ACI Worldwide, Inc. Message Board
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with little cash and 12 billion in debt not much flexibility..
by taratara144 •Feb 22, 2013 11:21 AMwhy on earth would APA want to use cash flow to pay down debt or exchange debt for equity? $12 billion debt is not a problem considering they have almost $10 billion cash flow per year... if anything, they should issue more debt @ 4% and buy back stock at book value. ... but certainly borrowing at this rate to fund development projects makes a ton of sense.
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I just finished spending some quality time with my spreadsheet trying to update my valuation for PER. It's increasingly clear that at least a large part of the recent drop is because the most recent earnings/distribution have made it clear that current oil prices are not sufficient to meet the projected distributions.
Obviously when this was being planned, no one expected the glut of oil from Permian Basin that has developed. So while the projections assume they will sell oil for $97/bbl, they are selling mid-low 80s. Even though they are hedged, the hedges are based on a WTI spot price at Cushing, and they are selling their oil for even less than that because of local supply glut, so that is why even with hedges and higher-than-expected output from accelerated drilling, they missed distribution estimates.
At some point new pipelines and such will alleviate supply glut, but it's unrealistic to expect oil to climb all the way back. The fact that PER has subordinated units that kick in once distribution is 80% of projection probably puts a floor on it--look at SJT to see what can happen without that, they would love to be in your shoes!--but IMO the only prudent approach is to assume that from 2015 onward PER will be paying out the minimum 80% of projection. The projections assume increase of 2.5% annually from a $97 base, and that is just not happening considering where we are now and how Permian production is now projected to keep rising for a couple decades.
If you assume distributions at 95% of projections until mid-2015, and 80% afterwards--and a 12% required return, which seems reasonable since growing E&P MLPs are yielding 9-11%--then PER is properly valued at $14.50 or so. For 11% return, that rises to $15.05, and $15.75 for a 10% return. So it's interesting that is exactly where it closed today. I had previously thought it was a buy in $16 so, but IMO you need much more conservative expectations. If they wind up paying 80%, you get some welcome upside. -
I also tried to model the pace at which the valuation decreases with each distribution. If you want to maintain a 12% IRR going forward, the valuation drops by $0.20 for each $0.60 cent distribution; and that number increases each quarter. So in next 4 quarters, unit value of PER will decrease by $1, and $1.40 the year after. The pace of decline then slows once you've worked your way through the distribution bulge in 2014-2015.
That's not being bullish or bearish, that's just math--every distribution that is paid is one less that a new PER buyer doesn't get. What that means is that there is no way this is ever getting back to $18--let alone $20. And unless it rallies really strongly soon, $16 will soon also be permanently in the rear-view mirror. Any rally to that level IMO will be a strong short-term sell signal, I don't think that price level will be sustainable.
I'm not trying to be really pessimistic, I bought this in 2011 and believed the numbers too. I only sold it last year because I was surprised that all the income was taxable. But I think this analysis holds true for all Texas oil producers to some degree, but trusts like PER are screwed because they have zero flexibility to respond to the market or grow their assets/production to compensate for lower prices. -
I haven't really looked at those in detail except in 2011-ish, when I thought PER had the best assets. Whatever else you want to say about PER, at least it is mostly oil, IMO the less dry gas the better. Right now I don't own any--when I sold PER, I bought PSE and QRE, which are also in the dumps--but have been considering PER for my Roth.
"It appears that these trusts have been a fool's game"
I'd like to be charitable and say that a couple years ago they seemed like a much better idea--the extent to which oil/gas production in USA is growing caught a lot of people by surprise. -
I've owned KMR forever, and KMI too, both times it's been public; so far this year I've been stocking up on the KMI warrants.
When you talk about PER as a fool's game, at least the oil in the ground is real, it's not just colorful pieces of paper. There really isn't a credible scenario where if you just hold onto PER, you won't at least get your money back. The only question is will you make a small profit, a really small profit, or a good profit. At the end of the day, there are plenty of worse things to invest in. For all the noise as it has dropped from 20 to 16, at some point it is guaranteed to drop to 12, then 8---the only question is the shape of the curve, and how long it takes to get paid back. -
It was a very simple K1--income was split between royalty income and interest income, minimal deductions. Other PER holders have confirmed that it is essentially all taxed at regular income rates, so IMO don't buy this expecting any tax advantage on the distributions. On the other hand, it seems just right for retirement accounts/Roths. Prudhoe Bay is an older trust, PER obviously has some different fine print.
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PSE, QRE, VNR, BBEP, to name a few.
PSE (which I've owned for a long time) is closest to PER in terms of assets, 100% located in Permian Basin. It's also been beaten down a lot lately--they have the same pricing issues as PER, more or less--but they have a large inventory of development acreage and will be growing production for years. They hold back 25% of cash flow for development, the 9% distribution is net of that, plus much of the distribution is tax-deferred (as it is for all of the 4 names). -
" I for one, am using my very readable coin investments, to buy PER."
That's funny, I also bought my first block of PER in 2011 with money from selling gold coins. I figured over long-term oil was basically as good an inflation hedge as gold, plus I get paid in real cash flow as long as I hold it.
My original PER basis was 18 or so, so even if I hadn't sold it last year and had held it through the recent plunge, I'd still be more or less even when you account for the distributions since then. -
Back in this AM below 14.
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1, they ARE an operating company; 2, they typically distribute 75% of cash flow (last year, $74 million out of $99 million), and reserve 25% for maintenance cap ex, to replace depletion; the $100 million is development cap ex, for new/increased production. So that gets funded either with debt, or new equity. At these rates & unit prices, debt makes much more sense, IMO.
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Early by one day...
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PER has actual oil in the ground... AGNC has colorful pieces of paper. Not much of a contest re: safety.
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Obviously *someone* saw the index removal coming, hence the pronounced drop before the release... did anyone see today's 7% rally now that the news is official??
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I think the better question is, why did it drop so low?? Even $24 is a fairly pessimistic price... quite likely that all we're seeing with this rally is relief from the recent selling pressure.
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one of the oil price issues that has affected PER is that their hedges are based on the WTI/Cushing spot price... but the grade of oil that they sell doesn't necessarily sell for that price, and in the past year that spread has been wider than expected, so they've gotten less than expected for their oil. So if WTI goes up, but the price for their grade does not, PER loses money. The flip side of course is that is a source of upside if the spread narrows... but it points out that the hedges are not quite the guarantee that people might think, in either direction.
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It's fun to read these old posts... PBCT (including div) is up 11% in two months since this post, double the SP500. Buy 'em when they're cheap.
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lucky for you then than CHKR is not an MLP, but a trust. MLPs are quite different--LINE/LNCO, BBEP, LGCY, PSE, VNR, QRE, etc.--and are still well worth your attention.
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Looks like it's bcome fashionable to short these trusts
by baytechinc •Mar 20, 2013 1:29 PMthis has nothing to do with shorts, it's a reaction to CHKR blowing up.... turns out CHKR reserves are nowhere near what they thought when they IPO'ed... oops!! To some extent, all of those trusts that went public about the same time--CHKR, PER, SDT, SDR--tend to get lumped together. Right now they are all sensitive to the issue of reserve adjustments.
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now that we're about 77, looks like we're breaking out of recent trading range, would not be at all surprised to see it run back to low 80s
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this is an excellent reason why placing anything more than a token, placeholder bid before the auction close is a dumb idea. always use a sniping service to hold your bids in reserve so you can cancel if you want/need to.