The debt covenants will prevent much cash going out the door for buying units. Hypothetically it would be great to buy back all the units they just sold for $8. But it won't happen.
What I'd like to see is for them to use some of the 750MM they just "re-affirmed" in terms of the LOC and buy back some distressed debt. That would create a bit of breathing space in terms of at least meeting interest payments next year.
Make no mistake, short of geo-political events directly hitting Saudi Arabia there is not going to be a sharp rise in the price of oil. There is just too much oil in the market and with Iran ramping up its going to get worse before it gets better.
From what I'm hearing Iran is already ramping up capital spending on oil infrastructure - figure that there will be a 6-8 month lag and sometime early next year the amounts will grow quickly.
I'd encourage you to go back and read some of the transcripts from APL in 2008/09 and also to read through ATLS in 2010 through present. You'll find that the words and results rarely were similar.
Keep in mind that APL sold off two very solid operating systems due to the hedging fiasco. The only thing that really brought back the APL/AHD entities was the fact we owned land in the Marcellus and its value went through the roof.
I don't see anything similar happening here. Short a recovery in pricing I think we are in a tough spot.
I am aware of our leverage limits being 5.25 and then 5 moving forward.
And at today's NG and oil price I believe that we'd be in violation of our covenants. Yes, we have hedges in place in the short term. Yes, I believe that in three or four years NG will be around $4+. No, I don't think we'll see oil get back to the level it was at for our last two acquisitions. And NGL's are a disaster.
Look, I want everything to work out. Just be aware that Cohen has a history of leaving himself no wiggle room. His plans are for when things are great and when things are greater. I've lived through the ups and downs and heard him promise the moon more than once while delivering fools gold.
If it were me, I'd suspend the distribution (after all the units have cratered 75% so who cares if they go down another 20%). Buy back discounted debt until either NG or Oil prices rebound. Then re instate the distribution and try to grow it rapidly.
We are in a bad spot. We really can't use units as equity for acquisitions. Remember that we have a decline rate of 11-13% per year and at some point you have to ask where is the future production? Better to pay down debt, have a stronger balance sheet and have the ability to issue new debt (at lower rates hopefully) to expand.
That is only under the scenario where they are paying out a distribution. At some point our debt covenants will kick in and the distribution will be halted. Same thing happened in 08/09.
By buying back the debt at a discount the leverage would be reduced.
This is all a result of the last two deals. They overpaid at the time (when oil was over $100) - and now that prices are half - our ability to service the debt long term is questionable.
We do own decent assets (paid too much for some of them but others were bought at a good price).
IMO - $4 is about a price at which I'm going to double down - get my average unit price below $10 and bet that NG is going to slowly recover over the next 2 years. Oil is now down to hoping for bad geopolitical events, economic growth will be sluggish and Iran will have about 1 million more barrels a day flowing by this time next year. So oil is a lost cause IMO unless war intervenes.
I think that $5 is about what they could pay out between now and mid-2020 if oil/NG prices remained the same. At which time asset sales would have to begin to occur to pay off debt (yes, its hypothetical as new debt could be issued and no one knows what pricing will be in 2019 nor next week!).
This also ignores the covenants which are designed to protect the bond holders and prevent this type of scenario from happening. Have to believe that there are now funds that estimate the distribution will have to be cut off at some point in time due to the covenants and are exiting the position regardless of unit price.
The likely Iran deal will put pressure on oil even though it will take 6-12 months for them to really ramp up production.
Best thing that could happen for ARP holders is an ISIS bombing of SA's main oil production facilities followed by SA and Israel blowing Iran's nuclear facilities and oil production facilities to oblivion. That would double the unit price. But short of that type of activity, things are not looking good for ARP.
And under delivered (sorry but ran out of allowed spaces).
The best case scenario IMO is that ARP continues to chug along paying the 10 cents a month until DCF doesn't support it. We have to hope for some type of NG and oil rebound by 2018. And by rebound I'm talking $4+ NG (which I think is likely) and oil at $90 (which I think would require some geo-political events and less likely). That would allow us to sell some assets to handle the debt due in 2021.
As a long time holder, I am amazed at the constant self inflicted wounds. The stupid $6 million raise - using FOUR chop houses - was just plain stupid. It sends the message that we are broke - that no one respectable will loan us money. Far better to simply tell unit holders that one month distribution will be cut to cover the $6 million! 10.75% plus fees is halfway to loan shark territory!!
Anyways, can this rebound to $10 - yes. If everything goes well we could see $15 with a healthier pricing environment. But if your hoping for $20 that would require some type of doomsday oil pricing of $150+ and probably means much of your other investments will have tanked! Those two acquisitions have permanently destroyed a good chunk of value.
ALL IMO!!!!! And I've been wrong many times in my life!
The assets sold to cover the hedging fiasco were sold by APL and they consisted of two top flight operating systems. I believe that sale was done in May 2009. They didn't have much choice in the matter. Its about the same time that Dubay was brought in to run APL. I believe both moves were forced by the banks that held their debt.
They later sold our Marcellus assets. Without going back to review everything - we first entered into a partnership with an Indian oil firm - but soon thereafter, simply sold the whole thing. The timing of that sale - in retrospect - WAS pretty good. Don't know that we got top pricing but got a decent amount for the assets sold.
At the same time, there is no doubt that we never got close to any of the projections put forth from management. They were projecting that THIS YEAR ATLS would be paying us $4-$5 a unit! HA!
They have overpaid for the APL assets mentioned and also the last two ARP acquisitions were blatantly overpaid (and I stated so at the time). Throw in the oil price collapse and you have value destruction probably somewhere in the 60% range on both of those acquisitions. Given the size of those acquisition compared to what previously existed and you get a unit price dropping from $20-$24 to $10 - then throw on oil and NG prices dropping and that gets you from $10 to $5.
The reason for the large decline is that its tough to put forth a path to simply paying off our debt. Now it doesn't come due for 6 years - that's good. But given lower output and pricing it becomes a game of rolling it over and extending. Which on its own is fine, but it leaves you little room to then grow.
Now on the positive side - we do own lots and lots of land - there is always a chance that we get something like the Marcellus on some of our holdings - I doubt that given the amount of exploration done the past five years. We so have the largest private partnership program in the country - but they have consistently overpromised.
Well to start with - do some back of the envelope calculations for DCF between today and 2021. Then look at the debt that comes due. And let us know how much extra $'s is left sitting around at various NG and NGL and Oil price points.
Then you'll have your answer.
I had assumed the $6MM payments would simply be handled from normal DCF and partly why I wasn't overly surprised at the cut in the distribution.
I don't think oil is going to $30, but then again when SA originally refused to cut I thought $60 was the low side - and bought ARP at $13.50 based on that obviously incorrect thought! Iran will be bringing a million barrels a day if not more by next year so agree that 50-60 is the most likely range for the foreseeable future. But you never know - one well placed ISIS bomb and SA's production could plummet. Likewise Greek Exit could trigger another financial fiasco and prices plummet.
What I'd really like to see is ARP hire someone like Dubay, but with experience in E&P.
Will be interesting to see what/if any distribution ATLS ends up paying out.
Hi Chegerar, Hope your doing well.
I do expect that eventually NG fundamentals will swing back in the favor of producers. But I think it could take another 18-24 months for that to really begin. Hopefully, between power production and the ramping up of LNG we'll see NG return to the $4 level and hold firm.
In terms of ARP (or any atlas entity) doing a good job with hedging - well..... I think you know.... that gave me a good laugh. I'll believe it when I see it!
I do expect that there will be a further reduction in the distribution if oil prices don't reclaim the $80 level by the end of the year. The desperation $6 million raise through chop shops tells me that the door is shut in terms of major financing - and that they have very little financial flexibility currently. I wouldn't be surprised to see .05 a month (its not what I want obviously, but when I see the headline I'll just shake my head).
But, as always, time will tell. Maybe we'll find one of our land holdings actually has huge gold reserves!
Agree with your point.
But I wouldn't assume that ARP will achieve the same cost reductions as other operators. Why? Because Cohen isn't an operator - he's a finance person. And the Atlas group has simply never achieved the same operational efficiencies as other companies. Will they see some savings - I'm sure they will but they will fall short.
I do agree that they need to reduce the debt if/when they have the opportunity to do so. But since they just used 4 chop shops to raise $6 Million in preferred equity I don't see that happening anytime soon. Think about that for a minute - 4 firms to raise $6 Million. At a 10%+ coupon plus fees!
Something is very wrong.
The acquisition last year was terrible - we overpaid at the time - and now its a huge value destroyer.
Keep in mind that the last time around (back in 2008/09) we got bailed out because we happened to have holdings in the Marcellus when that exploded. It was good luck. I don't see what is going to bail us out this time around.