I am thinking that they can bump the $112MM Q3 ebitda to $125MM/qtr run rate next year ($500MM/yr) with full postle and heavy growth capex in second half.
That gets leverage down to about 3 target, which management may have been thinking when they picked the number of shares.
Debt was $1.85bil at end Q3. $330MM proceeds from offering, if options fully exercised, so debt would be around $1.52Bil. plus or minus Q4 net cash.
Leaving the ratio close to 3, if ebitda assumption is close.
What are you expecting for ebitda next year? My guess is that they will be roughly net cash break even next year, but we need more guidance on ebitda and capex plans for next year. Maybe they will scale back capex a bit to consolidate the acquisitions.
For some reason they decided not to issue preferred, which would have reduced leverage ratio. I would be interested in their thought process on that vs senior notes. Likely they viewed preferred as too expensive.
Yes, they can lose money on the hedge by itself . But if oil is less than $95, they make money on the hedge. The purpose of the hedge is to lock in profit and cashflow. Not to guess where the market is going.
Production costs are way below $95, so they make good money at that price.
Maybe a small acquisition, but a large one will require another equity offering. Remember that they are still above their target leverage of 3. The note of offereing is debt, so it does not lower leverage ratio.
Also, give up on the idea that they will pay down debt from cashflow by any significant amount, if they stick with current growth capex plans. Show me some numbers that include maintenance capex, growth capex, interest, and distributions that shows that there is cash left to pay down debt. Cashlow to pay interest and distributions has just gone up.
Perhaps they are planning to really reduce capex next year, but I don't think they have given any guidance on that.
The senior notes are definitely more expensive than the bank credit line.
In 10K, they say rate is about 2.21% above 1 month libor. 1 month libor around 0.2%. So, all in rate well below senior notes.
I did not see info in latest 10q, but I doubt it has changed much.
I am not a tax expert, so this may not be right. First, since they are an mlp, they don't pay income taxes. The income get allocated the the unit holders, and often it is reduced significantly by depletion, intangible drilling costs, etc. So, often the income you pay tax on is a lot less than the distributions you receive.
Second, the hedges would only be taxable when realized, unless they close out a position early (which they rarely do ). When they do have a realized gain (as the hedge matures), that would normally be offset by selling their actual production at a lower price. And vice versa. So, the impact on taxes would not be that significant. What you make on one side, you lose on another. Basically think of it as selling their product at a fixed price, and oil market fluctuations don't effect the income or taxes that much. While the production is hedged.
By realized, I mean when they settle up monthly or quarterly with their hedge counter party , by paying or reviving the difference between the fixed price and the actual daily price (wti or Brent - for oil).
How does this help the quarter? Rate is certainly higher than the floating rate on bank loans. The main benefit is that it's fixed if rates go up, and not subject to the whims of the banks. Short term rates will stay low for a while with Yellen at Fed, so this will hurt them on a pure cash low basis, short term. That doesn't mean it isn't the right thing to do.
You are not subtracting growth capex, and not clear if you are subtracting interest expense either. Unless they cut back on growth capex, they are cash flow negative in total. Debt will continue to go up, not get paid down. The plus side is you might get some growth in ebitda. On the negative side, hedges are a bit worse next year, so that will knock off ebitda.
I remember someone saying that my assumption of a $18.50 net offering price was a radical assumption. Doesn't look so radical now....
If you annualize 3rd quarter ebitda of $112 x 4 = $448
Debt = $1,090 + $756 = $1,846.
Leverage ratio = 1846/448 = 4.12
I was kind of hoping it would be below 4. Postle was not on books for full quarter, plus maybe some related expenses. Hopefully it will be below 4 in 4th quarter.
Still looks like a need for equity or preferred.
Dividends/distributions will definitely affect call and put prices. Options are pretty much priced on theoretical models (black scholes, etc.), because that is what large dealers use to value and hedge them. I use to trade options (on bonds), so I have some expertise in this area.
I won't get into too many details, but basically if a dealer sells you a call, he is going to buy a certain amount of stock to hedge his position. The amount of stock he owns will change depending on how far in or out of the money it is. More volatility requires more hedge adjustments (buying high, selling lower for someone short the call), so that increases the option value.
If the stock is paying a dividend (or distribution vs. one with no dividend) during the option period, then that is to the benefit of the call seller (since he long the stock as a hedge and will collect the dividend). Thus, in competitive pricing, the dividend will lower the call value. The bigger the dividend the bigger the effect. Reverse is true for puts.
All of this gets factored into the option pricing model, which any large dealer is going to use to calculate premium values, hedges, etc.
It can be more complicated if it is an American option vs European (cannot be exercised before expiration), because of the option to exercise before the ex dividend date. So, a call owner might exercise just before the ex date to get the dividend, but he would give up time premium to do so.
From another source:
"Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date.
Meanwhile, options are valued taking into account the projected dividends receivable in the coming weeks and months up to the option expiration date. Consequently, options of high cash dividend stocks have lower premium calls and higher premium puts."
I noted a while back that are already below 4.0, with Postle at full run rate. However, they are probably closer than they would like because ebitda will vary a bit with commodity prices, etc. Not much room for error or acquisitions.
Also, they are cash flow negative with current growth capex plans. So, paying down the debt won't happen unless they lower capex plans. On the other hand, it can boost ebitda, so impact on leverage is hard to say.
Hedges are worse next year, which will lower ebitda a bit, everything else equal.