" I can't think of any reason why their suppliers wouldn't be too "
Here's a couple of reasons -- 1) some producers borrowed out the wazoo to fund drilling -- HCLP is only modestly leveraged, $3.5 million interest expense vs $65 million EBITDA. 2) other producers have high costs and can't make money at current prices. HCLP sells for $70/ton and produces it for $14 (more or less) 3) still other producers need to cut div to pay for development. HCLP doubled capacity, paid for it with an equity issuance earlier this year, and has already sold most of the additional product. 4) oil producers are faced with initial decline rates of 40% or more from new shale wells, and *need* to drill to stay in business. plus, they can boost returns by using... wait for it.. MORE SAND in each well that they do drill. Contrast the dynamics of an oil well with initial depletion of 40% with an HCLP sand mine.
1) where do you get the idea that payments are "guaranteed" ? Distributable cash flow of $30 million will decline to less then $20 million once the hedges expire next quarter, and decline sharply once they stop drilling new wells. You've got about 45 million regular units, and add 7.5 million more once the sub units convert. Nothing is guaranteed.
2) your $1.50 residual value is simply made up. even if it's accurate, you need to discount it back 17 years, so it's effectlvely 0. What are those wells going to be worth in 17 years, net of production expenses, divided by 52.5 million units?
You're probably looking at less than $2/shr payout through 2015 if oil prices don't recover, declining to probably less than $0.30/yr by end of trust lifetime.
I'm not saying it's a disaster at $6.50 or so per share, but it's not a steal either. IMO a much better bet would be the preferred stocks of something like VNR or BBEP, which give you a preferred claim on the cash flow + are priced to yield 12% or so right now + support from active development programs instead of depleting to zero.
I felt like an idiot in 2008 & 2009 with all my MLPs, I felt like an idiot in 2013 holding onto my bonds, and I wound up making all kinds of profit while never missing a single income payment... so I feel like an idiot now also with these preferreds, but I suspect this will also turn out OK. Bottom line is you have a preferred claim on some real assets that produce real income. I agree with you about supply/demand also, I already saw an article that Bakken production in Nov declined from prev month.
Last year they paid out essentially all the UNII, so I'd be surprised if it wasn't at least that much.
Not real thrilled that 30-50% of our annual income gets distributed to folks who only hold it for a couple of weeks, but on the other hand I'll be buying some more to do just that myself. Seems like they could easily raise the monthly payout by at least a third and still have cash left over, they've comfortably out-earned the distribution every month since 2012.
Early this year the UNII balance was actually slightly negative, so everything in UNII right now is from this year.
Last quarter, they have distributable cash flow of $58 million before paying out $5 million to the preferred holders, leaving $53 million for the common LP units. That's AFTER interest on the debt AND maintenance cap ex. So 90% of their DCF can evaporate and they still have the cash flow to service the debt, maintain production, and pay out the preferreds. And it's tough to lose 90% of their DCF when only 40% of their revenue is oil.
If oil goes to $40 and stays there until VNR's current hedges run out, probably the common distribution get's slashed, but basic economics is that oil price (like any commodity) won't sustain a price below marginal cost of production, which I believe is somewhere in the $70s or higher if you're talking enough production to meet current demand.
I think these are getting killed with tax-loss selling + lack of liquidity. Last December did very well buying several bond ETFs/CEFs that had been getting hammered and recovered decently in Jan/Feb. Will they rally back to 24? Probably not, but I expect at some point in Jan/Feb I'll have the choice of selling some shares for quick 10-15% profit or just holding them for the income.
My bad, you're correct, I thought the distributions would be qualified dividends if VNR's net income was at least greater than the distributions, and ROC past that (I had owned a different preferred that was taxed that way). The exact wording from the offering document is:
"The tax treatment of distributions on our Series C Preferred Units is uncertain. We will treat the holders of Series C Preferred Units as partners for tax purposes and will treat distributions on the Series C Preferred Units as guaranteed payments for the use of
capital that will generally be taxable to the holders of Series C Preferred Units as ordinary income."
Not really disagreeing with your comments, but the lack of liquidity is one of the reasons why they're trading this low in the first place. You do need to carefully scale in to a new position with limit orders in small batches of no more than a few hundred shares, but that's your opportunity. And the the oil price shock discount means IMO that you might be immunized when rates go up -- when rates go up but oil prices have stabilized, it is quite likely that the downside will be no less than where we are right now.
vixstox is also on the money with the tax-loss argument. Also a cogent point for the VNR common, I'm sure tax-loss selling is a big factor right now. Definitely want to build a shopping list of solid-but-depressed energy stocks -- the upstream MLPs, the frack sand stocks, drillers, etc -- for purchase this month.
the B shares now trading below 20 for almost 10% yield... and taxed as a qualified dividend, to boot. Even if you think distribution cuts or assets sales are on the horizon, tough to see how cash flow dries up to the point where they can't make preferred payments. Cumulative too, so if they ever want to pay another common distribution, you get paid first.
Morningstar made the very good point that the current "glut" of +1 million barrels/day is about 1% of production, whereas globally about 4% disappears annually due to depletion. So drilling will continue. And of course, for US shale plays, the depletion rate is far higher. Obviously the growth rate in US drilling is a variable, as is the oil/gas mix of HCLP's customers, but there is clearly a high baseline of drilling activity that will continue indefinitely.
I also saw a news blurb about that on Seeking Alpha... spent over $1.1 million for an open market purchase.
"Be thankful we are mostly a gas producer"
The problem with that statement is that while the production *volumes* are heavily nat gas, the *revenues* are much more oily -- I think (offhand) oil is like 15% of the production volume, but +40% of the revenue?
If this market slump continues and HCLP languishes in the 30s or drops lower, it becomes a very attractive takeout play. With cash flow already booked for next year or two, do not be surprised if mgmt teams up with a private equity firm and takes it private. Remember, as a MLP, the GP can sell the company anytime they want, they don't need approval of the LPs like us. They could take it out for $40, lock in a very nice EBITDA multiple on the deal, re-price their stock options at current price, and do another IPO in 5 years or so when oil is hot again.
Are those bonds listed on an exchange? I've been buying the preferreds -- which have also gotten killed lately -- at about 8.6% yield, sounds like the bonds would be a better buy.
The B and C shares have been tanking more or less in tandem, the A shares still yield a bit less. Yield on B shares is up to 8.8%? And with VNR itself having an up day?
My impression from reading the press release -- and making a good-faith effort to understand it, easier said than done -- is that ETE is basically being a good corporate parent and restructuring some deals to help out ETP. Didn't see anything that would benefit ETE to the tune of a 5% pop.
It could also be that this is just the Part A prelude to a another deal to be announced, and someone has leaked info. But you'd have to be pretty cynical to believe that sort of thing happens in this day and age...
I received a reply from IR about this issue -- here is what they said:
"Thanks for your email, and for your interest in HCLP.
You are correct - the majority of the $7.791 million allocated to the IDRs was not actually paid out to the IDR holders. The IDR payment is based on the actual distribution paid on November 14, 2014 of $0.625 per unit and was less than $700,000.
The difference in the amount allocated and the amount paid to the holders of the IDRs is still retained by HCLP, is available for any general corporate purpose, including funding of future distributions to unitholders. The Distributable Cash Flow in excess of the distribution paid is not restricted in any manner or reserved for future distributions to only the holders of the IDRs."
So the IDR payout was only about $695,000.
Every MLP is at the mercy of the general partner -- that's the "limited" part of being "limited partners" instead of shareholders. Sometimes the MLP pays out outrageous IDRs. Sometimes there are lots of "management fees" that get paid out. Sometimes the GP or "sponsor" drops down assets at inflated prices. Sometimes the GP sells out or does other "strategic" transactions that benefit them but shaft the limited partners (like the recent Kinder Morgan deal). So this isn't anything specific to HCLP (or particularly outrageous, as these things go). But clearly the best MLPs are the ones who were forward-thinking enough to buy back their GP relatively early, like Magellan and Enterprise compared to Kinder Morgan. Once the quarterly distribution climbs above $0.71/qtr, half of all the additional cash flow will go straight to the GP as part of the IDR deal.
""The Sponsors" are the people who are making big time money." That's why lots of MLP investors have learned that the best way to invest is to buy shares of the GP instead of the MLP -- look at ETE vs ETP, PAGP instead of PAA, KMI instead of KMP, etc.