Ed, all the property REITS look extended. I think some are beginning to roll over. I'm using a new technical tool, the Slow Stochastics. Once a stock is over 80, it's a sell.
Watch to see if they try to get cute and not address the impact of a higher covenant after March. If they don't address, the market will assume the worse.
But you said "if they were going to buy back capital." I don't think they can or would want to. I think ATLS owns the preferred and they aren't going to sell it at a discount.
Nice bounce in Yhoo today. Lots of rumors about their impending tax plan which is set to be released on the 27th. Stock should drift up to the low 50s by the end of the week as Marissa hobnobs with the uber wealthy in Davos. I own the Feb 55 calls.
Several people are comparing this carnage in MLPs to the declines in bank preferreds during the financial crisis. There is a very big difference. In 2009, the bank preferreds declined because no one knew which big banks were going to fail after Lehman failed. I believe the preferreds kept paying. But the Fed bailed out the big banks. They were simply not going to let the too big to fail banks fail no matter what, and that's when those preferreds started to rebound. The banks didn't just get better -- the Fed saved them.
Here and now, there is no Fed to bail out the e&p's. There will be distribution cuts and some companies will go bk. We have no idea at this point how long o&g prices will remain depressed. Plenty of people estimating about 20 months, but really no one knows for sure. By the end of this, many MLPs could be selling in the $5 range and paying no distribution.
I disagree with you and jbcguy.. Expensive capital is not the cause of their problems but a result of poor acquisitions. The problem is too much debt for the EBITDA that they are going to have. The debt covenant is connected to the bank debt and the senior notes. Blowing cash on equity repurchases, whether common or preferred, does not increase the EBITDA part of the covenant or the debt part. Debt repaid can possibly be re-borrowed. Plus, equity repurchases are probably limited by the debt covenants. MEMP could do it, but they are in compliance and may have different restrictions.
When they announce a cut of the divy (possibly not until April when the new covenant kicks in -- see my post above) then the stock may stabilize.
Check the SEC filings. I posted before that I thought I read that it goes to 4.25 at the end of March Here is from the 10Q page 21:
"The Credit Agreement also requires the Partnership to maintain a ratio of Total Funded Debt (as defined in the Credit Agreement) to EBITDA (as defined in the Credit Agreement) (actual or annualized, as applicable), calculated over a period of four consecutive fiscal quarters, of not greater than 4.50 to 1.0 as of the last day of the quarters ended through December 31, 2014, 4.25 to 1.0 as of the last day of the quarter ending March 31, 2015, and 4.00 to 1.0 as of the last day of fiscal quarters ending thereafter.
Kee, I think the percentage of oil for ARP is now higher (about 25%). The ARP board had a good discussion of it and one poster has run some DCF calculations.
Kee, MEMP seems to be holding up the best among the e&p MLPs because of their superior hedging, but even the best can take on water if oil goes further south. I still own ARP, but it is down big today. I expect a divy cut in April when their new debt covenants take effect. They are among the low cost producers but they made some oil acquisitions at the wrong time.
The Cohen's talked about the possibility of a deal when they announced the TRGP/ATLS/APL deal but ARP has declined so much that I think it would involve too much equity at too low a price to get the Cohen's to do it. I think the only thing they can do is cut the divy, reduce capex and pay down debt and try to ride it out. I wouldn't be surprised to see it lower.
william, the salaries and expenses come to about $3.1mm per quarter from the last 10Q That's $12mm per year. They would have to earn 13% on their remaining investments to break even. Of course, the dividend is determined based on RIC rules, so they may have to pay out something.
William, they said in their 3Q 10q that they would not earn enough to pay their operating costs. Like MREITs, with BDCs it is difficult to figure out the accounting. They said they could pay a divy if required to meet the RIC rules but that they would likely repurchase more shares. Since it is selling below book value, one could do worse, but it looks like they are liquidating the company. If they do it right, they would just merge with another BDC so that their remaining shareholders get capital gain treatment, but you might get stock of another BDC as the merger compensation. Since there isn't much left in the way of a business, there's probably no premium to book to be paid.
Chinese stocks getting hit. Oil resuming downtrend. Can Europe QE save the markets?
I read an interesting article about Exter's pyramid. Basically, an inverted pyramid with high risk investment sectors on the top with less riskier sectors each rung down until you get to cash and then gold. The theory is that investors rotate down into the next "safer" investment.
Vin, it is difficult but not impossible. I think we all have access to the tools both technical and fundamental. The problem is blotting out the noise of "it's different this time." For example, we know that mREITs have a cycle that corresponds with the interest rate cycle. They reach a peak valuation at some point in the cycle which usually corresponds with a the low end of their dividend yield. The problem is that when the stocks get to their low dividend yield (somewhere between 10-12%) those yields are still compelling, so we stay in those stocks and then watch them go down. This reasoning is often accompanied by such notions as "we can't find anything paying as much." I suspect the same is true for BDCs and everything else. The valuations peak, but then the rationale for not selling is "there is no alternative but for this sector or stock or investment." No one ever suggests going to cash, because they always think that returns will always be greater than zero earned on cash, yet there are always times when returns go negative.
But Chipotle hired another high school kid who can now buy a new $30,000 car and a $300,000 house with an FHA no down payment loan with his gas savings, so it all balances out.
William, very interesting. I know the name because it is local and one of their officers was a director of the company that I used to work at. Most interesting is that they said in their October report that they thought the cycle was at the peak. Give them a lot of credit for monetizing their assets at the top. Makes you wonder why anyone would own a BDC that did not see the same type top in the cycle (just saying for those of you that think there is no risk in something like PSEC just because they now pay a dividend which is the highest in the sector).
Probably little risk since the stock is selling below book, but then why are we paying them to manage a stripped down portfolio? Probably means they are up for sale or going to liquidate, but then the g&a or parachute payments take up too much of the proceeds. Have to do more research.
Vin, the difference may be that the utilities are highly regulated by the govt, whereas the infrastructure companies may have less regulation.
As interest rates continue to fall and as energy prices fall, investors are pushing utility shares up, to the point that they are getting close to overvalued.
Back to the topic of high yield vs. low yield. Let's be clear that investors can play high yield names on an opportunistic basis. During certain cycles, mREITs outperform and during others, BDCs or property REITs can outperform. They are Kenny Rogers' sectors ("you got to know when to hold them ..."). The same can be said for high growth dividend names. When their cash flow is rising and dividends rising, they can outperform. The trick to staying ahead is to know when sentiment changes and rotation comes. With high yields it can be difficult because retail investors who tend to chase the high yield names usually aren't good at calling that trend change.. With high growth dividend names, it's when the high growth slows or stops.
From a Barron's article today:
In a recent analysis, Barclays analyzed past returns for stocks with extremely high yields, ones with blazing dividend growth and ones with only healthy yields and ample payment growth. This last group scored best on both volatility and risk-adjusted returns against a wide range of macroeconomic backdrops, including rising and falling oil prices, interest rates, dollar strength and share prices. Extreme high-yielders generally fared worst.
Sarge, Yhoo is supposed to announce their tax saving plan next week. The plan could disappoint, but to hedge for that you buy puts. On the other hand, if the plan is good, then the stock goes up. The third option is that the plan disappoints, but it brings out a proxy contest and the stock goes up. That's why I have advocated using options to play yhoo. Reduce risk and capital and still participate in the upside.