Debt now below $200MM. My hunch is that banks will cut the line to 200 or less. At 200, the distribution can keep going for now. Below that, I assume distribution suspended.
Regulators have been leaning on the banks about energy related loans.
Nice to see that 2017 futures have rallied over $5 in last couple of days.
That gain would add over $7mm in cashflow/yr and over $0.20 in DCf/shr/yr.
Of course that is coming of a level that was pretty harmful to company.
So, how do we expect it to play out if they violate the covenant? No distribution is a given. Forced asset sales? Forced issuance of second lien loans or preferred?
This is the risk to think about, and the potential long term impact that might reduce upside down the road.
I agree a long term call on oil, but value of that option somewhat depends on what they might be forced to do to deal with the bank line.
Of course they all face this issue. Some sooner than others.
One issue maybe that they are essentially all oil. Oil getting hit harder than nat gas.
Hot money might flow into bigger more liquid names first.
Might have highest short term risk of a bank forced suspension.
But I would rather hold this as a low cost producer. If oil stays low many years, they are probably all be in trouble, depending on nat gas as well for others.
Survival strategy would be to stop distribution and keep paying down debt until the future looks better.
One possible resolution, if it comes to it, is renegotiating the bank line. Elements I could see would be temporarily higher leverage allowed (maybe 1 year), a higher interest rate (maybe tied to actual leverage), and suspension of distribution until some objective achieved. Probably capex cut to the bone as well.
I prefer a scenario like that, to something more long term damaging.
At some point they have to start taking steps to avoid violating the convenant. Timing hard to say, but I would say within the next 6 months if no big rally in oil. They may not be able to avoid by just a distribution cut. Not sure what second lien loans cost, but it will be a lot. Would hate to see asset sales.
My guess is banks will lower borrowing base to $200MM or less in October. So, that might force their hand pretty soon.
Price certainly reflects high probability of suspension.
I don't think you understand what the market value means. It's just the market value of the common units.
To get total "value" (or what is called enterprise value) of the company, you add the preferred and debt on top of the common units. So, enterprise value is currently in the billions. The main value being all of the oul and gas properties.
And yes, the common is last in line after the bank debt, senior notes, and preferred stock. So, the very low market price is indicating that the market participants expect most of the assets / cashflow will end up going to the creditors and preferred holders, leaving little to nothing to common holders. Only hedges (for a couple years) and a big oil rally will prevent that from happening.
So, what happens if they violate the 4x loan convenant (or above borrowing limit) some time next year? Will they be forced to sell assets to get back in line within a certain period. Or will suspension of distribution generally be sufficient? I assume there will be a deadline to cure the violation, which could force asset sales or a second lien loan.
My concern is that they will be forced into a bad long term move. That would argue for paying down debt with distribution now. Not an easy call, because one doesn't want to panic and suspend unnecessarily.
I guess all of these will not be paying at some point in the next few years, if futures prices end up being close to what happens. Memp does have great hedges for several years.
Partial sale is fairly complicated. Do you use an accountant? Distributions will lower your cost basis. Plus usually there some (depletion?) recapture which will show up as short term income. There can also be deferred losses, which may be released.
I believe they will do first in first out unless you inform them otherwise. The main impact for you will be a long term capital loss, which offsets other gains or anything beyond $3000 will be deferred.
Almost better to sell out everything and buy something similar.
Thanks. The whole sector is heading for trouble until supply drops off somewhere. Not convinced it will be from US shale, as they continue to get more efficient. Maybe natural dropoff from conventional, deep water, etc. will eventually balance things out.
Imagine if there is a global recession in the next couple of years. That will push out further the recovery time frame.
Mcep at least low cost in the sector. Reliance on bank line might lead to suspension of distribution, or possibly high cost other financing. We will see.
In theory that does not affect value of equity, but it will take a hit it if it happens.
Certainly by cutting from $2 to $0.50 they have already cut it a lot. So, most of the savings in cashflow is already in place.
The visibility right now (futures prices they can hedge at) indicates that they will have to cut it anyway in the 2017/2018 time frame, and will possibly be in violation of loan covenants by 2018 as well.
So, more prudent to start putting house in order now, as long as the outlook remains that way. But, even if they pay down $160MM by 2017 they may still hit the iceberg. So, I don't view eliminating distribution as saving the company, just reducing the odds a bit that creditors will eventually own the company.
Most bang for buck would be if they could buy back senior notes at 60-70 cents on the dollar. That will result in higher DCF and share price down the road. I would vote for that strategy. Probably need to put some money to pay down the credit line as well.
Anyway , I only have a tiny, tiny position in this now. I have sold off some, and switched some to mcep in the past 18 months. Plus the drop in share price. For tax purposes, I may be totally out by year end, and on to other things. I am not as bullish on oil as many here (but think it too low now), and not a big fan of how this has been managed.
So why do you want to see the next quarter's results then?
Even at $70 they will struggle (ex hedges).
Although, at $0.50 / share it probably doesn't make a huge difference. Just makes the situation a bit riskier.
Current coverage isn't going change that much this year due to hedges. So, discussing this year results is not that useful.
Without hedges, coverage this year would be less than zero. At current futures prices, it will be less than zero in 2017 and thereafter. That is the whole issue and concern. Not this year.
So, do you cross your fingers and hope for the best or do you base in your decisions on current market conditions and prepare for that, given that leverage is around 6 now when previous target was 3 and coverage is expected to fade away?
If you look at debt + preferred stock, it has actually gone up this year from $3545MM to $3632MM.
So, fixed obligations ahead of common are still increasing. Payables are down some.
If BBEP was going to buy mcep, wouldn't you rather own mcep? Certainly they would not sell out without a pretty good premium. You could then roll it into BBEP if you wanted.
Not sure what you mean about BBEP too big to fail. Government won't bail them out. Someone might takeover at a fire sale price of they were failing.
Main advantage to mcep is significantly lower oil price needed to maintain positive cash flow (after hedges roll off). Some slight disadvantage to mcep being more dependent on bank credit line.
BBEP trading higher than Mcep again. Mcep had better coverage (same $0.50 distribution) despite oil hedges $20 lower than BBEP. Also, looks like BBEP does not take out cost of new preferred stock (pays in more shares) when computing its coverage.
BBEP has more room on credit line, since they have lots of senior notes and preferred also in capital structure. That is one advantage. Mcep would have higher interest expense than currently, if they added fixed rate senior notes.
They added some Q4 2016 hedges at $64+ at some point this year. Could have done a little higher price for 2017 and 2018 if they wanted to. Those prices are gone now.
No upfront cost if you do a swap , like they did. Dealers make money on the bid/offer spread. No fees or premiums (in most common swaps).