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Eagle Rock Energy Partners, L.P. Message Board

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  • youcanpickum youcanpickum May 5, 2009 2:57 PM Flag

    Friday

    More from Barclays:

    • EROC plans to reduce debt by $75-$100 mm annually and bring debt balance to $650 mm: Given EROC has not violated its debt
    covenants; there has been no increase in fees or re-pricing of its revolver, which stands at LIBOR+175 bps. EROC has a $1 billion
    revolver facility that matures in 2012. EROC had 3.7x Debt to EBITDA ratio at the end of 4Q08. Management goal is to bring Debt
    balance to $650 mm and maintain debt to EBITDA of 3-3.5x. With the distribution cut, EROC expects to pay down debt by $75-$100
    mm annually. As such, we believe EROC will maintain $0.10/year distribution till mid-late 2010.
    • EROC has 20.7 million subordinated units that have not converted to common units: The sub units are owned by EROC’s GP
    Natural Gas Partners. As part of the partnership agreement, when distribution falls below minimum quarterly distribution of $1.45, the
    sub units cannot receive distribution until the commons have received MQD. As such, the common unit holders will have arrearage
    rights during the period EROC pays below MQD. Assuming EROC pays $0.10/unit per year for the next 8 quarters and reinstates MQD
    for all unit holders thereafter, EROC will have to pay an aggregate of $150 mm to its common unit holders before it can start to pay
    distribution to its sub unit holders.
    • We value EROC units at $4.00 based on 6x multiple on EROC’s assets: Given our EBITDA estimate for EROC up to year 2011, we
    do not believe EROC can pay arrearage to the common unit holders out of its distributable cashflow. Unless EROC gains access to
    reasonably priced capital to pay out common unit holder’s arrearage rights, we believe it is possible that the GP liquidates EROC’s
    assets to claim residual value of its ownership. Using EV/EBITDA multiple of 6x we believe EROC units should be worth $4.00 per unit,
    which is an average of three points estimates based on our EBITDA assumptions from 2009-2011. Given debt makes up a large
    portion of the enterprise value, the equity value will have small but magnified impact on the overall valuation which should lead to
    volatile unit price movements. Our model assumes EROC not paying distribution till year 2011.

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