Q3-09 DCF = $36.6M
Q2 Distributable Cash Flow 28.8
Annualized $131 M
Q3-09 Cash Income = $3.85M
Q2-09 Cash Earnings 3.2
Annualized $14 M
PRORORMA DCF W/O MINERALS = $117M
Units out roughly 50 M
Not counting the $174M coming-in, the $29M going-out, dilution of 10, 20 or 30%, elimination of incentive distribution rights, etc.
So how do we value EROC after getting diluted to a worst case 117 million units? First let's see what this is going to do to the company. I'd appreciate some help here if anyone has good ideas of the midstream or upstream valuation, but at least our capital structure is much simplified and our cashflows should be more predictable.
So the rights offering would bring in $45 million + $177 (need to double check) million for minerals. This would let us pay debt down to comparable levels to other non-distressed midstream players. If we decide to go through with the offering then we can add a high ROI pipeline as part of growth CapEx.
I think a fair estimate of value would probably be based on a slightly higher yield than the going rate in the non-distressed pipeline MLPs.
I'm looking at DPM, KMP, CPNO, EPB, WES, WPZ, WMZ, TCLP, NGLS, RGNC, SEP, KGS, OKS, BWP, MWE. These all yield between 5.5%-10%. The vast majority are in the 6-8s. Many of these dividends are paying through all operating cash flow and capex is funded by borrowing. EROC can pay .65 AND pay for capEx even on 117 million units.
So assuming that after paying down all its debt, and funding all capex and distributions from cash flow, it should still be worth the same as the highest yielding comparable MLP (CPNO which pays out more than it makes) at 10X the distribution. This would suggest a fair value of EROC of at LEAST $6.80 per unit AFTER dilution. Using a more likely 12.5X the dividend (8% yield) would value the equity at $8.50 per unit.
Maybe the other MLPs are overvalued, but EROC sure seems like a bargain in comparison. Remember that we could further dilute the units if the $6 warrants get exercised, but this would provide a lot more cash which could be invested, and also would suggest that we're sitting on $6 per unit + which would still be a big gain from $5.50 after taking the $2.50 units and warrants into account.
Ok, let's look at this a little more closely. I think there could be a lot more dilution, but I want to see if there's still a margin of safety here.
There are 53.6 million outstanding common units according to the last 10Q + 35% = 72.3 million outstanding units.
Then worst case we'd have a public offering with $105 million at $3.10 per unit. This would be another 33 million units. This dilution would be huge, and I think the likelihood of 33 million units being offered is very low because we don't need the money, and the unit price will be way higher than $3.10 or $3.40. Still, looking at worst case so we'd be sitting on ~106 million units.
Could add another 1 million units if we exercise options to take out the general partner.
The $29 million transaction fee will be in cash OR common units at $3.10 per unit (i.e. bigger give away to special interests than even reported)so that could be another 9.35 million units.
This would result in an absolute worst case of 117 million units. If we have FCF of 100 million (and I think it's going to be more going forward, but probably 100 million in 2010) we can probably justify $80 million in distributions which would be $0.68 per unit on 117 million units.
So for this part I think we can reasonably assume at least a longer term $0.65 + distribution even if we see bad dilution. I'll continue this below.
I was using an options strategy already, but I recently exited.
I was long the 2.50 CALLS and short the $5 CALLS. My idea was that if the subscription rights deal went through the PPU might drop below $5 so that I could exercise my options, participate in the rights offering, and hopefully not get my units called away at $5.
I exited just before this recent runup, so I missed out on quite a bit of potential profit, still I've got too much exposure here as it is.
oh great for you then I was going to let my calls expire and then dump this later if its still above 5 dollars. its like getting 7 dollars right now then if I use the rights.
So I just looked at the options seems everyone just did a copy cat from my strategy with options. Options are now being offered a bid price OF LOWER THAN THE COST TO BUY seems whoever wants to bid or pump and dump is looking at our posts.
Also, my cost basis in EROC is $3.19, and it makes up 33% of my portfolio AFTER selling 1/4 of my position. I plan to exercise my subscription rights, but not add more otherwise just because I already have too much (even though it has paid off and should continue to pay off.)
I can dilute my EROC holding by adding cash into other undervalued investments over time, so I'm not sweating it.
I agree that we'll probably see $10 at some point on the post dilution units. I'm not sure if that's going to be in the next couple years or not.
I do think that the $6 warrants are going to be a great investment opportunity. Especially because I bet that people that exercise their subscription rights to get more units might decide to dump the warrants for cash.
hmm question what would happen if i sell eroc
5 dollar handle with options
wonder if people will activate it right on that day... or actually let me get the rewards.
If they will then instead of selling eroc I'll sell it via options. since I know this wont break 5 dollars next month.
and even if it does I just got the reward who cares.