Considering that XTEX is about the same price, and may have somewhat higher cash flow per share potential, or at least equal; considering there are about the same number of public unit outstanding with NO insider subordinated units to eventually steal cash flow; considering they don't have an NGP to bully them around and steal opportunities from them; considering that after this sale EROC loses the mineral business that made them unique and becomes closer to being just another midstream company . . . does it make sense to flee to try and preserve long-term cash flow?
I'm hanging around for awhile to see how this develops and because it seems there is a short-term gain inherent in the structure from this point, but this is not what I had in mind. I always figured that NGP might do something, but I thought it would just make an offer and take it private. This convoluted deal is too messy and confusing, I don't understand the need for most it, given that the passage of time will cure the debt ills anyway. If leaving well enough alone worked well for the public unit holders, then just about anything else cannot be in our favor.
I know, I moved over about 1/5th of my EROC position, as the tax basis of those shares (FIFO) was roughly break even. So aside from a few cents difference, it was almost exactly parallel. I'd still like to move more, but I'll stand pat for the moment, the tax cost on the remaining shares is now much higher after the high basis shares have been sold.
I suspected as much myself, but had hopes, wishful thinking I guess. I too am using $1.50 as a conservative estimate for XTEX, I ran some calcs I posted there:
In the Q2 call they gave guidance for dcf of $64 - 72 for 2009, which included 7 months of operations sold. Based on the midpoint guidance for the remaining five months, it appears the operations sold were generating in the neighborhood of $2M per month.
Management indicated the second sale will shed about $9M for Q4. Management's guidance in the conference materials is now $190-200M, say $195M. Removing income for operations sold included in that number, 7 months x $2M for the first sale, 3 quarters at $9M for the second = $154M.
Now that number is "adjusted cash flow", before interest. Debt at Q2 was $1.163, less (say) $250M for the KMP sale = $913M, say another $50M reduction going into the refinancing they want to do in 2010 = $860M roughly. Suppose they can finance that at 6%, that's $52M per year in interest, add some fees and such, say $55M, so net dcf is in the range of $100M, and that includes maintenance capex. These are 2009 numbers, so fairly conservative one would think.
So, based on a conservative $100M of dcf before income growth, after the 2010 refi, divided by roughly 50M units, you get around $2 per share. That should yield distributions of $1.30 - $2.00 per share, depending on the desired coverage vs. growth capex and so forth. The midpoint is around $1.65, well north of the $1.50 I've been using as an assumption.
XTEX doesn't have a sponsor, which is a weakness in one sense, but on the other hand they can't be bullied in this fashion. We get the spoils, and there's nothing insiders can do about it, aside from finding a buyer, like LGCY management tried to do. Sure, they can try to screw us, but it's not as easy.
A few days ago, I didn't own EROC or XTEX. Didn't even know about XTEX. If I had more free cash I would have purchased both, but had to make a choice. I bought XTEX over EROC, but it was for my basket of possible future income producers. I have a grouping of stocks and preferred which could be great capital gain or income payers down the road. I'm willing to wait 2-3 years for a turn. So, that's the matrix. I could be wrong, especially in the short-term.
I am on the side of those who feel favorably about this deal. It could have been much worse. And, I certainly could be wrong. As you mention, the issue is will XTEX run soon and opportunity for purchase at these levels be lost.
I factored in a 60 cent divvy for EROC someday and $1.50 for XTEX. Skepticalnewtrader estimated $2.3 for XTEX, but I factored down quite a bit as to payout.
As always, I could be wrong and probably will be.
One thing I did get right, I never thought the idea of EROC going thru the process of slowly paying off debt and arrearages, taking 3 or 4 years, would happen. That's just not the Texas oil patch. No one sits on a boring story like that.
BTW, for myself, we're at break even right now:
EROC = $4.87 - my tax basis $3.69 x 35% = $.41. Right now XTEX is within 41 cents of EROC, so I would lose 4 cents a share on a parallel move.
Yes, I read that. I refuse to be that optimistic about XTEX (not that I wouldn't take it), of course they won't distribute it all. The estimate for EROC is based on the new number of shares. It seems the choice is to put up more cash for more shares by using the rights, or contract your ownership in EROC by selling the rights and warrants. Either way it's not as favorable as just sitting and waiting for them to pay down debt.
LGCY had a deal that management was all hot for, and it got shot down by the conflict review, it never came to a vote. Hopefully that will happen here. But can you afford to wait? I suppose so long as XTEX doesn't get ahead of EROC, it's harmless to sit, because it doesn't really matter what the market prices are if it's a parallel move (f'ing taxes aside).
It took months for anything to happen at LGCY, patience may be required! But if the gap between XTEX and EROC shrinks to less than the taxes due on a sale of EROC, I'll be strongly inclined to make a parallel move to protect against XTEX leaving the station while I'm sitting on this train. I sure don't see much in the way of XTEX returning to health.
If I was ten years younger, the present value of the cash flows would be an issue. But my discipline is that I don't touch the principal or capital gains, but any cash flow is mine, I pull every penny out and spend it. The more cash flow I have, the more fun. Maybe I won't need it all, but more is gooder. I want a big cushion.
I respect that approach, and I'm very long EROC, and even considering adding more (other than just participating in the offering).
Still if XTEX can produce significantly more cash flow than EROC over the long term, then I think that THAT'S a perfectly legitimate numbers game as well.
I'm not long XTEX at all...I mean to read up on it, but i've been so long on EROC, BBEP, CEP, QELP, PLLL (although the calls I wrote here went against me) that I haven't wanted to add.
Pious, I would like to explain to you time value but you and I are definitely different types of investors. Lets say with this deal ERoc immediately starts to pay 60 cents annually in distributions then by 2015 you have your entire investment back and whatever eroc is paying is more percentage wise than any other MLP that doesnt start til 2015. Time value means the faster you can turn over and continue to make money the better you are. I am a number man in the 1980s I started doing wrap mortgages when no one here knew what they were, I borrowed all i could at 22% because even though I was making 12% home loans when the bank was charging 15% I was making a yield of 33%. I had 500k of these. It was a number game. That is what I am best at and always have been. That is what I am doing now with bull call spreads. I am telling you money now has a much greater value than more in the future depending on the yield you put on it. If you dont figure that in then you could really be getting further behind with a larger number, such as when inflation happens. If it is inflating 10% and you are making 9% you are losing. same with time value. I hope I am not as clear as mud.
<<or me catalysts plus financial clarity is worth a lot. They should put EROC at the same multiples of BBEP. And both of them should be targetting soon LINE, VNR multiples.>>
Why not add ENP...They are aprox. 65 percent oil 35 percent NG where most are not over 30 percent oil and have as good as any in dist.....Walker the ceo at BBEP thinks ng could go as low as a buck soon per his last conference...He claims there is no place left to store more ng...