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."
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.
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.
Early this year the UNII balance was actually slightly negative, so everything in UNII right now is from this year.
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.
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.
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 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.
I was looking through the offering doc for the preferred, I didn't see any language in there linking preferred distributions to debt covenants.
One thing you have to give them credit for, in recent years when everyone was trying to get more "oily" and paying $$$ for oil acquisitions, VNR looks pretty smart now for buying nat gas properties on the cheap.
one of the reasons it's not reacting to the distribution is probably because no one knows about it... I haven't seen any public announcement, including the fund page on the PIMCO website.
It's very strange to me that this particular press release was not distributed on the wire services like the others... you can see just in the past couple days, the press releases for the new fiscal yr, etc are broadcast on Marketwired. They obviously deliberately chose to not publicize this one.
I think sending half your money to each is probably a great idea -- they're arguably the two best fixed income mgrs in America. Both will probably figure out a way to make money in 2015 no matter what. I doubt the fixed-income market is quite as binary and simple as you make it out to me.
I've noticed the A shares have been very strong relative to the B and C shares for a while now... A shares yielding 9.25%, C shares 10.65%, with B shares a bit less than the C. B & C shares have about $2 of headroom before the yield is comparable to A, I think it's only a matter of time before that gap closes.
Volume today is comparable for all three, with the A shares in the middle. Best guess is that this is simply the sort of thing that happens with thinly traded securities? and it is a good opportunity to profit from it. Someone who wants to accumulate as few as 10,000 shares can probably swing the market dramatically.
I can't imagine that they would borrow to pay distribution... they will want to preserve as much borrowing capacity as possible for development expense + build up liquidity against whenever their next maturity is + (hopefully) the ability to buy properties at fire-sale prices, which you have to assume will start to be available. The smart thing is to look at what their cash flow will be in 9-12 months as hedges roll off assuming current prices, and cut distribution to that number sooner rather than later, and build up a cash/liquidity reserve with the difference.
Based on their latest table of price sensitivity, they'd be at about 85% coverage at current prices. But only 30% of their oil is hedged for 2016, so presumably as 2015 progresses and current hedges expire, that coverage will get worse and worse. In current environment, not maintaining conservative coverage of at least 1.1X coverage is simply silly. Their price sensitivity table was posted at end of October, and only shows oil down to $70, and it's already dropped to $55.
First off, like several other posters, thank you for your service. Not to belabor the obvious, but this is a small, leveraged, risky oil company. As such, I would suggest you hedge your investment in BBEP by splitting your money with another company that is completely different, such as a large, blue-chip company that will benefit if oil continues to decline or stay down. Something like UPS comes to mind. Also suggest splitting your BBEP with another MLP that is more nat gas, less oil, like VNR.
Putting all your eggs in one basket, especially something like BBEP, is silly. Please disregard everyone talking about the 2015 hedges: it buys a couple more quarters for the distribution, and that's all. The market is discounting the risk beyond 2015 if oil stays $60 or below, and that a company like BBEP runs into serious liquidity and/or balance sheet concerns that permanently trashes the equity holders. Not trying to knock BBEP -- the profit potential is certainly real -- but simply being realistic that a company with a reasonable chance of tripling your money in one year has a reasonable risk of the exact opposite. Good luck.