Yes Cooperman and Cohen want to save their investment.
Of course, you could apply the logic that they should have been doing that all along, right?
If Cohen can't keep ARP from crashing and burning WITH the hedges, what makes you think he is going to be able to pull off some miracle now with limited liquidity and hedges rolling off?
As for Cooperman, he's along for the ride. Not much he can do but sell or wait to see if they can save the company.
You have the audacity to say that ARP, trading at $1.60/unit, with a debt to ebitda ratio of over 5.1x and likely to rise as the higher dollar hedges roll off the books, is not a distressed company? I'm obliged to ask if you work for the company? Because only a shill could say that with a straight face.
Atlas will be lucky, yes, lucky if they survive and if they end up with any equity value.
It is fine to hope for $80 oil, but the reality is that oil might not get back to $80 for several years. The strip, which isn't terribly reliable says many years longer than ARP's hedges. You can talk about hedges all you want, but I would be willing to bet that YOU have not run the numbers, the way luscious.rodin has, calculating cash flow per year (and per unit) using the strip pricing for unhedged volumes.
You are delusional if you think ARP is going to be in a position of strength.
ARP has already admitted that nothing aside from the Eagle Ford is economic at current prices, and buying back bonds exceeds that by a country mile. It is only the need to deploy capital at AGP that pushes them to pursue these marginally economic plays.
I fully expect unit holders to be completely dissatisfied with what Cohen chooses to do with the cash, which will likely not be the prudent thing, which is to retire notes at 40 cents on the dollar, but rather to dump a lot of that cash into his dreamy scheme aka Atlas Growth Partners. You have missed the forest for the trees. Cohen is going to do whatever he has to do to save his baby, ATLS. He salivates at the thought of his little incubator in Lightfoot and AGP. Ok, so he destroyed ARP. So what. He intends to save ATLS so he can float some other scam, whether it be midstream or upstream is of no consequence. It's all about finding OPM and taking a slice, then another slice and then walking away.
Rest assured, Cohen will drive this one into the ground, but not before sucking every penny out that he can.
I look for him to either get ARP to divert cash from debt buy backs to "investing" in Atlas Growth Partners, or a merger of ATLS and ARP. That would move ATLS's debt over to ARP. But look for Cohen to make sure to spin off a non economic control GP to himself so that he can maintain control of the cookie jar.
Poor Leon Cooperman. What a chump. He fell for Eddies nonsense hook line and sinker.
For goodness sakes, ARP is in no condition to be making "strategic" acquisitions of assets from distressed companies. ARP is a distressed company, or couldn't you tell by the slow steady grind down to $1.50 per unit and reduction in distribution to 15 cents per year?
Yes, there are plenty of quality assets that will be coming to market over the next 6-12 months. Many would be perfect for an E&P MLP. This includes Quicksilver's legacy Barnett shale production, but I will be very surprised to see ARP manage to land any of these. The cash will likely be frittered away on projects that are neither strategic nor economic. The Eagle Ford shale at a 20% IRR makes little sense when you can buy notes at 40 cents on the dollar and get a comparable cash on cash return, yet accept no geological/drilling or operational risk and also get the huge back end tailwind of retiring debt at 60% discount.
It is no wonder that so many execs are bailing out. Wearing pinstripes probably doesn't appeal to them.
I can't wait to see the permabulls reactions when ATLS fleeces ARP out of a bunch of cash or they propose a merger.
It's actually quite funny to see every lever that Cohen tries to turn fail. He wanted to issue preferred units ($100 million worth I believe was listed in the filing) only to see those nose dive to a point where the yield is prohibitive. Too bad Eddie.
Then he was forced to cut ARP's distribution, meaning ATLS's income nose dives. The units they own also drop in value, meaning they would gain little if they divested the units. Then, to add insult to injury, and it couldn't happen to a nicer shill, even ARCX is dropping like a rock, so even if Cohen tried to get Lightfoot to divest units and make a disbursement, their value is dropping daily.
Oh and Atlas Growth Partners is struggling mightily. They have only 1 basin and it offers lousy returns. Negative ebitda? And while the Titanic takes on water, he refuses to acknowledge reality, in the same, obstinate and cavalier manner as when he nose dived APL years ago, panicked, layered on hedges at the absolute bottom, then had a nervous breakdown on the conference call and then had to divest crown jewel assets to save the company and finally let a real manager (Eugene Dubay) manage operations so he could go back to ATLS and pretend to be a Chairman.
And then the kicker, when he salivated over recompletions. Eddie, you can buy notes on the open market at 40 cents on the dollar, get a return that exceeds anything in your portfolio and also get a massive deleveraging tailwind and you are day dreaming over all of the recompletions the company can do. Senile?
It would have been easier if they just eliminated the distribution to zero or $0.00 :)
The ~90% distribution reduction means a meaningful decrease in cash received by ATLS on the order of around $5.5 million per quarter.
This means ATLS will need to resort to some kind of chicanery to fleece ARP out of some of its cash in order to stay solvent.
Cohen always thought he was smarter than everyone else. Then he got envious of the other guys and lost all discipline and bought oily assets at the absolute top, neglected to hedge, neglected to run with a decent coverage ratio, treated the investment partnerships like they were a never ending piggy bank.
I'd love to be a fly on the wall listening to him blame everyone for his poor decisions.
And it gets better, everyone is bailing out. Matt Jones the CEO, then Sean McGrath the CFO and now Brian Begley of IR. No worries, just grab another wet behind the ears stooge and plug them in.
I am shocked that ATLS did not drop below $1. Without the cash distributions from ARP, it is going to wither away.
Oh but wait, I guess this was the announcement that was going to have investors jumping to their feet.
Wait till the merger terms are released! ARP is going to get stuck with ATLS's debt and essentially no real assets.
Yes, the market will force both reduced investment, which will eventually lead to lower production and perhaps also increased demand.
The marginal (incremental) barrels should in theory be the first to come off.
In the interim, everyone suffers until both an equilibrium is found, but also a good portion of the "above average" storage is worked off.
That is likely to be late 2016, assuming the world produces 1.2 million bpd of demand growth. US production is on the precipice of another round of declines, having flattened out for the past 3 months after falling from 9.6 to 9.1 million bpd. Many others will peak within the next year or two. What we are seeing is everyone pumping wide open and the world is only oversupplied by 2%. This glut will be a shortage in a 24 months barring a major world recession.
Herz was selected because he is young and not an E&P guy. This allows Cohen to control him.
As I have said all along, if you look, all of the execs with the exception of Schmacher are Cohen yes men with little to no E&P background.
marklibera is right, Cohen controls Herz. As ARP is an LP, the unitholders do not even get to vote on the BoD composition. It is selected by the GP, and guess who controls the GP?
Cohen is calling all of the shots, and he wants a young, eager beaver that will say yes and not question his silly ways. You wonder why Matt Jones and Sean McGrath both bailed out? Neither of them were thrilled with the prospect of being at the helm when this goes down and Cohen quietly walks away to ATLS, or forces ARP to merge with ATLS to save it.
If you think it is ugly now, just wait. Rest assured, the game will continue as long as Cohen can continue shoveling cash to himself and his progeny at the expense of the unitholders.
If you think about it, MCEP made the Eastern Shelf acquisition at the end of last year. $120 million for about 1100 bpd of production (net of gas).
They financed that deal with 5.8 million units that netted $96 million. That deal, while poorly timed, was well executed in that they financed the bulk of it with units and now with no distribution, the true carrying cost is the interest on the $24 million in debt they took on to finance the remainder.
That deal is keeping the company afloat.
The beauty of MCEP lies not just within the fact that they have water-flood properties, which are low decline and require less maintenance capital to keep production flat, but also within the relatively "clean" capital structure.
MCEP has no preferred units, no notes, junior or senior debt. Their entire debt load consists of bank debt. While this prevents them from being able to buy back notes on the open market at a huge discount, as others are doing, it also comes with much lower "maturity risk". MCEP will likely be deficient after the upcoming borrowing base determination, however, it seems likely that the base, taking into account MCEP's 2016 hedges and a relatively flat to modestly inclining strip, will likely be no lower than $170 million. It is really quite surprising how flexible the banking industry has been with other overleveraged firms. MCEP will likely end up simply entering into a deficiency reduction plan, whereby the cash that was formerly being used to pay distributions will go to paying back the banks. This is much different than the default risk that comes with refinancing bonds at maturity. Plus MCEP gets the benefit of "pay as you go" on the revolver. Their is little reason or need for the banks to be overly aggressive with MCEP but rather slowly walk the base down and allow an orderly deleveraging.
The real "issue" at hand is that MCEP will be aggressively paying down debt and also perhaps investing modest sums of capital back into the business, this will work to help moderate the choppiness in the quarterly debt/ebitda calculation. It really is a slow race against time, as debt drops, perhaps at a rate almost in step with the decline in ebitda, the banks have less and less "at risk", while MCEP still maintains production flat to modest decline and they wait for pricing to recover to perhaps $55-$60 over the next couple of years. Once the hedges run off, things will be tighter, but by that time, I expect debt to be much closer $130 million.
We are witnessing the popping of a giant bubble of yield, brought on by the ZIRP era.
Now, that is not to say that yield vehicles won't prosper in the future as I firmly belive that the baby boomer generation will end up investing in yield vehicles to generate income. That being said, quality still matters.
ARP struggled for several years to grow the distribution (and even cover it at 1.0x) when oil was $90+ and gas was $3.50+. While the distribution has been cut, the debt load taken on to finance those deals has not been cut. And as we have all noted numerous times over, the conflict of interest between ARP and ATLS prevents ARP from suspending the distribution and buying notes back on the open market at 40 cents on the dollar, generating an almost 25% cash on cash return, not even counting the huge windfall of debt reduction when the notes mature. Oh, and that 25% is a non-declining zero execution risk adjusted return. That beats even the lousy Eagle Ford returns, which appear to be the sole economic bright spot.
It is very clear during the call that the only straight shooter is Mark Schumacher. ARP operations are likely turning over every stone, scrutinizing every single transaction, rental, field service charge etc to cut LOE. Like most producers out there, they are doing a decent job of cutting expenses, but that will not be enough to save them.
An immediate suspension of the distribution is in order, with all proceeds going to wards reducing debt (and interest expense) being the logical choice.
I cannot wait to see how Cohen "saves" ATLS at the expense of ARP unit holders. Rest assured, ARP will end up carrying the ATLS debt of $84 million. I even expect if they merge ARP and ATLS, that they will find a way to give the non-economic GP to Cohen, so he can maintain control and thus maintain his family piggybank.
If the Saudi's cut production and pricing rises to $60+, efficient producers will once again begin drilling more aggressively and bring more production online.
The only efficient way of restoring supply/demand is to do what they have been doing and force the marginal barrels off the market. OPEC has no other choice, none. Period.
The odds of OPEC cutting in December are low, but they are not zero. The odds of a cut that is meaningful is even lower. Who is going to cut? How much? For how long? Who will enforce the cut? How do you stop cheating?
We will have to restore the imbalance the old fashioned way, by decreasing supply through reduced investment and natural decline and by increased demand. These take time, but they are the only sustainable long term method of balancing the market. If the Saudi's cut production by 2 million barrels and oil jumps, what prevents them from coming back in 3 months and raising production by 2 million barrels and driving the price right back down?
Investors have a better chance of Cohen delivering good news that will have them "leaping to their feet in priase" than they do of the Saudi's and OPEC making a meaningful cut!
Yes, as Buffett always states, it is after the tide goes out that you find out who has been skinny dipping. Well, the tide is out and ARP is sitting on the sand bar naked.
Atlas is down 90%, yet they continue to blindly state that they are prepared for this downturn. They've cut the distribution, gotten a second lien, will likely be cutting or even suspending the distribution, they have a MAJOR conflict of interest with ATLS and of all of their assets, only the Eagle Ford appears to give them a decent rate of return, and it is marginal.
ARP is planning to issue preferreds at 16-20% yield via the ATM. Those investors are going to be very disappointed when the distribution gets cut shortly thereafter. But hey, FBR and MLV will collect up to $3 million in fees for shilling the trash.
The most logical use of cash is to repurchase notes on the open market at 40 cents on the dollar, giving them a 25%+ cash on cash return with no execution risk and of course the added benefit of huge debt reduction. However, that seems unlikely to happen.
I have to admit, it is quite entertaining to watch Cohen squirm and try to spin the massive collapse into something positive.
If you think about it, the call provided essentially no new info.
The perma-bulls now have to wait, on pins and needles, another 3 months. That likely means a looming distribution cut, of unknown quantity.
Registering the preferreds after the call, classic Cohen.
ARP is looking to issue up to $100 million in aggregate value preferred units.
Looks like they have FBR and MLV shilling for them, to the tune of 3% commission.
What poor suckers are going to buy this junk, trading at 40-60 percent of par liquidation value and yielding 16-20%. This is Atlas's cost of capital these days. 20%, the same return they claim they are getting in the Eagle Ford. This is nothing more than Eddie trying to keep the debt to equity ratio in a position to allow him to keep paying distributions to ATLS. ATLS needs cash, because, well, it is leveraged to the hilt.
Those poor suckers are going to be shocked when Eddie nnounces a merger of ATLS and ARP and a subsequent suspension of distributions, including on the preferreds. I'd look for an eventual conversion back to a c-corp status. That will take care of the arrearages on the preferreds.
Oh my, what a tangled web they weave, when first they practice to deceive...
They are selling preferred equity to fund the common LP distributions. PONZI scheme in sheeps clothing.
Bankruptcy is still quite a ways off. No doubt in my mind that ATLS and ARP will eventually get merged, the distribution will be suspended, with all cash flow going to deleveraging. This will buy time for them, but the hedges are rolling off the books every day and they are hoping for a rebound in commodity prices.
Oh, and issuing preferred units to fund the distribution is laughable. That's called a Ponzi scheme.
In the midst of a industry wide downturn, Cohen installs an inexperienced financial puppet with no material E&P background to run and oil and gas company. Absurd.
Watching this trainwreck is going to be pure entertainment.
Yes, the small holders of notes have to sit by and watch Franklin move up the ladder in terms of seniority. The institutional players have the upper hand in that they can accumulate and effectuate an exchange. I am very eager to see how the pricing on the remaining 2019 responds, with many calling for a bounce (due to $1 billion in total debt reduction, while others calling for a drop due to moving down the ladder so to speak in terms of seniority).
Ah, but what should we expect from a management team that has been completely unfocused and clueless since Mark Ellis took over. In that time period, the only positive has been that operationally they've performed quite well and that is more likely a function of Arden Walker than Ellis and the now departed Rockov.
And to add insult to injury, it remains to be seen how Linn bagholders will be impacted tax-wise due to the various transactions retiring notes at a discount.
Somewhere the hockey kid is probably laughing, and while he got it right (for the wrong reasons) he still got the last laugh.