Valuation of ARP and all E&P MLPs is tricky. The whole idea is to use the equity and arbitrage the difference between private market transactions and what the market income seekers are willing to pay. In other words, mature production typically sells for 6x-8x cash flow, or a 12% to 16% return and you buy it using a blended average of debt (say 7% and equity, typically sub 10%).
The erosion in unit price has wiped out virtually all of the premium and you are buying the assets and the corporate structure at around NAV. Of course, the drop in commodity prices has not helped NAV.
I think ARP is undervalued, even counting the lousy management team. With the hedges they have in place, they should be able to achieve at least a .90x coverage in '15 (I am not as optimistic that they will raise $275 million for the private drilling program).
You hit the nail on the head, however, I do believe APL will benefit under Targa leadership.
They need to bring Dubay to ARP. They seem to believe now with plenty of acreage that they can increase fund raising...we shall see.
I am not sure if it is related to the conference call or related to general market sentiment regarding E&P. It does seem though that ARP takes a disproportionately harder hit than many of the others.
I guess at some point the fear will subside and the price will be silly cheap. I think the best thing ARP can do is to stop acquisitions, focus on operations and maintain the distribution and continue to remind the market of their hedge book.
No problem. I haven't had time to listen to the replay of the call. Disappointing is all I can say regarding market price. No doubt the E&P MLPs deserve a discount to the midstream but ARP appears to be one of the highest yielding in the sector. Really has fallen apart. The lack of drop-downs seems like a weak excuse. Long term it remains to be seen if Cohen will ever learn to run with a coverage ratio above 1.0x.
Looks like natural gas is climbing a bit. Will likely mean a slight uptick in distributions in a few months (owing to the lag in payments).
Additionally, I believe November is the last month that Burlington Northern is recouping overpayment. That should add almost $.01/unit to the monthly distribution starting in December.
Sounds like Mancos development is still progressing for WPX and Encana.
Yes, I agree. They need to strengthen hedges on both gas and oil for '15 and likely for '16 as well. I think the market would reward them with a lower yield if they could show strong margin protection going out 2-3 years.
Too bad they blew $600 million on oil properties right before the collapse and right before Quicksilver is likely to put a lot of nice Barnett properties on the market. Will be interesting to hear what they say about the growth prospects of Atlas Group given that ARP is likely to be static in '15.
Not spectacular. Not terrible. Par for the course for Atlas.
They ought to bring gas hedges up closer to 90% given the relatively predictable volumes in most of their basins and oil closer to 80% for 2015.
I looked at most of the assumptions for reaching 1.10x coverage in '15. I think the realized prices look right especially given their 70% gas hedge position and the recent pop in gas prices. If they hedge at the strip, essentially $80 they can achieve the $83.00 realized price.
The production on gas looks achievable. We know that the coal bed methane and Barnett production is relatively stable. The base Appalachia is low decline, with Utica and Marcellus mixed in. They actually project volumes about 5% below this Q, so that seems about right. Oil and NGL volumes are a bit higher than current, so it seems like they expect some production growth perhaps from the newly acquired EFS properties.
Maintenance capital seems about right. Not sure about the growth capital but it seems consistent with years past.
Private drilling program raise of $275 million seems like a major stretch. Perhaps they are optimistic now that they have some premium EFS locations to eat up a lot of capital to go along with the Marble Falls, Mississippi Lime and Utica/Marcellus. I'd expect something like $200 million. My hunch that they fail to meet $275 million is why I think they will not make 1.10x but rather something much closer to 1.0x
Operating costs (LOE) look normal/reasonable.
I think the reality is they will likely achieve coverage of about 1.0x for 2015 (on a $2.40/unit distribution). Not spectacular, but given the drop in crude and NGL prices, I don't think anyone can expect much better than trudging forward.
Atlas Group (the stub) will need to find a way to grow ARP. By far, the bulk of the $1.25 they project is coming directly from the ARP common and preferred units they own.
Agreed. Legacy appears to be much better positioned than the market perceives. While they no doubt will feel the sting of lower pricing on their unhedged volumes, their relatively low leverage and enviable position regarding their revolver means that they should be able to weather the storm for several years. I believe as they mentioned, they should be able to acquire properties in this downturn that will be accretive. I suspect that Legacy may throttle back or perhaps even entirely on distribution growth over the next year or so but I believe with their hedges and also firing power, they likely should be in a good position to cover the distribution.
This becomes a nice play on natural gas especially with Burlington Northern (ConocoPhillips) not spending much on development, which means SJT's proportionate share of development costs are lower than in years past. Monthly distributions ought to average around $.10/month.
Longer term, the potential of the Mancos Shale make this an interesting play. Development of the Mancos would mean SJT would be funding their portion of the drilling costs (which would hurt distributions on the front end) but would result in what hopefully would be meaningful reserve and production growth and of course, distributions.
How is Linn bond working out for you norrishappy?
And, yet another month has come and gone and poor degenerate sandforbrains prediction of a distribution increase has gone unfulfilled. It really is a shame that he was wrong on so many counts..but alas, that was it's calling in life to be the court jester (or rather message board clown).
Meanwhile, if you will notice in a previous message preceding your clearly incorrect comments, I noted that NGLs cannot be effectively hedged out much further than 18 months due to the market being rather illiquid and certainly not compelling in terms of pricing.
As for coverage, hedging and risk, you prattle on incessantly but the reality is that you $40 price target on Linn looks like a pipe dream right now. It will take a lot of yield compression for that to happen since Linn's coverage is in question and their relatively light crude oil hedges have left them exposed on a large percentage of '15 crude production. Linn's lack of '15 outlook was a major disappointment to the street, and while it is true that a large portion of their portfolio has shifted, a lack of even basic guidance speak volumes of how weak Ellis and company have become in terms of managing the crisis and the story. One can only imagine that they had to perform due diligence on the properties before they performed the 1031 swaps and clearly in some of the deals, they actually projected accretion to cash available for distribution (aka distributable cash flow). So, once again, the market is telling management, show me. As painful as it has become, it looks like Kaiser and Hedgeye were at least partially right (even if they got the details wrong) and perhaps some of it has simply been a self-fulfilling prophecy with Linn effectively being pushed out of the equity markets due to such high yield preventing accretive equity financed deals.
2015 will be a year heavy on integration and optimization and it remains to be seen if they can manage 1.0x coverage.
It isn't nearly as problematic if you are hedged 5 years in advance. You don't need to hedge next years production but rather production 5 years out. You layer them on and run with a decent coverage ratio to mitigate commodity price fluctuations.
I think now with the transactions at ATLS and APL, ARP becomes the primary cash generating vehicle for the Atlas stub, so it should be paramount for them to find a way to grow ARP, or at the very least, maintain the distribution.
I personally think eliminating the IDRs is the right choice, but it is unlikely to happen. So, we are stuck with a nice collection of producing assets in a corporate structure that the market presently thinks very little of. We have a nice hedge book, a private drilling partnership program that while somewhat weak in years past, still produces a nice stream of cash.
I think a focus on operations and producing above 1.0x coverage will be important to regaining the streets confidence.
Yes, you are correct, Linn did not give much guidance regarding 2015, but as was reported, they have had a major transformation in their asset base. It will take them some time to work through the new assets and to high grade the opportunity set that came with those acquisitions and to merge them with the opportunity set on their existing assets.
But, I think we all know that 2015 will be a year of focusing on integration of the new assets and much like during the '08/'09 timeframe, we will see plenty of recompletions, optimization, re-work type expenditures (i.e. those that are very cost effective, low-risk and may have the ability to positively impact LOE and SG&A). I think the market underestimates how capital efficient they (and of course other producers) are at finding high returning projects. One can only imagine how many optimization opportunities exist after merging the original BP Hugoton assets with the ExxonMobil Hugoton assets, Pioneer's and also Devon's.
We also have yet to see if they can divest the remaining 8,000 boed of Wolfcamp production and if they do, will it be swapped for natural gas producing assets. A swap to natural gas assets would help them obtain the 70% hedge status in the 60-70% projection for '15.
Of course, distribution increases are highly unlikely in '15 barring any miraculous recovery in crude oil pricing and barring a major deleveraging transaction (presumably an acquisition of a low levered c-corp by LNCO). It is painfully obvious that abandoning the fully hedged for 4-5 years strategy is hindering Linn especially on the crude side (gas is of course covered and NGL markets are typically only liquid going out 18 months). Making it worse is highest in sector leverage. Perhaps management will once again embrace strong hedging on the liquids side as they have embraced a return to their original strategy of operating mature, low decline, predictable producing assets rather than trying to be a hybrid.
I believe ARP will trudge forward. We might see some more volatility but it appears that even if their private drilling program raise is less than stellar, they should have coverage close to 1.0x. That should be enough to get them through 2015. They are actually in decent shape for gas going forward a number of years. They do have some weakness on crude oil hedges past '15. I think growth is going to be difficult going forward, especially with the IDRs, but I also think that this one won't explode as some of the poorly hedged E&P MLPs might..
Exactly. ARP was "supposed" to hit $2.40 at the end of 2012 for those that remember that far back. Needless to say, they made the Rangely and Eagle Ford deals and clearly received virtually no accretion from either of them as evidenced by the $.04 distribution increase "projection" and 1.10x coverage ratio (assuming a whopper of a capital raise in the private drilling partnership).
The more likely outcome is an increase to $2.40 and a coverage ratio of perhaps 1.0x
Ed is good at raising capital, but he is by far, one of the worst operators in the industry. He destroyed APL more than once and only good work by Eugene Dubay turned it around. Let's hope he focuses on Atlas Group and let's real E&P people run ARP...I had hoped the addition of Schumacher to the team would have helped ARP but it has been stagnant instead.
I ran the numbers and I think 2015 will be what many have expected, a year of stagnant distributions. I think ARP will likely manage 1.0x coverage rather than 1.10x. They are being optimistic to expect to raise $275 million in the private drilling partnership business in '15 when they have struggled to raise $200 million for the past several years. Note, they do project $225 million for '14. Current distribution is $2.36 and they target $2.40 so not much of a bump.
Their gas hedges cover about 70% of expected production and gas has slowly climbed back around $4.00 for '15, so that seems manageable to achieve $3.80 on realizations even with Leidy differential issues. Same thing with oil, they have about 70% hedged at $94 and the blend between the hedge values (and volumes) and the unhedged volumes and current strip prices means they will likely achieve their target realization prices.
It is clear that they are doing better than many in terms of cash flow protection but without a strong equity, they are limited to essentially to plodding along around 1.0x
It is disappointing for them to not give any info on 2015, but as has been the case all along, 2014 is a year of transition. No doubt the drop in crude oil is disconcerting to investors.
I think those that actually look at the hedges and crunch the numbers, the drop today is saying '15 will be tight and potentially sub 1.0x coverage.
The key will be Linn divesting that last 8,000 bpd of Wolfcamp production and converting it to primarily natural gas. That affords them higher hedge coverage and in all likelihood, there is likely a lot more value in mature natural gas assets at this point than in oil assets.
A $2.40/unit distribution (a cut of $.50 on an annual basis) might allow them solid coverage (equity growth capital no less) for 3 or 4 years.
It is essentially 100% gas, but they have extensive holdings that are prospective for the Mancos Shale (oil). The recent uptick in gas is likely helping push SJT up, even in the face of falling crude oil prices.
With Burlington Northern (COP) throttling back on development, it has allowed most of SJT's revenue to fall down to the bottom line.
I think much of the sell off is simply fear/panic. The market doesn't really differentiate. Even many of the natural gas midstream MLPs have sold off as oil dropped, despite little direct correlation.
I think we will simply have to trudge forward and wait for the malaise to pass. Oil will settle eventually, at what point I am uncertain.
ARP is well hedged on gas going out several years and we will see how well they are hedged with the recent crude acquisitions.