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# Eagle Rock Energy Partners, L.P Message Board

• lizahuang54321 lizahuang54321 Jun 9, 2010 2:54 AM Flag

## value of warrants

close prices 6/8
EROC 4.73
EROCR 2.94

Implied value of warrant = 2.94 - (4.73 - 2.50) = 0.71c

Let's assume that EROC is able to start a 0.23c quarterly distribution starting next cycle.

Also assume EROC unit price goes to \$8 to give an 11.5% yield.

Warrant valid for 2 years means 8 distributions = total of 1.84 during that period. Assume distribution stays the same during those 2 years and that unit price remains at \$8.

If the warrant is executed after 2 years, you pay \$6, giving a gain of \$2 assuming unit price if \$8. Taking into account price of warrant 0.71c based on today's closing prices, the gain is reduced to \$1.29.

But you could could buy units today for \$4.73 and get \$1.84 in distributions over the 2 years bringing the cost basis down to \$2.89. If unit price after 2 years is \$8 then gain is \$5.11

Or let's say you buy units after the distribution is announced and purchase price is \$8. You still get \$1.84 in distributions bringing the cost basis down to \$6.16, meaning gain of \$1.84.

No tax implications considered here, nor opportunity cost of money saved for \$2 before exercising warrants.

Based on these simplistic assumptions, is it worth bothering with the warrants? It would seem to be much better to simply purchase units before any distribution is announced. Even waiting for the distribution to be announced, at which point unit price is assumed to be \$8, it still seems better to buy units because you may collect 2 years worth of distributions during the validity period of the warrants.

The warrant sounds good until you consider the distributions you miss holding warrants instead of units.

Based on this, I'm wondering if it's better simply to sell the rights and use all the proceeds to buy EROC units adding in extra cash of \$2.50 per right, instead of exercising the rights and getting a smaller number of EROC units plus warrants.
In other words converting my rights to all units instead of units plus warrants.

Thoughts?

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• Exactly, you would need to got temporarily go out of pocket for the units if you wanted to hold just warrants, and risk market conditions through the end of June. Of course, the units could go up and pay for the warrants, no crystal ball.

Given how cheap the rights got today, and the value proposition, I bought another 10,000, and I'll probably keep both the units and the warrants. I'm banking on a reasonable distribution to value the units substantially north of \$7, because otherwise I see no reason why the vote would have been so positive, the big holders must have assured themselves of the higher value. After all, the current worth of the two securities together (unit + .35 right) is substantially down from pre-vote levels. I'm sure no one bargained for that as the status quo.

After the warrants are distributed next month, and depending on market conditions, there may be a chance to pick them up cheap. Possibly a lot of retail holders will exercise and sell one or both securities received back, or just dump the warrant out of confusion. One can hope, anyway.

• Sure, If you could just buy the warrants maybe they would be the better deal like you say. But to buy a warrant you also need to buy a unit so that 9 warrants for \$4.88 you mentioned is not available (unless you exercise the rights then sell the units and keep the warrants).

Anyway, it's done now. I sold my rights and used all the proceeds plus the \$2.50 per right I was going to have to shell out if I exercised the rights, to buy units of EROC. So I ended up with no warrants but with more units than if I had simply exercised. Meaning if they resume distributions soon I will get higher distributions than if I had simply exercised the rights.

P.S. Reading the prospectus last night, I discovered that there is an oversubscription option for any un-exercised rights. You can ask to exercise more than your number of rights. But don't ask for too many because you would only likely get a few and you need to pay for all you request in advance and then get a refund for however many you didn't get. Went through this with PDS and it takes some time to get your refund. And as most rights will be exercised you are likely to only get a few more than your own allocation.

• If EROC does hit \$8 sometime over the next 2 years, then that would represent at least a 100% profit from holding the warrants, maybe 200%. That's not a bad day's work. Of course if the stock keeps slipping you could make the same argument, plus the distribution, as you say. Looks like it may have bottomed though.