First, my guess answer to your question: Based on the company's statements, about 90% to 95% of 2015 projected sales volumes are already committed and priced and the company expects sales prices to drop about 2% or 3%. So the company's projections for 2015 already reflect the lower prices. For 2016, somewhere around two-thirds of expected sales volumes are already committed and priced. So unless prices improve, I would think the damage starts in 2017, and people will really begin to focus on that in the second half of 2016. Unless things improve by then.
The company has lots of offsets against the drop in prices, but I'm focusing on only 1 - White Oak. Even with lower prices, as White Oak scales up, ARLP's cash commitments to fund it are decreasing significantly, and its cash flow from WOR will increase significantly. Especially in the beginning, because ARLP gets a preferred return until it recoups the losses it funded during construction. So unless WOR is a complete disaster, I think ARLP will do OK unless prices take a long time to recover. ARLP can be profitable with IB prices in the $ 40s, but not very profitable. FELP and ARLP both said they would be disciplined in controlling production if prices didn't justify that production. Now that Murray will control FELP, I hope they will continue the discipline. But Murray is incurring a ton of debt to buy control of FELP and they may need increased production to fund that debt, even if it starts a price war.
So I think WOR is the upside surprise and Murray is the downside risk. And the 2016 presidential election is the biggest and most important unknown factor.
A long post belaboring the obvious. It’s really for my own benefit, to convince myself not to sell.
People are wondering why ARLP is tanking and how much further it can drop. I have a theory about the possible drop, but I’ll save that for a later post.
First, the obvious: coal stocks/units have been tanking for a long time; it just took a while for ARLP/AHGP to join the party. In 2014, almost every US-based coal miner that I could think of dropped by 50% or more. That includes BTU, ACI, ANR, CLD, NRP, WLT (down 91%), and RNO, all down 50% or more (actually, CLD and NRP were only down 49%, but I like to round). I excluded FELP because it wasn’t public the entire year. The exceptions? CNX was only down 10%, ARLP and AHGP (up 20% and 14%, respectively, and WLB, which was up 70%. No idea why WLB did so well. But CNX has a profitable coal operation, something the others can’t say; it sold off its CAPP mines and it has a nice oil & gas operation. And ARLP/AHGP are the class of the group.
So people kept buying ARLP/AHGP while the others tanked.
This year has been more of the same, only more universal. If you exclude the stocks trading around $ 1 (I’ll get to them shortly), since December 31, BTU is down another 34%, WLB is down 23%, CNX is down 21%, CLD is down 37%, NRP is down 23% and FELP is down 9%. FELP is only down 9% because its price moved up on the announcement of its deal with Murray.
The dollar stocks are down even more. WLT is down 50% since Dec 31, ACI is down 38% and ANR is down 39%. RNO alone is flat YTD.
Finally, KOL (which has a lot of foreign exposure, as does BTU) is down 10% YTD after dropping 23% in 2014.
Compared to the above, ARLP is down 25% this year (including the distribution but no reinvestment) and AHGP is down 16%.
I think the coal damage has lots of causes, that anyone on this board can name – the war on coal, for example. But I also think MLP investors that were invested in the E&P names last year got burned so badly that no one wants to own a name where the underlying commodity’s price is dropping. That certainly describes coal. ARLP, for example, is still working off contracts that pay around $ 52/ton (just looking at the Illinois Basin operation), but the spot price for Illinois Basin coal has been in the low $ 40s for almost a year now. That won’t hurt too badly for another year, but I think it keeps investors on the sidelines.
But I also think it’s investors throwing in the towel on the whole group – they have been killed by the coal names for several years now and they are now including ARLP/AHGP in the names to sell. If everyone else is losing their shirts, how long can ARLP/AHGP fight the trend? (That’s a rhetorical question, BTW.
Anyway, to state the obvious, the problem is coal in general, not anything specific to ARLP/AHGP. ARLP/AHGP resisted the group weakness for a long time and even now, it’s about average or slightly better than average for the group.
I don't know about everyone else, but I found the earnings release to be unintelligible. It looked terrible, with Q4 losses all over the place, partly offset by nonrealized appreciation in non-affiliate investments.
But the call was reassuring. The statements were, in fact, unintelligible without further explanation. The change to a BDC (but not a RIC) in November caused changes in accounting that were confusing. The RIC election on January 1 meant that income realized last year would have been subject to corporate taxes, but if the income was deferred until 2015, no such taxes would be due. So the statements look pretty ugly. EPS through 9/30 was 75 cents, and by November when the BDC election was made, YTD EPS had dropped to 45 cents for a 30 cent Q4 loss up to November 11, and another operatin gloss throuigh December 31.
The call explained a lot. Barry Sloane seems like a really good guy, with a sense of humor and a willingness to take all calls. Anyway, a few comments:
1. Most importantly, the company deferred a sale of SBA loans from December until January to move the related taxable income into 2015. This helps lower the overall tax.
2. Currently, the dividend of C Corp retained earnings is still estimated to be about $ 47 - $ 48 MM. That's about $ 4.75 per share, payable in some combination of stock and cash. At least 20% has to be in cash, and I'd guess that everything above the 20% minimum will be paid in stock. I don't know how they will value the stock, but I own NEWT in a retirement account so I don't care much. I would be very reluctant to own NEWT in a taxable account, but Mr Sloane owns a chunk of stock personally so he will take a hit. He owns a little more than 1 million shares so he will get a taxable dividend of almost $ 5 million. I expect the company to bump up the cash portion to help him pay his taxes. They expect the dividend to qualify for the 20% tax rate.
3. They currently have mezzanine debt that costs 18% (and he thanked the lender for making the money available!). They have repaid $ 10 MM of that mezzanine debt and will save quite a bit in interest expense in 2015.
4. They think the 39 cents Q1 distribution will be covered by earnings. Since they have the gain on sale pushed into Q1, I expect that will be easy. They also think earnings, including gain on the sale of SBA loans, will cover the $ 1.81 2015 distribution with a little cushion.
There’s more, but that’s enough for now. Anyway, the call calmed me down.
The same question gets asked every call and their answer is always the same - they are aware of the situation and are considering it.
But follow the money - Mr Craft's interest is mostly in AHGP, not directly in ARLP. So why would he do a deal when the relationship of AHGP's price to ARLP's price is on the low side, historically? If anything, I would think he might want to buy out the public unitholders in ARLP. I don't think that's likely to happen, either. But I can't see him approving any deal that doesn't give AHGP a significant premium.
The $ 5.32 was a nonsense number to begin with. The company projected 2015 net income of between $ 395 MM and $ 455 MM, and the writer simply divided those numbers by ARLP's outstanding units to get to EPS. At the low end, $ 395 MM divided by 71.2 MM units gives you the $ 5.32 the article mentions.
Unfortunately, that calculation is nonsense because it ignores the IDRS that AHGP owns. So, for example, in 2014, ARLP's net income was $ 497 MM, but the IDRs/GP take was $ 138 MM off the top, so the EPS for ARLP was $ 4.77. The company is projecting lower income this year for several reasons (accelerated DDA for a mine that is running out of coal, plus added amortization for the coal reserves purchased from Patriot). The company cannot give an EPS projection because that would depend on the level of distributions and IDRs paid to AHGP. So the writer connected the dots but made a mistake. At the midpoint guidance of $ 425 MM, you're looking at EPS of about $ 3.75 for ARLP holders.
And yes, I understand that EPS is not the best way to judge an MLP's results. I'm just pointing out that the article is pretty superficial.
2 answers, 1 technical and the other practical.
The technical answer is that there are 2 potential sources of UBTI when you invest in an MLP. The first source is the easy one - Line 20V of the K-1. The second potential source is when you sell, there will be an amount of your gain that is reported as ordinary gain. The IRS position is that this portion of your gain is also UBTI. You can have ordinary gain even if you have an overall loss on your investment in the MLP. (You may have line 20V losses that can be used to offset any potential UBTI on sale, but that would still require a filing. Also, there's a $ 1,000 exemption each year before the UBTI tax kicks in.)
Now the practical answer - ignore what I just wrote. MLPs have been around for 30+ years and the IRS has never given a lot of guidance with respect to MLPs and UBTI. I have never heard of the IRS examining an IRA for UBTI, although there are cases and rulings involving UBTI through partnerships (not MLPs) with respect to other types of tax-exempt entities. Since the IRS doesn't seem interested in enforcing its own rules, I wouldn't worry too much. My recommendation, though, is this: if you're talking any MLP investments where your economic gain might exceed a few thousand dollars, don't invest thru an IRA. Buy a C Corp MLP general partner or invest through a CEF or ETN. Eventually the IRS will wake up and since there are other alternative ways to invest in MLPs that don't raise any UBTI issue, why bother with direct investments?
Not related to your post but Yahoo won't let me start a new thread.
US Steel today announced the idling of its Granite City steel works in response to oil & gas weakness. SXCP and SXC, which supply coke to the Granite City plant, are tanking today. I don't know who supplies the met coal to the plant, but it doesn't matter much. Less usage will hurt pricing for everyone. And since NRP is heavily into met coal, it will eventually do some damage.
Funny thing - I think US Steel has a take or pay contract with SXCP/SXC so the immediate damage to those names should be limited. But they are getting killed. Maybe I'm wrong on the contract.
The March 25 dividend is the regular quarterly dividend, not the special dividend which will be needed to eliminate the company's earnings & profits. The quarterly dividend is like any other - the stock will presumably drop by 39 cents on the day it goes ex (March 25, I guess) and who knows how it might trade for the rest of the day? If people are comfortable that the dividend will be maintianed, I would expect the stock price to recover whatever drop it suffers within a week or so, but that's just a guess.
The special dividend is supposed to be announced in March or April (maybe they will give an update when they announce Q4 results next week).and is expected to be paid before the end of 2015. That's the big one - the company estimated it might be as much #$%$ 4.50 per share. When a dividend is that large, the ex date is usually the payment date. But we won't know much about that dividend until the company says something.
GES reported last night. GES's year-end is January 31, so still short of VOXX's February year-end. GES has connection to VOXX's business, except that GES has a large European operation. From GES's earnings release:
"European revenues decreased 16% in U.S. dollars and 5% in constant currency" So an 11 % revenue hit from the drop in the euro.
Looking to 2015, GES estimates:
"Currency headwinds are expected to negatively impact consolidated revenue growth by approximately 8 percentage points, for a net decline between 9 and 7 percentage points." "The estimated impact on earnings per share of the currency headwinds is roughly 50 cents." So no rest for the weary.
I have no idea if VOXX hedges its currency exposure to any extent. But now that Venezuela is in the rear view mirror, the euro looks to be a continuing hurdle. Q4 numbers will probably be ugly. Hopefully the market will see that as a short-term item.
Yahoo has this little "remove" button on the posts. You might want to use it before too many people read this post. Dangerous thing, making predictions. First rule - be vague about the prediction or the timing.
If you believe those prices are coming, buy stock in gas station companies. TA (runs travel centers on highways) had a blow-out Q4 due to lower gas prices. More usage, better margins and lower interest expense to carry inventories. All upside from lower prices. GLP (also an MLP) has a decent sized gas station business and I think SUN might also.
And the numbers you mention (depending on just how far below $ 1 for gas you think is coming), the crack spread for refiners should do nicely. So you might want to buy NTI or one of the other MLP refiners, or a C Corp refiner.
Or you could buy one of the reverse oil price ETFs.
So if you believe those prices are coming, you might want to do some research in those areas, and away from NRP.
C'mon, go easy on old Carl. He's just an SA editor - he was reporting what Macquarie Research and one of its analysts said. If anyone is to blame, it's the analyst.
Hey, Money, good to hear from you.
If that was the reason, today was a gift for buyers. The OCI that passed on the Q1 distribution was OCIP, down in TX. They make something that goes into fertilizer.
The OCI that NRP owns a piece of is related to OCIR, OCI Resources, which mines soda ash. OCIR is doing fine. No bottlenecks that I know of.
But that will really be funny, if people misread the symbol and took $ 100 million off NRP's market cap (Funny in an ironic sort of way, not ha-ha funny.). But I don't think so. Not a good day for MLPs in general, a terrible day for coal and a bad day for E&P is my bet.
Mot that it matters, but NRP has purchased lots of reserves from Mr Cline and his companies. In addition to the 4.5 MM units you mention in 2006 (actually, Jan 2007), NRP issued Cline 8.91 MM units in 2007 in connection with one Gatling properties (NRP later wrote it off as worthless); in 2009 NRP issued Cline another 4.6 MM units for the Gatling Ohio property (also later written off as worthless) and then paid him $ 400 MM in cash for 2 more properties. Mr Cline has sold off most of the units long ago. What's left, if anything is left, is held in trust for his children.
But I can't see why NRP should fall on news of the FELP deal. FELP itself is trading OK, so why should NRP be down?
I have been waiting for a chance to buy NRP and now that I've been given the chance, I can't bite the bullet. There has to be something else going on that I don't understand.
Maybe it's just that NRP sold about 12.5 MM units in 2014, through an ATM program and an offering, at prices way above current prices and people are just dumping? I would have though most of them (except Mr Robertson) would have already dumped by now.
Strange. I only read the summary of the FELP deal, but it sure seems the public units are overpriced based on the terms of the deal.
Murray is already a pretty big lessee of NRP. They operate the AFG-Ohio property and they bought the Hibbs Run mine from CNX a little more than a year ago. But I suspect the relationship between Murray and NRP is a bit rocky - production on the AFG-Ohio property tanked 70% in 2014, so maybe they idled the mine or part of it. And the Hibbs Run mine was an ugly (for NRP) deal where CNX activated an ancient mine lease with unbelievably low royalties and then sold the mine to Murray. Production is 2014 was 6 MM tons, or about 12% of total production on NRP's properties and the royalty rate was below $ 1 per ton. And Murray fights with everyone (including Chris Cline until this deal was announced).
But the most interesting thing about the deal (to me, at least) is the financing. Murray is basically financing the whole purchase price and it doesn't look like Murray had problems getting loans. They are a private company so I don't know their entire debt load, but they paid $ v3.25 billion for the CNX mines a year ago and financed most of that. So financing is still available for coal, although I suspect the terms were not so great.
The web site says mid-march. Last year, the K-1s were released on March 31 on-line, a few days later in the mail. I think they were my last K-1 last year.
I haven't read a whole lot yet; just the conference call and a scan through the 10-K. But from the little I read, the technology products division lost $ 50 MM in operating income for the year, presumably $ 25 MM of which was nonrecurring write-offs. Industrial supply division made $ 40 MM and corporate charges were $ 15 MM, all netting to a loss of $ 25 MM, or break-even before the nonrecurring write-offs. Keep in mind that SYX has had "nonrecurring" write-offs for the last 5 years, so take the "nonrecurring" word with a grain of salt. I wonder if the nonrecurring items included all the extra legal fees.
I don't see a lot of projections of what the company's results might look like after the retail ops are closed. They talk about saving about $ 20 MM per year from the closings, but that's not enough. Throw in a little growth in industrial products, and throw out the nonrecurring expenses, and that gets you to maybe $ 30 MM of operating income. After interest and taxes, that's maybe $ 20 MM of income, which doesn't support the current price.
And boy, the original CompUSA and Circuit City purchases a bunch of years ago really ended up costing the company a ton, didn't they?
It's funny - I bought shares in SYX earlier this week, hoping that the Q wouldn't be as bad as people feared. Now I'm sitting on a little gain; I got what I wanted and I should sell. I don't really have the time to follow SYX. But now I'm getting greedy. I got a good price and maybe the company will turns things around. I don't have a lot of faith in management, though. All the stories about the Fiorentinos and now the law firm stealing from SYX makes me wonder who's asleep at the wheel.