BTU was down 11 cents in after hours trading. ACI/ANR were flat in very light trading, and CNX was up. I didn't look at any other coal names. Who was crashing?
The BB&T analyst could be right, but 2 things, one about WLT and one about coal mines. WLT has $ 615 MM in cash and its burn rate (operating cash flow less cap expenditures) was $ 65 MM for the 9 months ended Sept 30. It has $ 12 MM in debt repayments due in 2015, $ 6 MM in 2016 and none in 2017. So if it files for bankruptcy, it's not going to be due to an inability to repay debt; it's going to have to be some violation of its debt covenants or a strategic decision by the company to get rid of its debt (and its shareholders). I have no idea how long the BB&T guy has been bearish on met coal, but I suspect today's story was just to get attention. It couldn't have been newsworthy to announce his belief that WLT would file next year. Everyone knows the company's problems already.
More importantly for NRP (as we have discussed before, WLT is not a lessee of NRP), when coal miners go bankrupt, their mines generally stay in operation. Which is unfortunate for NRP. Its lessees need some competitors to close their mines.
I think people finally figured out the trust - VOXX is actually an oil exploration company.
Seriously, I have no idea. No news, volume was decent but not huge, and the price drop was stretched out over the day, not like it fell off a cliff at 1 specific time. Because VOXX is down so much this year, it's a prime candidate for tax loss selling, but you'd think people would be a little more careful in selling.
The small caps were down more than the other averages, but VOXX's drop was crazy. Not that I'm buying any more on the drop.
Based on the trading since the oil & gas deal closed, not many people think that management had any idea what they were up against.
Seriously, this isn't a shot against management. No one expected, or could have expected, the drop in oil prices over such a short period of time. Management had no chance to hedge at decent prices. So now we wait until oil prices recover. The problem is that the oil & gas deal was supposed to tide NRP over while we wait for a recovery in coal prices. Now we wait for a recovery in coal, oil and fracking sand prices.
It's not the end of the world, although I think NRP will trade for a while like it is the end. NRP has an enterprise value of about $ 2.6 billion or a bit more. So the $ 340 million Bakken deal won't break them.
But management is pretty conservative; they cut the distribution this past January before the need to cut was apparent. They cut to help pay down debt until coal recovered. Not a bad idea. But now (for 2015) they need $ 175 million to pay the distribution, about $ 100 million to pay interest and $ 80 million to pay debt principal payments that come due next year. That's about $ 355 million of EBITDA. They were just barely there when oil prices were about $ 25/barrel higher than they are today. No way can they handle all that next year unless oil prices recover quickly.
So oil was their way to be prepared for next year and now it's another problem.
Maybe $ 11 will look like a great entry price 2 years from now; I don't doubt that. I also don't doubt that the selling of just about all MLPs is overdone; in fact, you have no idea how devoutly pray that the selling ends - I own lots of MLPs, and all of them are getting killed. My point is that no matter how smart NRP management might be, they're in a tough place and I think the distribution gets cut again. This time, I'll stay away until the distribution is announced.
I don't follow MCEP all that much. But I'll assume you're right - that MCEP is hedged until mid-2015. But what happens then if oil prices don't recover, or don't fully recover? Say you get a 10% return for the 6 months until mid-2015. What happens to the other 90% of your investment? Right now, people are probably valuing all the E&Ps as though they will get $ 60/barrel once their hedges run out and at that price things get ugly.
Assume MCEP was getting $ 90 until now. Using $ 45 as the average cost (based on your post), MCEP nets $ 45 per barrel. Using $ 70 as the sales price and $ 45 as the cost, the net cash flow equals $ 15. So a 33% drop in price equals a 67% drop in cash flow. That's the problem with maintaining the distribution.
Don't get me wrong; just like after the oil price drop from mid-2007 to late 2008, prices will rebound and rebound a lot at some point. The problem is that in 2007/2008, it took 18 months for the price of oil to drop from $ 140 to $ 40/barrel. I have no idea how long the current drop will last or where it will end. So I'm on the sidelines.
And finally, MCEP is a really small cap company, especially after the recent drop. I don't think anyone thinks it's worth the research to see how bad things might get. Sell first, think later.
I think Friday and today's drop in NRP price was due to coal and MLPs in general. I don't think most investors have focused yet on NRP's projected 2015 EBITDA from the new oil & gas investment. When people do focus on that, I think NRP has one more drop to go. That may not happen until January when NRP has to give an updated 2015 EBITDA projection, but at some point the other shoe will fall.
But unless oil prices really rebound long enough for NRP to enter into profitable hedges, there's still 1 more drop to come.
was priced at $ 17.27, less than a month ago. 5.8 million units; I doubt the underwriters picked up the over-allotment, to state the obvious. Great timing for the company, although it didn't look that way at the time. And presumably a lot of unhappy investors, many of whom are presumably dumping units Friday and today. Even if oil stabilizes, there will be more tax loss selling before year-end. Trading volume since the secondary, and certainly the last few days, has not eaten up the 5.8 million units sold. I think there's more selling to come.
If oil rebounds a bit, MCEP might be an interesting spec very late in the year. Certainly not now.
Maybe coal will save the day?
Seriously, the new oil & gas deal could turn out to be a small disaster. NRP announced the deal on October 6, with an effective date for the buy of October 1. On those days, Whiting Petroleum traded around $ 73. Friday, Whiting closed at $ 41.77, a drop of more than 40%. And Whiting is heavily hedged for the next year or more. Whiting is the operator of the wells that NRP purchased a working interest in. Also, both Brent and WTI have dropped about 25% since early October. Even if NRP hedged shortly after the deal closed, it still isn't likely to produce the EBITDA that was projected for 2015.
Maybe they did hedge right after closing; everyone knew the OPEC meeting was scheduled and that there was a risk that OPEC would not cut production enough to matter.
Short-term, I don't think the hedges would help the unit price - just look at Whiting's drop with all of its hedges. But if OPEC could drive the price down this much by doing nothing, at some point they could reverse the situation without much advance notice.
And there's probably a small offset with production likely to be higher than expected (unless they cut production because of the prices). Whiting has recently increased its drilling program in the Sanish Field (that's the part of the Bakken that NRP invested in) because of early drilling successes in that field.
Pub 550 is for shareholders; with regard to distributions, it just tells shareholders to follow what the company tells them about the taxable nature of any distributions. A few paragraphs above the section you quote, the pub says: "Ordinary dividends are the most common type of distribution from a corporation or a mutual fund. They are paid out of earnings and profits and are ordinary income to you. This means they are not capital gains. You can assume that any dividend you receive on common or prefer-red stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive." So the pub doesn't even discuss E&P, it just tells shareholders to rely on what the company told them.
Pub 542 deals with the corporate side of things; that pub refers a corporation to Form 5452 to inform the IRS about the taxability or nontaxability of dividends. The instructions to the form state: "Nondividend distributions are distributions made to shareholders in the normal course of business. They are considered fully or partially nontaxable as dividends only because the paying corporation’s current and accumulated earnings and profits are less than the distributions."
So (1) E&P are the determining factor; and we can't know what ACAS's E&P might be next year because it depends heavily on the timing and amount of its exits from its investments. (2) I don't think we can know the value of ACI when it is distributed; ACAS has said how much book value it intends to include in ACI, but ACAS trades way below book, so I don't know how to value ACI today. I can't even suggest that we assume the distribution will be fully taxable since we don't know the value yet.
Yes as to your conclusion about ACGI. There is no question that this is intended to be a tax-free spin off and the share distribution will not be taxable.
Your conclusion as to ACI may be true, but the taxable amount may be less (or it may be 100% taxable; we can't know yet). ACAS is a C Corp; its dividends, where paid in cash or stock, are taxable to the extent that ACAS has either current year E&P or accumulated E&P. I assume that ACAS has no accumulated E&P based on the fact that it had significant net operating loss and capital loss carryovers at the end of 2013. But if the spins happen in 2015, the question of whether ACAS has current year 2015 E&P depends on what happens in 2015. ACAS's GAAP income in 2013 was $ 100 million; YTD this year it's $ 110 million. Both of these numbers are based on realized gains and losses; the numbers exclude unrealized gain and losses because they don't factor into E&P. So in 2015, ACAS might realize a lot of gains, creating a ton of current year E&P and the entire ACI distribution value might be taxable. Or in 2015 ACAS might realize some losses (there are still unrealized losses and loss reserves on the books), and might actually end up with zero current year E&P. Or it might be in the middle. We can't know yet. Also, the distribution of ACI is taxable to ACAS itself when it happens, if the value of ACI exceeds ACAS's tax basis in the spun off company. So that itself could create current year E&P.
And NOL carryovers do not reduce current year E&P.
And since ACAS is a C Corp and apparently intends to remain a C Corp, any dividend amount that is taxable should be a qualified dividend. If the distribution exceeds the current year E&P amount, that portion of the distribution would be a ROC.
Actually, NRP is trading better than I expected. Coal is getting killed again today and so are oil & gas names. The distribution is really helping to support NRP.
There are so many variables it's hard to know what to expect. Yes, lower oil prices reduce ARLP's costs, but the lower oil prices are also tanking natural gas prices today as well. That hurts coal demand on the margin. Like you, I expect Q4 numbers to be good but management has cautioned that utilities are reluctant to sign long-term deals right now so 2015 guidance will be key.
Based on sales per ton numbers I saw from other miners in Q3 (FELP especially), I think ARLP's future pricing is going to be squeezed even more than we have seen so far. The key variable, in my mind, is White Oak and what they can show for contracted coal. If that turns out OK, then ARLP should be OK for 2015 at least. But if WOR can't show demand at decent prices, I think ARLP will be in for a rough year.
I don't see that ACI disclosed exact numbers but from what I read, the production increase is coming from the opening of the LEER mine in NAPP, which is not an NRP property. Also earlier in the year ACI said something about production increasing at the Lone Mt mine in CAPP, which is an NRP property. Those increases offset the closing of ACI's mine on NRP's Pardee property. So I don't think there's much help for NRP from ACI.
And it sure looks like today's trading is going to be ugly across the board for energy MLPs, but especially the ones with direct exposure to oil prices. Not particularly good for anyone.
I hope everyone had a good Thanksgiving. My guests have left so I had a chance to read some newspapers. Tonight's electronic version of the Wall St Journal says that OPEC's meeting today did not result in any significant production cuts and that WTI/Brent are both down today by about $ 5, breaking the $ 70 floor for WTI. (I guess the trading is electronic and doesn't need an open market, or else the trading is somewhere outside the US.) There's going to be some pain among the E&P MLPs tomorrow (just about anything oil-related, actually). I hope NRP has hedged some or all of its near term production from the new Williston Basin wells. I also hope they say they have done so. Otherwise their $ 60 million 2015 EBITDA projection from the purchase is looking pretty unlikely.
Several answers, but your question first. There are 2 categories of E&P - current and accumulated. Current E&P is basically whatever taxable income the company generates in the current year, less any federal taxes paid. Current E&P is NOT reduced by any net operating loss carryovers. So even though those NOLs can offset 100% of taxable income (for regular tax purposes, not AMT), they do not reduce current E&P. Accumulated E&P is all of the company's accumulated taxable incomes over the years, so in effect it IS reduced by prior year losses.
Dividends are treated as first coming out of current E&P. So if ACAS has taxable income in the year of the split up (including any gain on the taxable part of the distribution of ACI), the distribution of ACI stock will be taxable up to the amount of current E&P. Any value of the ACI distribution in excess of current E&P will presumably be a return of capital since it appears that ACAS has no positive accumulated E&P.
There's more, but at the shareholder level, that's the basic answer.
For example, you spoke of whether ACAS would eventually utilize its NOL. When the company splits in 3, the NOL will be allocated to whatever company generated the NOL in the first place. This is a general answer; I have not looked at ACAS's NOL history and I don't see that they have disclosed the allocation of the NOL yet. So if the legal entity called ACGI, and any legal entity subsidiaries of the ACGI group were in existence in prior years, and if those legal entities incurred $ 100 of ACAS' overall NOL carryover, then $ 100 of the NOL carryover will go with ACGI. Same for ACI. You'll have to wait until after the split up to see what the numbers are.
It might be helpful to look at NCT's disclosures about its taxable distributions (I think SNR was the most recent taxable spin done by NCT, just within the last month). All of those entities are REITs, but the shareholder-level tax rules are the same.
I don't own ACAS so I don't know the specifics of its split up. But the tax rule is that distributions first come out of current year E&P, without regard to any deficit in E&P that has been accumulated in prior years. So the distributions are taxable dividends up to the amount of current year E&P. You'll see an example of this in reg sec 1.316-1, and it's even more clear in reg sec 1.361-2.
If the distribution exceeds the current year E&P you look to accumulated E&P to determine if the distribution is a taxable dividend or a ROC distribution. I'll take your word for the fact that ACAS doesn't have any accumulated E&P. I haven't checked.
And you need to consider this: if the distribution of shares in the split off company by ACAS does not qualify as a tax-free spin off for any reason, ACAS is taxed on the appreciation in its investment in the spun-off company. So say ACAS has a $ 100 tax basis in the company being spun out in a taxable transaction, and the current value of that company is $ 500. ACAS has taxable income of $ 400 to reflect the gain, and it also has current year E&P of $ 400.
Take a look at NCT which has been spinning off companies in taxable transactions for the past 2 years. They explain that the spin-off itself creates current year E&P, making the distribution taxable to the shareholders, up to the total amount of current year E&P.
So if ACAS has current year taxable income/E&P in 2015 (I assume that's when the distributions will be made?), without considering any prior year deficits, the distribution will be taxable up the amount of the current year E&P.
Sorry, waiting for a late flight for Thanksgiving guests and I'm probably not being as clear as I should be. Hope this helps anyway.
Long article, 2 parts here:
The Obama administration is expected to release on Wednesday a contentious and long-delayed environmental regulation to curb emissions of ozone, a smog-causing pollutant linked to asthma, heart disease and premature death.
The sweeping regulation, which would aim at smog from power plants and factories across the country, particularly in the Midwest, would be the latest in a series of Environmental Protection Agency controls on air pollution that wafts from smokestacks and tailpipes. Such regulations, released under the authority of the Clean Air Act, have become a hallmark of President Obama’s administration.
Next year, the E.P.A. is expected to make final two more historic Clean Air Act rules aimed at cutting planet-warming greenhouse gas emissions from coal-fired power plants. Those rules, which are intended to curb pollutants that contribute to climate change, could lead to the shutdown of hundreds of power plants and freeze construction of future coal plants.
The Republican-majority Congress, to be led by Senator Mitch McConnell of Kentucky, the incoming majority leader, has vowed to block or overturn the entire group of rules. In a separate development, the Supreme Court on Tuesday agreed to take up a challenge led by industry groups against another E.P.A. rule intended to curb emissions of mercury from coal plants.
The article basically describes how vulture funds are shorting the stocks and unsecured debt of coal mining companies (WLT, ACI and ANR are mentioned) and buying their secured debt. The idea is that the companies won’t survive because of their debt levels, and will eventually go bankrupt or restructure their debt. But their mines will still have value and the secured creditors will end up owning the mines.
The article’s reasoning was a bit confused, talking mostly about met coal, but throwing in some thermal coal comments. But they claim that some of these companies’ mines (WLT in particular) have low cost met coal mines that can be profitable once the debt is removed through bankruptcy.
No real news, but it indicates that even if the companies fail, the mines will not close.
Riverstone is a private equity/money management firm that specializes in energy businesses. They own 30% of Foresight Energy (FELP, Mr Cline's company) and on they've done deals with Quintana (the investment firm that Mr Robertson is associated with) and they used to own a bunch of PVR (the other coal royalty MLP) before it bought some midstream assets and got acquired by RGP.
Coal is one of their specialties, but it's a small part of their overall operation. They manage a ton of money (I think they say they manage $ 80 billion), and coal is a pretty small part of it.
An article about TNH was posted on Seeking Alpha last Thursday; I only found it today. Basically it argues that the selling in TNH is overdone, that over the next few years the price of corn (and therefore the price of nitrogen-based fertilizers) will recover and so will TNH's price. I have some problems with the analysis, but not with the conclusion.
But first we have to get through Q4, with the UAN pricing pressures from China, and Q1 2015 with the scheduled turnaround which will hurt results. But eventually, we'll get there.
I have a different theory.
Yesterday, the beaten down coal miners were up, but the more successful ones (I'm thinking ARLP/AHGP, FELP and CNX) were either up or down slightly. But what was up yesterday across the board was oil & gas E&P companies - among MLPs, LINE/LNCO, BBEP, MCEF and VNR were all up nicely, and the smaller, beaten down independent C Corp drillers also had a nice day. Why? Apparently there's an OPEC meeting on Thanksgiving day, and there was a rumor yesterday that OPEC would take steps to cut supply and support prices. I suspect that helped NRP a lot yesterday.
This morning, the rumor persisted, and the E&P MLPs again jumped, but by the end of the day CNBC reported that the rumor was fading as more traders purchased puts on oils prices, thinking that OPEC won't do anything next week. So while the E&P companies closed up for the day, they were way off their highs for the day. That's kind of how NRP traded, closing down a few pennies after having been up nicely early in the day.
I think until NRP gets its hedges in place, people are trading it a lot on its exposure/opportunity to the oil & gas wells it recently purchased. I didn't see much news on the coal front yesterday or today to move NRP.
And the daily moves probably don't mean much anyway. There's just so much volatility in the energy markets these past few weeks that just about any news drives everything up or down.
But the fact is, we won't know what actually moved the stocks until it's history.