They're going to sneak them in bit by bit using the ATM [probably about $250-300M worth I figure, including funding growth capex]. I'm not a big fan of this transaction, but I do like that method of raising equity, as it avoids the big swings offerings create, which can create holes that take time to climb out of. That, combined with monthlies, should keep the unit price pretty stable, although with rather constant selling pressure, I wouldn't expect the unit price to run away.
Some things on the call I liked, it appears they were listening to the unit holders, some of whom may have been skeptical about this new direction, as they went out of their way to emphasize that the growth capital component is modest ($50M), and is limited only to this acquisition, which they don't control of course.
At one point Richard said ". . . if gas prices stay in the $4 range, we have many, many, many years of sustainability. Between our Woodford property and now this property, we just have so many locations to drill like I can't put a number of years on, we haven't calculated, but it's certainly well over 10 years." I hope he's right, but I'm not sure gas prices will stay in the $4 range, I'm more inclined to think this recent period is a local top and we'll slide back into the $3's in a few months. My view of the medium term gas market is much more restrained that theirs, which is why I'm not thrilled with a big dry gas acquisition, in Wyoming, in a small minority position being operated by someone else. Makes me a little queasy. The 20 year life, and the huge number of unproved locations . . . that helps.
Thinking about it further, what does all this mean? Take into account VNR has been "dead money" for almost three years, some ups and downs of course, but the mean of the chart is about flat. It's currently yielding at 8 1/2%, which is probably a tad too high. Take into consideration that LINE was in the 7's during calm periods after the financial crisis, and that VNR is significantly larger that it was, yielding in the 8's during that period of time, you could argue that a stable VNR might be priced to yield 8%, a couple bucks higher than here (before modest distribution increases). Nothing to get excited about.
Compare that to LINE, which is probably at least 20% under-priced right now, capitalizing the distribution at a modest 8%. The bottom line is, that if you want price appreciation, this is the wrong place to be putting new money. If you want rapid distribution growth, well, that's not management's style either, they would probably cut back spending if DCF coverage got out of hand, not pay out a lot more cash. LINE is overdue for a bump, which I think is coming after they digest the recent acquisitions. So, why buy this?
The old answer would have been . . . safety, conservatism, low risk. With this transaction they have become substantially more "gassy" than their peers, which is the wrong direction, in my opinion. They have also exposed themselves to drilling risk to support growth, something they've never done before. If gas collapses again, they do have hedging time to live through that, but if they try and grow through drilling for dry gas, they expose themselves to commodity risk, because you can't hedge what you don't have. On the other hand, the proposed capital program is relatively modest, and if the operators quit drilling due to low prices, VNR can exploit a lot of undrilled locations it owns. But we didn't use to have to say "if" so much..
You make a lot of good points as always ruby. My reasons for sticking with VNR are:
A. Since I became a unit holder, VNR has treated my pocket book just fine with very few reasons to not sleep well at night knowing this is one of my larger investments
B. While LINE and other peers like QRE may very well have a better risk/reward attached to them, I like to diversify my money with the majority going to boring (we hope) companies like VNR and EPD within the MLP universe and CVX, RDS-B, and COP/PSX amongst the non MLP energy companies.
Natural gas prices may remain stable at $4. There is a lot of pressure on the DOE to approve more applications to export it.
ConocoPhillips Alaska Inc. has filed an application with the U.S. Department of Energy to resume LNG exports from Alaska. The DOE recently authorized Freeport LNG to export LNG to non-FTA (Free Trade Agreement) nations. The list of applications (that were first submitted in 2013) is huge and most are pending. Gas and oil lobbyists are probably behind Ted Poe's bill; nevertheless, it illustrates where things are headed.
U.S. Representative Ted Poe (R-Tex.) has introduced the “Export American Natural Gas Act of 2013″ (H.R. 3760), which would “provide for the expedited approval by the Secretary of Energy of liquefied natural gas exports.” The bill would require the Secretary of the U.S. Department of Energy to either approve or deny an application to export LNG within 60 days of (1) receiving an LNG export application and (2) the applicant entering into a contract for the exported LNG. If the Secretary did not act within 60 days, the application would be deemed approved. The bill was referred to the House Committee on Energy and Commerce and the Committee on Foreign Affairs.
from rbn's 2014 top ten energy prognostications:
"Reality will start to set in for potential LNG exporters. Four export terminals have been approved by DOE to non-free-trade-agreement countries, for about 7.0 Bcf/d capacity (Sabine Pass, Freeport, Lake Charles and Cove Point). We figure another couple are not far behind, that will bring export capacity up to 9.0 Bcf/d. More terminals in Canada are likely to happen that would add another 4 Bcf/d or so to the total. Then there are 17 other U.S. projects that have been proposed to DOE, of which seven have made their companion FERC applications, adding up to about 25 Bcf/d more capacity. Add to that still another 14 Canadian projects in the talking stage. (See FERC’s List here). Those are crazy numbers. Of course, if you followed the LNG import frenzy of a few years ago, this proliferation of projects looks pretty familiar. However, this time there is one major difference. Most of these projects come in at $10 billion a pop instead of the single billion dollar price tag for import terminals, and are much more dependent on specific long-term sales deals than the import terminals that just relied on a generically strong U.S. demand.. Regardless of how many ultimately get approved for construction, it just makes no sense to put over $150 billion in natural gas liquefaction and export terminal facilities on the ground. Take another 15 or 20 Bcf/d of natural gas out of North America beyond the approved terminals (as much as 25 % of supply) and you know what would happen – U.S. prices would increase and international prices would decrease, killing the economics for all that terminal construction. Not to mention that there are a few other very strong competitors out there for a growing but finite world LNG market. With so much money on the line, we predict that many of these projects will be dropping by the wayside over the next couple of years - whether or not they get permits."
Agree, but look how long it's taken to develop even one terminal, in Cheniere. And the cost, just staggering, several billions per Bcf/d of export capacity. We're talking the end of this decade before it would have any meaningful impact. That's my timeline, that gas will stay basically flat, confined by supply jumping up to dampen prices, until we get towards 2020, then a steady rise as some of these new demand outlets get cranked up, commercial trucking and so forth. Then there's the impact of the drilling revolution in the rest of the world, which hasn't caught up. We may find that can come on line much faster, and reduce the export demand before it ever happens.
Oil on the other hand I see as being much slower to increase in supply, with domestic prices in the $80-100 range for the forseeable future - which is fine, that's plenty adequate to support upstream DCF, hedging out futures. After all, we still import a lot of oil, we're petroleum pigs, and that's not changing this decade.