Generally, assets in an MLP get a higher valuation than the same assets in a taxable C Corporation. So the usual game is for the MLP sponsor to "drop down" some of its operations to the MLP to take advantage of the higher value. "Drop downs" are sales of assets by the sponsor to the MLP.
The reasons for the higher MLP valuations are (1) lack of a corporate tax, so more of the MLP's cash flow can get distributed to unit holders, (2) tax rules that give the publicly-held MLP units special tax deferrals (the section 754 election), and (3) MLP's are more heavily owned by individuals (rather than institutional investors) that are more willing to pay up for yield.
Plus, throw in the IDRs, and after the 6-quarter waiver period, Westmoreland (WLB) will get a disproportionately higher percentage of "new OXF's" distributions. At the closing, WLB will own 77% of "new OXF", but will get between 80% and 90% of total distributions, depending on the level of distributions.
So the game works as follows: say WLB owns a coal mine that produces $ 100/year in cash flow. WLB can sell that coal mine to OXF (the drop down) and WLB gets to keep between 80% and 90% of the $ 100 when it is distributed. Then "new OXF" does a secondary to fund the purchase price. The secondary is done at a multiple greater than WLB's multiple. So effectively, the MLP structure gives WLB an opportunity to cash out some of its assets at a higher price but keep most of the cash flow. WLB also gets the opportunity to sell some of the "new OXF" common units it owns at the higher multiple.
The game works really well if WLB can drop down the majority of its assets (becoming a "pure GP"), and reduce its ownership percentage of the common units. Even if WLB were to dispose of all its common units, the IDRs would allow WLB to keep 50% of all distributions by "new OXF" in excess of 20 cents per Q.
That's why you also saw a jump in WLB's shares after the announcement.
And NRP yields about 12%. So if new OXF is priced to yield 10%, the post-split units will trade at $ 8, which works out to 67 cents for the existing units. If the market thinks new OXF is being reborn with the Westmoreland connection, and prices new OXF to yield 6.5%, the post-split units will trade around $ 12.30, or about $ 1 for the existing units. So it looks like the units should trade between 70 cents and $ 1, which is where they are.
What does Westmoreland get? I can only think that it avoids the need to IPO its own MLP, which would probably be impossible these days for coal. It took FELP 2 years to complete its IPO, and FELP is actually profitable. Westmoreland looks like just another coal company that's losing its shirt. It recently bet the ranch on some new Canadian properties and so far, the market likes the bet. But the bottom line is still deep in the red. And BTW, Canadian operations generally don't qualify for MLP treatment because Canada does not allow MLPs to be tax free at the entity level.
Was that worth $ 30 million? I guess to Westmoreland, it was.
Anyway, feel free to ignore me. I just did the analysis to see if I was missing something that I should invest in.
I get Westmoreland owning 80% of new OXF, and the announcement says 77%, fully diluted, so I assume there's some options or warrants out there that I missed. But either way, Westmoreland will own about 80% of new OXF.
Step 5. OXF common unit holders need to vote to give up their distribution arrearages, which by now is pretty substantial. That's the minimum distribution that OXF promised to pay but didn't. The common unit holders also need to approve all the other changes.
Step 6. (By the way, I'm numbering all the steps, but they really all happen at the same time.) New OXF restructures the IDR arrangement, so that the IDRs kick in when quarterly distributions (after the reverse split) reach 13 cents per Q. Above 20 cents per Q, the GP (that's Westmoreland now, remember) gets 50% of any increases. The IDRs , however, don't get any payments at all for the first 6 quarters after the deal closes (unless Westmoreland does more asset dropdowns; confusing, yes?)
So the coal reserves that Westmoreland is contributing should produce cash flow of $ 5.8 million per year. Of course, new OXF will have the old operations and overhead expenses, etc. There will be 5,621,000 common units and 115,000 GP units, and at 80 cents per unit annual distribution, new OXF will pay out $ 4,590,000 per year to start. But 77% of that amount, plus the GP distribution, will go right back to Westmoreland.
And assuming Westmoreland drops down other assets to new OXF, it will continue to receive 77% of the distributions from those new assets, plus (eventually) the IDRs.
As to existing common unit holders, you have been getting zero distributions for ages now, and the deal will give you a quarterly distribution of 20 cents for each of your newly reversed split units. That works out to 1.67 cents per Q on your existing units. Either way, put a yield on that - profitable coal MLPs (ARLP, FELP) yield about 6.5%; coal MLPs like RNO that have problems yield 13%.
1 last message to go.
Westmoreland is not assuming any of OXF's debt.
OXF is changing its name to Westmoreland LP. The announcement says "Westmoreland LP will enter into a new credit agreement with certain lenders to replace Oxford’s existing $175 million of credit facilities..." So "new OXF" is going to refinance its debt. Westmoreland Parent isn't assuming it.
I don't follow your computation at all. And the deal steps are confusing; I can't get the numbers to work out exactly. To make things simple, I'm going to ignore the name change of OXF to Westmoreland LP and will refer to OXF after the deal as "new OXF". I'm also ignoring the subordinated unit warrants because that part is pretty meaingless.
Step 1: Westmoreland buys the GP interest and the IDRs from the sponsors. Westmoreland also buys the subordinated units from the sponsors.
The sub units are just about worthless today. OXF isn't likely ever to pay enough distributions to the common unit holders to make the sub units convert to common units. So they are effectively worthless as things stand. To reflect this, Westmoreland is essentially canceling the sub units as part of the deal. The sub units will convert to being "liquidation units" after the dweal closes. They will get zero distributions and zero vote. From the name, I'm guessing that they will have some value in the unlikely event that new OXF is ever liquidated, but toher than that, they are worthless. So Westmoreland is really paying $ 30 million for the GP interest and the IDRs.
Step 2. The existing units (10,727,000 at the last 10-Q) get reverse split down to 894,000 units.
Step 3. The existing units get an extra 202,000 units. The news release calls this a 25% distribution, but I can't see where the 25% comes from. Anyway, at that point, the common unit holders will own 1,096,000 common units.
Step 4. Westmoreland will contribute coal reserves to new OXF in exchange for 4,512,500 units. So Westmoreland will own 77% of new OXF.
1 more post.
Goldman Sachs attributes this week's rally in coal stocks to shorts covering. The comment that I cribbed from some web site today: In a research note earlier, Goldman Sachs commented on this week's rally in coal stocks. Stocks mentioned in the report include Alpha Natural, Arch Coal, Cloud Peak Energy, Consol Energy, Peabody Energy, Foresight Energy LP, and SUNCOKE ENERGY, Inc. In the view of analyst Neil Mehta, gains are tied to profit taking on the heavily shorted group.
"After sharp ytd underperformance, the coal sector rallied 18% this week versus the S&P 500 down 2%. We note the sector has still lagged the broader market by 44% this year and 13% in the last month. We attribute this week’s strength to profit taking and technical factors more so than any fundamental changes in the underlying commodities," said Mehta.
"Overall we forecast four beats (ACI, BTU, CLD, and SXC) and three misses (ANR, CNX, and FELP) for 3Q2014. We do not view quarterly results as important as commentary on (1) asset sales, (2) contracting details, (3) resolution around rail issues and (4) production cuts."
Funny, SXC is getting out of the met coal business. It's real business (about 90% of revenue) is converting met coal into coke on a fee basis. And CNX is mostly oil & gas now. But short covering is what GS thinks happened this week.
OCIR owns 51% of OCI Wyoming; NRP owns the rest. OCIR raised its quarterly distribution 5% from last Q, so presumably the underlying operation did well, or at least decently, during the Q. OCIR has IDRs; I'm not sure where it is in the splits just now, but presumably some of the increased cash flow goes to its GP. NRP simply owns 49% of the operation, with no obligation to share it with any GP, so it should do slightly better than OCIR. So that's a good sign for Q3.
The problem is that there are currently a few public companies that have announced their intention to sell met coal mines in APP, and each has taken a large write down to reflect the reduced value of the property. No one has been able to sell any mines yet, though, which isn't a good sign. It looks like SXC and CLF, for example, have essentially written off 100% of their met coal mines and still haven't found a buyer. SXC looks like the write off was greater than the carrying value of the mine, which means the company thinks it may be on the hook for EPA/workers comp liabilities even after a sale. So I think there's a good chance that at least some of the mines will simply close, and if those mines happen to be on NRP properties, it's not good for NRP.
NRP only gives disclosure about the production from its various properties once a year, and usually only gives detailed future guidance once a year, so all we can do is guess what's going on.
So are small caps. I think people just don't want to own the perceived riskier investments going into the weekend. But who knows. We're getting inot earnings season soon. Some coal companies should have good or at least decent numbers (ARLP, FELP, CNX, maybe even BTU) and others will be disasters. Let's just see what the met coal names say and how that might affect NRP's guidance for next year. If NRP gives any guidance.
This morning, CLF announced that it would take a $ 6 billion after-tax impairment charge for its (1) seaborne iron ore and (2) met coal assets. Credit Suisse said this probably equates to an $ 8.1 billion charge before taxes.
Credit Suisse showed its own guess as what was being impaired. CS' numbers add up to more than $ 8.1 billion, so keep in mind that the following number is probably overstated a bit. CS says that CLF's carrying value for its North Amnerican met coal assets is $ 1.751 billion and the value of those assets is estimated to be between zero and $ 100 million. So those met coal assets would require an impairment charge of about $ 1.7 billion, or 97% of the carrying value.
CLF leases one met coal property from NRP; earlier this year it said it might close the mine, and later changed that to say it would try to sell the mine instead. But the impairment charge implies that they don't think anyone will pay much for the mine, so I'm guessing it gets closed, which is not good for NRP's results going forward. In 2013, the mine produced 2.4 million tons of met coal. At NRP's average 2013 royalty rate for met coal, that would account for $ 9 million in royalties. I have no idea how long CLF's lease with NRP lasts or what minimum royalties are required.
On the other hand, there have been announcements of several met coal mines going up for sale, and companies taking impairment charges indicating those met coal mines have little or no value. So maybe this is the start/acceleration of met coal mine closings, which would help pricing long-term, but hurt NRP short-term. I'm guessing we won't hear much about this from NRP management until year-end and the 10-K
On October 14 I posted on this board: " 2 time frames. Really short term (in the next few weeks), energy and the MLPs are oversold and there will be a bounce, and I hope a big bounce, from these levels." I think we're seeing the bounce. For some MLPs the bounce should stay and for others it will fade. I think NRP is a fader for November and December simply because people will be looking to take some losses.
I feel the same way about coal in general. Nothing has changed for met coal that I can see; ACI had the same problems six months ago when it was at $ 4 and a day ago when it was at $ 1.50. Nothing has changed except the market perception. You can call ot a dead cat bounce for some coal companies. I can't see the bounce lasting for ACI, ANR, or WLT.
For NRP, I think it's dead money until year end. Nothing to do with the company; my feeling is strictly based on the tax loss selling I expect to see. It's still down almost 50% from where it started the year and a lot of people have big losses in the name. Hopefully the new year will bring some hope to the company and its long suffering unit holders.
OXF will change its name to Westmoreland something or other.
There's more, but I don't own OXF, thank God, and I don't care too much about it. I just mention it because this board has become the only active coal board (although the ARLP board has picked up recently), and to show that there's still some interest in coal out there.
Is that more clear? I hope so.
OXF is a sailed coal MLP. It stopped paying distributions long ago and trades under $ 1, with no hope of surviving, as far as I can see. According to Yahoo, it had a market cap of $ 13 million at today's close. It has 2 classes of common units - about 10.5 MM publicly traded and an equal number of subordinated units, owned by OXF's GP and sponsor. In addition, the GP owns 400,000 GP units. The controlling GP also owns some of the publicly-traded units. I think.
Pretty much OXF is dead; it closed its Illinois Basin mine, fired a lot of people and is down to operating 1 mine in NAPP, I think, and not making any money.
Westmoreland Coal (symbol WLB) is a C Corporation coal miner, all out west and in western Canada. Its market cap is about $ 500 million. Apparently, WLB has wanted to start its own coal MLP; my guess is that WLB's operations were too small to justify the cost of an IPO, but that's just an uneducated guess. Anyway, WLB has agreed to do the following: 1. It is buying OXF's GP and the subordinated and common units owned by OXF's sponsor for $ 30 million. That gives WLB control of OXF. 2. Then, WLB is going to contribute some assets (coal reserves, I think) to OXF in exchange for enough new units so that WLB will end up with 77% ownership of OXF. 3. The public unit holders and the suborduinated units will undergo a 12-for-1 reverse stock split. So the 10.5 million common units will convert into 900,000 units, and the subordinated units will do the same. Including the GP units, it looks like there will be 2 million total units outstanding after the reverse stock split. 4. After the reverse stock split, OXF will pay a 20 cents quarterly dividend. That's 80 cents per year times 2 million units outstanding equals total annual distributions of $ 800,000. For comparison, NRP pays annual distributions of about $ 150 million.
I guess the plan after that is for WLB to drop down/sell some of its assets to OXF and run the usual MLP game.
I'd post this on the OXF board, but that board seems dead. Westmoreland Coal has agreed to acquire OXF's GP and contribute some assets down to OXF. Westmoreland ends up with a 77% interest in OXF plus the GP interest. OXF will do a 12-for-1 reverse stock split and the distribution rate is supposed to be 20 cents per Q after the dust settles. After hours trading shows OXF at $ 1.09, so 12 shares is worth $ 12.81 and the 80 cent distribution yields 6.25%. I just skimmed the release so I could be wrong about everything. I don't follow Westmoreland at all; I didn't even know they still existed. But if they can get buyers for OXF at anything like a 6% yield, when NRP is available, I don't get it.
I don't think OXF has any value whatsoever other than it saves Westmoreland the costs of doing an MLP IPO on its own.
If you're right on the revenue line, I hope you're just a little light on the EPS. More importantly, since they are getting to the end of the major investments, I hope they show some comfort in their future and increase the distribution more than the 2% sequential quarter increases they have been doing for the past 2 years and get back to the 3% + increases. The difference is meaningless except that it shows confidence in the business and maybe a reluctance to make any new expansion plans or acquisitions.
I don't think they are so complicated, but yes, AB will send you a Schedule K-1, and its distributions should not show up as taxable dividends on the 1099 form that your broker sends you.
One of the reasons AB cam afford to pay out such a high distribution is that it is a partnership and not subject to Federal tax itself. The K-1 shifts the tax liability to you and all the other partners. So they avoid the double tax that corporations/dividends involve.
White Oak said this past summer that it has contracted for the sale of 4 MM tons out of its 6.5 MM ton 2015 production. White Oak did not disclose the customer or the pricing, so all we really know is that 2/3 of the production will be taken at some price. My take is that ARLP wouldn't have agreed (in 2011) to invest $ 400 MM in the operation without some assurance that there would be takers for the WOR coal. Further, ARLP had the opportunity to increase its investment several times if the other investors didn't make their contributions to WOR. Those other investors ended up making their agreed-upon investments and ARLP stayed at 20%. But ARLP had said it would have been willing to increase its ownership at that time. So again, as late as 2013 ARLP was comfortable enough with WOR's prospects, so they must have had some information that is not publicly available. Plus, ARLP has named 2 of the 5 board members at WOR, so they must know what's going on.
So I'm comfortable with the WOR investment. And the way ARLP's agreement with WOR and the accounting for WOR work, ARLP will show a great GAAP profit for the first year or 2 that WOR is fully operational. After that we're looking at a 20% share in profits plus royalties plus handling fees. The minimum royalties alone are $ 20 MM per year, starting Jan 1 2015. There's a catch-up provision in ARLP's equity interest that will front load a good deal of cash flow and profit in 2015.
So it would be nice if ARLP/WOR were to say something specific about the mine on the calls, but I think things will be fine for the next few years at least. As long as ARLP uses the increased cash to pay down debt and increase the distribution. Anything except invest in another mine.
So why the tanking? I get that it's coal. I get that oil prices are tanking, but utilities rarely use oil for fuel. I get that nat gas prices are still low. But that's old news. Short-term and mid-term, IB coal should do well.
Wells Fargo - kind of a coincidence, don't you think? On the 6th, they are 1 of the joint book-running managers of NRP's recent 8.5 MM unit offering, and shortly thereafter, WF raises its rating on NRP? I don't think I've seen too many ratings on NRP, positive or negative from WF before.
No need to apologize. If I apologized for every post where I used a word I didn't mean to use, I'd never have time to correct others who do the same thing.
More importantly, today's drop is crazy. AHGP owns about 40% of ARLP, so its float isn't really that big. The question is whether the recent drop is smart people that have figured out that some problem is bigger than other people realize, or just people panicking. The only worry I have is White Oak and whether it will be able to sell all the coal it wants to produce without starting a price war among WOR, ARLP and FELP, all of which are expanding in the IB at the same time. Sorry, 1 other worry - will ARLP continue to look for expansion once the WOR/South Gibson and Tunnel Ridge cap ex ends? I sure hope not, but they are coal people and coal people often want to open new mines.
We'll see in 2 weeks, I guess. Funny, at $ 50, I was very comfortable. At $ 38, I'm worried. It should be the other way around.