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.
I realized I never replied to your original question, about whether NRP bought into $ 35 oil or $ 87 oil. I think the cost of their production is going to be around $ 20 or $ 21 per equivalent barrel.
Whiting operates all of the wells that NRP bought into. Last quarter, the average cost per barrel of Whiting's production was $ 18. Of that $ 6.50 was severance taxes and the rest was operating costs. It also had $ 3.50/barrel of G&A. It also had lots of depreciation and amortization expenses for the costs of drilling the wells and getting them ready for production, which raised the overall cost, but the cash cost was only $ 18 - $ 21.
And when NRP bought into the working interests, they don't get charged for the upfront costs of the existing wells - that's part of the $ 340 MM they paid. They only get charged for the cash operating costs. I don't know about G&A.
That's a bit lower than NRP's existing well's cash cost. Last quarter, the operating expenses were about $ 22 per equivalent barrel. Based on NRP's EBITDA disclosure, I think the severance taxes were included in the operating expenses.
And from those numbers, we can make some semi-educated guesses about the average price that NRP projected it would get in 2015 for the new wells. Expected production is 3,100 equivalent barrels per day or 1,130,000 barrels per year. At $ 20 per equivalent barrel of cost, you get about $ 23 million in cash costs. Since NRP expected $ 60 million of EBITDA, or slightly less, you get projected revenues of about $ 83 million. Divide that by the 1,130,000 barrels of production for the year and you get an average price of $ 73 per barrel. But that's if everything was oil, with no natural gas or NGLs. If I guess 20% natural gas production at $ 4, the projected price for oil would be about $ 85 per barrel. That sounds high so I guess they expect an average price of $ 75 - $ 80 when they made their projections.
NRP didn't hedge before the deal closed. When they announced the closing (2 weeks ago or so) they said they would hedge production opportunistically. They didn't use the past tense. So there's a risk. Hopefully, they had a really motivated seller and got a good price. But we won't know until the 10-K comes out in February; they will have to come clean at that point, good or bad.
More importantly, what's up with today's trading? Someone wants in, and doesn't mind moving the price a bit to execute the buy.
$ 2 sounds really low. People are talking about another really cold winter, which supposed ly will help increase utilities' demand for coal. If that happens, I can't see natural gas prices tanking that far. Maybe next spring or summer. But if $ 2 natural gas is a possibility, you're looking at another nail in coal's coffin. I think that ARLP has said in the past that the breakeven point for utilities burning coal versus natural gas is $ 3.25 nat gas or thereabouts. Considering that coal prices have come down since they said that, I'd guess the breakeven is closer to $ 3 natural gas these days.
You're probably right but coal stocks tanked pretty good today (at least the ones I own) so maybe we'll get a better chance. And I don't think cold weather helps NRP as much as a lot of the Illinois Basin miners - I don't think cold weather affects met coal usage; in fact last winter was so cold that SXC and SXCP (which convert met coal into coking coal) couldn't operate at full strength because the coal froze together in big pieces. So their Q1 numbers were less than expected.
So I guess you're in, at least for a start?
Anything is possible. It took me quite a while to figure out how coal mining works (sort of) and I have not devoted as much time to understanding the oil & gas E&P business. It gets really complicated and mostly I lose money when I invest in E&P companies. So I tend to saty away.
Anyway, here are the possibilities. NRP did not actually buy into any wells directly. Instead, it purchased a 40% interest in an entity named Kaiser-Whiting LLC, which is some sort of subsidiary operation under the Kaiser-Francis Oil Co. The LLC seems to have owned a 37.5% interest in the wells, so NRP ends up owning a 15% interest. It would seem to me that Kaiser-Whiting might have hedged the value of the production, and NRP might step into its shoes with regard to the hedges. But if this were true, why would NRP go out of its way to state that it would enter into hedges after the purchase closed? I would think NRP would have wanted to buy into any existing hedges to avoid any gaps in coverage. Also, they would have been able to state affirmatively that the 2015 production was already hedged, giving people a lot more comfort about the 2015 EBITDA projection. The fact that NRP felt the need to say that it would hedge the production after closing tells me that NRP does not get the benefit of any existing hedges. I spoke to a client of mine that has purchased working interests before (but not from Kaiser Francis, and he told me that in deals of this sort, each investor is on his own for hedging. So I guess there's no hedging there that would benefit NRP.
But then we get to your question - I assume that Whiting either owns a piece of Kaiser Whiting, or else it owns part of the remaining 62.5% of the wells. But I get to the same answer - if NRP benefited from hedges that Whiting had put in place, I think NRP would have said so.
So while I can't be certain, I am pretty sure there were no hedges in place on the date of closing.
The 10-K will be out in 3 months and we'll know.
They have the same address and management and that makes them the same company? Sorry again, but you don’t know what you’re talking about.
TNH is a publicly-traded partnership with 1 fertilizer plant located in Verdigris OK. Originally it was 75% owned by a company named Agricultural Minerals & Chemicals Inc. (TNH’s name at that time was also Agricultural Minerals Partners). In the mid 1990’s Terra Industries acquired all of the stock of Agricultural Minerals, thereby becoming the 75% owner/GP of TNH. At that time, TNH changed its name to Terra Nitrogen.
In 2010, CF industries acquired TRA, thereby becoming TNH’s 75% controlling GP/owner. CF is a huge company (market cap $ 13.5 billion, compared to TNH’s market cap of $ 2.4 billion). It has 6 nitrogen fertilizer plants of its own in the US and Canada. Until earlier this year, it also had several phosphate plants that it sold in March, although it’s still winding down that business. It is one of the largest fertilizer distributors in the US. It has JV operations in the UK and Trinidad & Tobago that it acquired in the TRA deal. And finally, it operates a global fertilizer trading business in Switzerland. None of these operations have anything to do with TNH. They are all CF’s operations, and YTD they generated over $ 3 billion in sales that had nothing to do with TNH. And finally, CF also owns the 75% owner/GP interest in TNH.
So let’s see. TNH is a mid-cap MLP with 1 fertilizer plant in OK, a purely domestic operation that makes 2.3 MM tons of nitrogen-based fertilizer with YTD sales of $ 479 MM. And as a partnership, it pays no taxes. And as an MLP, it is not a member of any stock index that I know of. CF is a multinational manufacturer and distributor of nitrogen-based fertilizer that sells 13 MM tons of fertilizer each year and has sales of $ 3.5 billion YTD, about 15% of which come from TNH. And as a corporation, it pays taxes. And it is a member of several stock indices, including the S&P 5
Sorry, but that's wrong. First, CF only acquired its interest in TNH in April 2010 when it acquired TRA. So your comment about 10 years of their trading together wouldn't mean much, even if it were true.
Second, CF and TNH haven't traded together at all. Since April 2010 when CF acquired control of TNH, it has appreciated 205%, including dividends not reinvested. Over the same period TNH has appreciated 133%, distributions not reinvested. And if you look at shorter periods, like the last 12 months, CF is up 30%, including dividends not reinvested, while TNH is down 13%, distributions not reinvested.
I don't know where you get your correlation coefficient, but you need a new source.
And they aren't even remotely the same company. The trading history should tell you that.
And to continue - management isn't incompetent; it's just that they (like everyone else) was blindsided by the Saudi's move to lower prices. Look at the stock price of every E&P company, whether they are corporations or MLPs, from October 5 until today. Whiting, for example, is down 25% in that time frame.
I'm sure that the price NRP paid for the new wells reflected the drop in oil prices from July through the first days of October and I hope they negotiated a little but more to reflect the adverse trend. But they haven't given out that detail - expected production, expected pricing, PV-10 values,etc. I assume we'll get that detail in the 10-K but we haven't seen it yet.
As to coal, everyone and his brother has been moving to the Illinois Basin in the past 5 to 7 years. Take a look at ARLP, FELP (NRP's lessee) and even RNO, for example.
And in the same time frame, NRP paid Mr Cline $ 320 MM worth of units (most of which he sold in the $ 30s) for 2 properties outside of the Illinois Basin that they later had to write off, taking losses of about $ 200 million. They aren't dumb, but like everyone else, not all of their bets pay off.
And I've never criticized their OCI Wyoming deal - I've just said I bought OCIR to get the exact same soda ash business without NRP's coal baggage.
The cost of production doesn't matter - if the sales price comes down, so does the EBITDA.
NRP doesn't give out much disclosure until its required. So until we see the 10-K we won't know the oil/gas/NGL split. But the new wells are in the same area as the old wells, and in Q2 and Q3, oil made up 90% of revenues and a little less than that of production. So I'm guessing that carries over to the new wells. Also all of the new wells are operated by Whiting, and a little more than 80% of Whiting's production is oil, so that fits into NRP's history. Finally, in the last presentation, a comment was made (but didn't make the slide deck) that supports a 90% oil assumption.
In Q2, NRP received $ 93.40/barrel for the oil; in Q3, this dropped to $ 84.65. These numbers are similar to the prices shown for ND Sweet on PAA's web site. So I'm assuming a significant drop in Q4.
There is no disclosure of any hedges in the 10-Qs, but NRP must have hedged the natural gas production at the old wells - they were getting $ 5.71 (Q2) and $ 5.11 (Q3) for the natural gas, which is way above current market. Maybe they hedged the oil, too, but you wouldn't know it from their disclosure.
Am I calling management liars? misguided? leading investors astray? No, I'm just saying their disclosure stinks. They gave that disclosure on the date they announced the contract to buy the interests in the new wells. They also warned (from the last 10-Q) that their projection of EBITDA from the new wells was based on a bunch of assumptions that might turn out to be wrong, in which case their projections would be wrong. They also gave the standard "forward looking statement" warning that their projections were based on what they knew as of that date, their assumptions might turn out to be wrong, and they assumed no responsibility to update their disclosure.
But I can tell you is that the price they agreed to pay for the wells on October 5 is way more than they would have paid 30 days later.
I have a new toy, thanks to one of the few sane posters on the NTI message board. Plains All American posts the prices they are willing to pay for oil from lots of different fields across the US. Two of them are North Dakota oil, sweet and sour.
On October 6 NRP announced a deal to buy nonworking interests in oil & gas properties in the Williston basin of ND. The wells are operated by Whiting Petroleum, and based on Whiting's SEC filings, it seems that 80% of the production should be oil, with the balance being NGLs and natural gas. NRP paid since paid $ 340 million for the interests, and on October 6 NRP said the wells should generate between $ 58 million and $ 60 million of EBITDA in 2015. The deal closed last Friday, and NRP said it would opportunistically hedge its production, which means it hasn't happened yet.
Per the PAA site, on October 6, the price it was offering for ND Sweet was $ 72 per barrel, and for ND Sour, $ 69 per barrel. On the day of closing, the prices had dropped to $ 58 per barrel for ND sweet and $ 49 for ND sour.
I am not using those prices as gospel; I have no idea how much PAA buys in ND and whether the prices are realistic. My point is just the trend; the prices dropped 20% for ND sweet and 28% for ND sour. I can't see how this wouldn't adversely affect NRP's plans for the approximately $ 60 million EBITDA next year. Natural gas prices have not dropped anywhere near as much as oil, and I don't know about NGLs. From the prices I have seen for propane and some others, they have dropped right along with oil.
I certainly hope that prices recover; if they do recover, maybe my LNCO won't tank so much. But it seems NRP picked exactly the wrong time to bet on oil.
The good news is that Whiting Petroleum's record of producing oil and gas in the Bakken seems really good.
The $ 10.50 - $ 11,25 range in October was a great time to buy in retrospect, but for now I'm waiting for the next distribution announcement in January. Late last year, I thought something like $ 19 was a good entry point, and then I doubled down briefly at $ 16 and change. So my idea of value is all based on the distribution and until I'm comfortable with that, I probably won't buy.
My other problem is that I own a lot of ARLP/AHGP so I already have a position in coal, overweight actually. I also unfortunately bought a little LNCO at $ 24 (give you an idea about how good my entry point ideas are?), so I don't really need another oil & gas producer. And finally, I own OCIR (happily) so I don't need NRP for that, either.
But if it tanks below $ 10, I'll be tempted to buy. But I have this little post-it note stuck to my computer screen, reminding me that I thought RNO was a buy at $ 4.75. So I try not to think about buying NRP until the distribution news is out.
What about you? Are you going to buy some? From your comment, your decision doesn't seem strictly based on NRP's price, but also on the underlying business trends.
Today's Newsday (LI newspaper, for non-Long Islanders) has a cover story about criminal charges being brought against a local attorney/legislator for mail fraud and other charges. This follows a civil suit by his former law firm against him to recover legal fees billed to one of his clients from 2006 through 2012.
According to sources cited by the paper, the defrauded client was Systemax. The amount in question was $ 2.2 million in fees and $ 125,000 in expenses.
2 points: 1. The time period overlaps fairly closely with Mr Fiorentino's fraud against the company, so I wonder if there's any connection. and 2. I have no idea how common fraud is, but for SYX to have suffered through 2 major frauds at the same time either has to be the world's biggest coincidence, or management and the board are really out to lunch.
I don't think another cut is in the cards. Unless NRP announced some huge acquisition that they thought was a home run, and said they needed the extra cash flow from another distribution cut to make the acquisition work. And I think that's a long shot.
OCIR and NRP together (that means OCI Wyoming), with the financial backing of both OCIR's general partner and NRP, could make a deal work for FMC's soda ash operation. FMC would probably have to take some paper back, too. If FMC's soda ash business is worth $ 1.5 billion, it's a stretch to think they could swing the financing, but it's possible. It all depends on the price and FMC's soda ash operation's cash flow.
Then the 1 good question - what is the company's expectations for 2015 coal production and revenues? He said they're working on it and will announce their projections shortly after year end. Then I'm sure he added that they don't expect any large production cuts in 2015, but I was tired so maybe I didn't hear him correctly.
It's funny - the EVP was the last speaker before lunch in NY and he got 5 or 6 questions. Mr Hogan was the last speaker of the day in Houston, and as he put it, "I'm the only thing standing between you and the bar." Not surprisingly, he had zero questions.
The comment about 2014 coal-related revenues being $ 120 million less than in 2011 on a 2 million ton drop in production got me interested. I think the facts are a bit more complicated. In 2011, FELP mined 9 million tons of NRP's coal in the Illinois Basin. This year, they're on a run rate to hit almost 14 million tons, and at a pretty decent royalty. Production in NAPP is up quite a bit vs 2011 (but at an incredibly old and low royalty rate), and so is Southern APP production. The problem is CAPP, both in production - maybe 10 million tons lower this year vs 2011 and lower royalty rates everywhere, met and thermal. Give management credit for buying into the Illinois Basin when they did. It really has saved the coal royalty business. And since I criticized them for the 2 properties they bought from Mr Cline that turned out to be un-mineable (is that a word?), I have to give them credit for the IB deals. I also have to look at some old 10-Ks.
NRP did 2 presentations today, 1 in NY and 1 in Houston. Mr Hogan got to stay home in Houston.
The slides were the same for both presentations, and I listened to the EVP in NY. A few interesting tidbits, 1 might just be a slip.
They expect the new oil & gas deal to close late this week. I may be reading into what he said here, but he said that NRP will hedge the oil & gas production "opportunistically" after the closing. That's not exactly what the company said last month when they announced the deal. Back then, they said: "Upon closing, the Partnership intends to hedge approximately 80% of the acquired current production volumes through 2016, with a small percentage of that production to be hedged for 2017 and 2018. NRP will opportunistically seek to hedge additional volumes beyond 2016 as the market provides favorable opportunities." So maybe just a slip up or maybe the company doesn't find today's prices acceptable for hedging and won't automatically do the 80% hedges. With the drop in oil prices, I wouldn't blame them, but this might cause their EBITDA projections for 2015 to change.
He pointed out that NRP's coal related revenues are expected to be $ 120 million lower this year (2014) versus 2011. Lessees' production is only down 2 million tons, so the vast majority of the revenue drop relates to pricing, and met coal is a big part of the problem.
Both the EVP and Hogan mentioned the good coverage ratio, but neither mentioned that the company had cut the distribution.
The EVP's Q&A was pretty dumb, with 1 funny comment. Someone asked if they were looking at international acquisitions and he said the focus was on domestic.
The funny line - someone said that he had only mentioned "coal" twice in his presentation, and then only to say that NRP was diversifying away from it. But the question was weird - he asked if NRP would consider any coal-related acquisitions. Answer - they look at everything.
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