent to the cubic foot gathered.
OK Mid continent wells average 1147 btu's per cubic foot so gas has to shrink by 13% to find the correct volume as an oil equivalent.
I used begin rate year one 245 to end rate 160 for average of 202 barrels of oil equivalent a day at 55% gas times .87 to take into account the denser liquids in the gas and you get average 1st year gas production of about 580,000 a day. End of year rate 460,000.
Declines used 40% then 25, 15, 10, 8, 6
Year 1 245 to 160 average 580,000 end of year rate 460,000
Year 2 160 to 120 average 401,000 end of year rate 344,000
Year 3 120 to 102 average 318,000 end of year rate 292,000
Year 4 102 to 91 average 275,000 end of year rate 261,000
Year 5 91 to 84 average 249,000 end of year rate 250,000
Year 6 84 to 79 average 232,000 end of year rate 232,000
If you want to estimate processing needs then add the 2nd year production estimate you choose to the first year new wells to get the estimated total processing needed or if it is static at 400 wells per year then real easy by just adding the following year to estimate needed additions to processing volumes.
I have only been guessing at SD wells that APL will get but CHK might add a lot also.
Thanks for posting.
I did not see any surprises. 18% total return in 2012 with a $42 target price.
If that $40 price per share comes back any time soon I might be tempted to switch out of APl in my IRA into ATLS, EVEP and/or Atlas Resources.
My surprise was the expected yield of 5.75% and distribution of only $2.40 12 months from now...i expect closer to $3.00. Page 30 is probably the reason why, only $217 net million in growth projects for years 2011 and 2012 and 2013 combined. My numbers would be way lower with that expansion expectation also.
Atlas Pipeline Partners (APL)
Attractive Distribution Growth & Leverage to NGL Infrastructure Expansion, Buy
Attractive Distribution Growth — APL enjoys visibility to a growing asset base through high return projects and is well positioned to grow distributions by more than 11% over the next twelve months. This distribution increase is supported by ~ 6.7% increase in cash flows and excess coverage of ~35% in 2011.
Leverage to NGL Infrastructure Expansion - New NGL takeaway capacity coming on-line in 2013 should allow APL to execute plant expansions and get increased NGL production to the market at attractive pricing providing further upside.
Estimate Changes — We are adjusting our 2012 estimates to reflect CIRA E&P team's lower natural gas price expectation. Our new 2012 adj EBITDA estimates are lower by about 3.5% which reduces the partnership's coverage for 2012 to 1.06x. However, our estimates may prove conservative due to lower ethane price assumptions.
TP to $42.00 — We are increasing our TP to $42.00 from $40.00 Our new TP is based on partnership achieving an annualized distribution of $2.40/unit 12- months from now and units trading with a yield of 5.75% (6.00% previously). Our lower yield is driven by favorable view of midstream MLPs that possess strategic assets, an attractive yield, and offer LT organic growth potential. We believe these attributes are likely to attract fund flows in the current low yield environment that is marked by global uncertainty.