The hedge amounts are disclosed in the SEC reports. For Q2, they are hedging about 180 bbls. But their oil production has declined each quarter. Last quarter it was 102, down from 112 from the previous quarter. So while a rising price mitigates some of the decline in production on the unhedged volumes, on the hedge volumes they get killed because the hedge volume doesn't decline as much as their production (it actually went up from the previous quarter). Plus we also know they never get the full amount of rising prices, but their hedges are probably tied to NYMEX and won't have the subtraction of basis differentials or transportation.
You are correct that the hedges roll off in Sept 2015, but if prices then drop, they will get burned. I doubt there's really anything to crank up in terms of production. I think it's more a case of trying to stretch out what they have over a longer period, which is not necessarily a bad thing for a current holder. Remember, CHK is getting 0 distributions on their sub units
You do realize that this is an MREIT that is required to pay out 90% of its taxable earnings in order to avoid taxation at the corporate level. That being said, taxable earnings are different from GAAP quarterly earnings so don't get alarmed if it looks like they are paying more than their "earnings" in their quarterly reports. Many mREITs report "core earnings" which attempts to eliminate some of the accounting entries.
As for the safety of the dividend, an mREIT earns a "spread" equal to the difference between what it earns on its assets and what it costs to finance them. Multiple the spread times their leverage times their book value and that gives you an idea what they are "earning" to pay the divy. The spread can change, but they also can adjust the amount of leverage that they use. mREITs that use more than 8 times leverage can be at risk of having to cut their dividends because if the price of their assets decline, their lenders issue a margin call.
If they are providing the appropriate guidance to Wall Street, then everyone should know what their spread is, how much leverage they are using and what their book value is and there should be no surprises, even if the dividend fluctuates. mREITs get hammered when there is an unexpected decline in the dividend.
I have owned NYMT since the last spo because it is performing. But they are investing more and more in subordinated CMBS and mezzanine loans. Those assets are hot now, but their prices can be volatile and plenty of mREITs who invested in those assets got burned during the last crisis.
If your brother is not comfortable with the "risk" of owning a good stock with a 4-5% yield, he could consider owning a corporate bond. I just saw that Scana (SCG, a utility based in South Carolina which pays a 4% dividend) is issuing bonds with a 4.5% yield. He might also be able to buy a GNMA for 4%. If inflation spikes or interest rates go up, the market price will get hit, but he should get his principal back. Utilities and the like can be good inflation hedges as they usually can raise prices which keeps their dividend streams increasing.
In case those thought that this Trust benefits from higher oil prices, here is what the article says:
"Unfortunately, oil prices rose, leaving the trust on the hook for millions of dollars in settlement costs. These hedges, combined with CHKR's terrible well production, mean that the trust will not capture any of the upside in oil prices until the hedges expire. CHKR is not a good candidate for investors wishing to bet on oil price increases."
Grgsvll, you might recall that another poster mentioned that the Trust is basically "short" oil because of its hedges. Here are a few statements from the 10-K:
"These derivative contracts consist of fixed-price oil swaps, in which the Trust receives a fixed price and pays a floating market price, based on NYMEX settlement prices, to the counterparty for the underlying commodity of the derivative."
"If the floating market price exceeds the specified fixed-price, the Trust must pay the counterparty this difference in price multiplied by the volume of production hedged, even if the production attributable to the Royalty Interests is insufficient to cover the volume of production specified in the applicable derivative contracts. Accordingly, if the production attributable to the Royalty Interests is less than the volume hedged and the floating market price exceeds the specified fixed-price, the Trust will have to make payments against which it will have insufficient offsetting cash receipts from the sale of production attributable to its Royalty Interests. If these payments become too large, the Trust's liquidity and cash available for distribution may be adversely affected."
From my reading of the above, rising oil prices are a bad thing for CHKR. Maybe retail investors who chase this yield think that rising oil prices are good, only to be disappointed each quarter when the revenues and production decline. Know what you own.
My bad, but the main point was that the production is still expected to decline each quarter. The distribution will be lower. Not sure if this is already priced into the stock, but the robots algo traders will pick up the headline when the new lower distribution is announced and pound the stock lower.
Let me offer a few more thoughts. We know that a stock usually drops on the ex-date by the amount of the divy, so in NYMT's case, that will be about 27 cents. We also know that an mREIT will decline about 4% on the announcement of an spo (more if the mREIT is not very large), so that's another 32 cents or so for NYMT and we know that the mREIT model almost always leads to an spo whenever the stock is trading at a significant premium to book. So in total, we can expect NYMT to decline about 59 cents or 7% at some point in this period. Annualized,that's about 28%, which is double the current yield. Picking the exact top to sell and the exact bottom to re-enter may be difficult even if one is looking at the chart and RSI levels. But staying in the stock, when you know the probability of a decline because of the ex-div and spo is high, is not playing the odds. I'm not suggesting that every stock should be traded because there are tax consequences and a nuisance factor. But mREITs because of their large dividends and frequent spo's, tend to have more predictable fluctuations in price than other stocks.
Investing is not just about return, but also about risk and expected return going forward.
Sorry, but I didn't read in their disclosure that bad weather effected their production. I think the lower production was just a continuation of the the trend. Since the subordination period ends by the next distribution, you can expect a lower distribution as there will be more regular units and no subordination threshold to bolster the distribution to regular unitholders.
You are not going to find it unless you look at those brokerages like Wells Fargo or Credit Suisse that follow MLPs. Wells expects CAGR distribution growth of 16% for the next 5 years, but the main driver of the stock price increase is the Lake Charles LNG terminal project. Wells expects that to add $15 to ETE's share price.
BTW, I don't think ETE has the largest estimated distribution growth of all general partner MLPs or C-corps. TRGP and WGP have higher estimated growth rates.
grgsvll, as we have discussed, the continuing decline in production is exceeding any benefit gained from higher oil, NGL or gas prices, resulting in lower revenues each quarter. Also, as we have discussed, the Trust appears to have exposure with its oil hedges in that its hedge volumes exceeds the amount it produces. This has the effect that they are "short" oil, such that a rising oil price leads to impairment of the value of their hedges. Despite the higher oil prices, they have not been able to increase drilling to increase production. So despite the fact that the distribution remains at the subordination level, the fair value of the future cashflows leads to a much lower level than it is currently trading at.
All it will take is one more Seeking Alpha article to explain this (again) and the computer programs that control "investing" or "trading" in stocks will hit "sell" and drive the price down again. Wash, rinse, repeat.
At some point in the future, the drilling schedule will be reached, the subordination period will end and the distribution will correct lower and the stock price will have to be adjusted to account for a lower distribution.
In the short term, the stock price can stay elevated. For example, there are a couple of trusts, one is a trust that produces iron ore pellets (GNI) and one is one of the Whiting oil trusts WHX, whose stock prices stayed above their fair value for long periods of time because of the high distributions they were paying, despite the fact that each trust had disclosed that their term was coming to an end and the sum of the remaining istributions would fall well below the then trading price. Then one day, each of these stock prices collapsed IN ONE DAY. GNI fell from 60 to 25. WHX went from $4.5 to under $2. Everyone was warned but because the drop never seemed to come, they kept holding until it happened.
It's funny that everyone loved WMC when it was flying high, but now people hate it. Gracieblackbelt's comments on the WMC board are instructive. I agree they bungled their spo and their transition to a hybrid mREIT was shaky. It will be interesting to see what their dividend is this quarter. Some are expecting a large cut and some still think they will pay what they paid last quarter. The answer is probably in-between. If it exceeds expectations, the stock could get some dividend chasing into the ex-date. But we probably have to wait until they report their quarter before confidence will be regained in the stock. I'm holding through the dividend announcement.
As for other mREITS, NYMT has had a nice run and should announce their dividend by the end of the week. I'm looking to take profits then as they are trading at a big premium to book value and an spo is most likely. If they do an spo, I am going to wait a bit before buying, as the price declined a bit after the last offering
Bayman, you might want to check to see if AWLCF withholds any of their dividend. for foreign taxes. You could get the withheld amount back if you file a foreign tax credit form with your return. Remember this from the days when I owned Canroys.
The stock has held up well and the absence of a Seeking alpha article is noticeably. Past charts show the decline typically occurs during the third week in the Mar, June, Sept Dec, which aligns with options expirations. Maybe the algos or hedgies are propping it up to let the June puts expire before they take it down.
Aubrey's new company announced a large purchase of acres in the Permian and the Marcellus. Looks like the Marcellus properties went for well over $20k per acre. Jefferies was the investment banker on the deal.
On a separate note, MHR has a slide in their presentation materials that shows the value of each company in the Utica based on their $ of their market cap per acre of Utica The lowest $/acre of Utica properties is EVEP.
My posts aren't posting so I'll try one more time. RSI on Apple is over 80. Last time that happened, the stock fell 100 points (pre-split). Some reports that many professional money managers are underinvested going into the quarter end and have been using Apple as a market proxy. That could keep the rally going into month-end. Read about 6 separate articles from Jeff Saut (no bear) Todd Harrison and others. Many of the indices are approaching "round" numbers, i.e. 2000 on the S&P, 1200 on the Russell, 17,000 on the Dow. Good levels to pause.
Listening to the PAA/PAGP investor presentation. I don't own either of these, but they have been great performers. From the presentation, this struck me. PAGP which is the gp (and you know how I love GPs) is planning on growing the distribution 25% this year. Equally as important, it is taxable as a C corp, meaning no K-1, and because of their NOLs, there will be no reportable taxable income for 2014, 15 and 16.
Stagg, yes and no. I have seen some of the best companies return to all- time highs after several years including missteps, and I have seen some vanish. I could be wrong about commodity companies like VALE but they have had a decade of global growth led by China and other developing countries and cheap credit. They were also building houses in the US and banks were making loans right up until 2008 when the bubble popped. That's how the game is played -- they go 100 miles per hour and then crash in the real estate/ building sector. There are recent items that China has discovered that the metals collateral securing metals-backed loans is missing. The WSJ reports today that some banks are looking to see if some commodity collateral was used more than once to secure additional loans. So there are continuing signs of issues in China. Maybe it doesn't crash, but a slowdown would still be bad unless the growth picks up somewhere else.
As an example, US drug companies had a tremendous run in the 1990s but then had a long period of being flat before their stocks started up again. So it's about opportunity costs as well. Even non-cyclical companies can have stocks that run in cycles.
Kee, I once owned both ETP and ETE when I first started investing in MLPs. The lesson there was to own the GPs and forget about the yield difference, further supported by experiments owning TRGP and NGLS, owing WPZ but not WMB, and owning WGP versus WES. Target on ETE is $75 but it's K-1 is a mess with 5 different MLPs to report.
Antero filed an S-1 a few months ago. You can find it under Antero Resources Midstream. They are still in the SEC registration process so there are no numbers yet in the latest amendment, but it should come public in July/Aug. They do have the financial statements however and the growth was huge and includes a water business. In the Marcellus. Antero is or will be one of the biggest producers there. My experience has been to just buy these midstream IPOs. Hopefully it won't be priced too rich.
I am also going to add more WGP. I read that it will double in 2-3 years.
A little early to sound the all clear on PSEC in my opinion. Let's see how rates react next week. Watching the 2.63% level on the 10 year to see whether to hold onto WMC. Dividend announcements in another week or so on that, NYMT NRZ and others which should provide a run but then some SPOs.
From the i.v. board, PAA raised guidance 8-10% over the midrange of their previous guidance. Should give a boost to both PAA and its gp, PAGP. With the market up so much, it is hard to recommend new things to buy.