Well, I will go out on a limb and say that Linn does not increase the distribution in '15 and frankly, I am shocked at how many people think Linn is paying down debt. Linn is not doing any major deleveraging., they simply don't have the cash to do anything more than nominal cash management
If they had the cash flow, they would have maintained the distribution.
Not too shabby. 1.5x coverage. Clearly APL deal poorly timed. Won't be a major contributor for a while. Looks like Targa will trudge through 2015. It is times like these that investors should be happy that they choose to run with such a high coverage ratio.
They will likely manage to eek out decent distribution growth this year.
The recovery will likely take longer than many impatient investors expect. Not only does supply and demand need to come into balance, but the huge inventory in storage needs to be worked off.
As for E&P MLPs, I prefer midstream. I picked up BKEP about $.75 ago and am thrilled with the prospect of Cushing reaching capacity. I own most of the older mature midstream MLPs.
I think Legacy is one of the better managed. EVEP is interesting, in part because of their ownership stake in UEO, which will likely be monetized and converted to mature production.
For regular c-corp E&P, I really like Denbury, especially if we get a decent recovery into the $60's.
Linn on the other hand is still a zombie. They are so encumbered with debt, even if Rockov can manage to find acquisitions, they will need to finance them primarily with equity to help lower their debt to ebitda, which will clearly reduce accretion.
Yes, and as I mentioned before, the Saudi's have on the order of around 2 million in production not currently producing that could be brought to market.
But, on the other hand, if you look at production over the past 4 years, really only the US has shown meaningful production growth, and that was with a tailwind of $100 oil for 4 years!
I own a number of midstream storage MLPs and all indications are that 2015 will be quite good due to impending contango market. I'll gladly let the market settle this glut, I'll simply profit from the oversupply.
I don't pretend to be able to call bottoms, but I do believe that psychology is important at the bottom. When analysts begin calling for $20 oil...while others are calling for $65..it makes me believe that the process for sorting out the glut is taking root and some get it and others are still stuck believing crude can only go down, forever. Rapidly falling rig counts are a leading indicator. The strip is also a good indicator. It told us crude was going to fall last year (when Linn refused to hedge oil at $80) and now it tells us crude will rise.
I think I would defer calling a bottom until after Cushing is full, which ought to happen within 6-8 weeks. With storage burgeoning at capacity and refinery maintenance season around the corner, calling a bottom this early seems premature.
I do however believe that falling rig counts (and I believe they will continue falling perhaps as low as 800) will eventually result in a tapering of production growth and perhaps by '16 we may even see a slight drop in US oil production.
The key to balancing supply and demand won't necessarily be borne entirely by the US. The North Sea is going to be severely crippled, dare I say even devastated. We will also see some of the red-headed step-child OPEC nations reduce production (not voluntarily, but because natural decline will overcome reduced investment). and who knows with places like Libya (where the degenerates are killing each other)
Also look for modest demand growth. The kicker will be whether Saudi Arabia opts to "flood" the market with the roughly 2 million bpd of production that they have in reserve. That would really swamp the market and obliterate producers...but again, SA (and OPEC) cannot satisfy world demand (only 40%), so creating too painful a shock will only work against them as prices will rise aggressively, spurring another round of overinvestment and supply growth. No, the Saudi's must walk a fine line of killing high priced production but not destroying the market.
Calling the bottom will be tricky, but really isn't necessary. Taking stakes in well managed, quality companies with solid balance sheets will be handsomely rewarded a year or more from now.
Divesting hedges in outlying years may indeed be on the table. It means you are at the mercy of the spot market in the future, but clearly they will have to do something.
Perhaps with this latest debacle, old Ed will finally retire and let a real manager run the day to day operations and also manage the balance sheet.
Perhaps Ed can focus instead on playing with Lightfoot and some of the other goodies if it suits his fancy. Just let someone with real experience like Mark Shumacher run the E&P business and get rid of the current yes man in charge.
Do people REALLY believe Linn is going to pay down a meaningful amount of debt? If so, where do they think Linn is getting this cash? Linn is barely able to pay the $1.25 distribution under the current commodity price environment and hedging. They simply do not have meaningful surplus DCF.
Linn's likely plan of action will be to invest any surplus additional cash flow into mature production (and let's hope Rockov has learned to hedge 90%+ and out as many years as practicable), where they can boost ebitda and help lower their awful debt to ebitda metric (yep, that still matters, especially to bankers and when things are ugly, even to retail investors now it seems).
The fact of the matter is that Linn gains a lot more breathing room by boosting ebitda (especially ebitda that is generated at bottom of the cycle margins which can expand as commodity prices recover) than by trying to slowly chip away at the billions of debt.
Linn is effectively a zombie company right now. They can pay out $1.25/unit and make interest payments and perhaps even modest distribution increases and production growth, but it will be virtually impossible for them to pay down any meaningful amount of debt.
Yes, we shall see if the margin call has changed his ego. I actually think way too much has been made of the GSO financing deal. One, it isn't even certain whether Linn will utilize this farm-out (carried interest) option and second, it really won't move the needle that much unless Linn is able to achieve very strong returns early and are able to back-in for the 95%. It will be a nice stream of income when/if it does finally revert back to Linn, but you are talking about tail-end production after the bulk of the major declines have taken place. Nice, but not meaningful in the grand scheme of things.
What will be very revealing is whether Kolja Rockov is as arrogant and pompous as always, or if his monster margin call has humbled him a bit and forced him to realize that he isn't quite as smart as he thinks he is.
After all, this guy is the architect of Linn. Mike Linn simply brought the assets to the table, it was Rockov whom devised the model, which, arguably is a good platform when run in a reasonably conservative manner, which they did not do and of course necessitated the distribution cut. When you abandon you time tested strategy of hedging nearly 100% of production in favor of less hedging and becoming a hybrid growth/income vehicle..well, stuff happens.
So, Q4 DCF looked good, especially in light of the commodity price collapse. Looks like $411 million in DCF. Coverage ratio around 1.06x.
Guidance for '15 is being lowered. Frankly, they are still growing the business and distribution growth is projected at a very respectable 7% at PAA and 21% at PAGP. Not too shabby considering a nominal 40% capital cut at most E&P companies.
The call tomorrow should be illuminating. Armstrong and company are likely to have a lot of insight into producer plans and also the fundamentals of the market.
Indeed, 1.5x coverage is nice. It gives them a nice cushion and helps them pay for a large portion of their expansion projects, by my estimate about 1/3 is covered by "equity" capital. That means less equity to be issued and less debt to raised.
Simply wrong. Oil is produced out of wells. Rigs are what are used to drill wells. Rigs are not being idled because they can't pay the workers, they are being idled because at current prices it is either uneconomic or the return is no enticing enough for them to take the risk and expend the money necessary to drill and complete new wells. On the other hand, I know of no wells that have been shut in at all. Once a well is drilled and completed, the cost is a sunk cost. As long as the netback exceeds the lease operating expense and field level G&A, then producers will be incentivized to generate whatever cash flow they can to service debt and keep cash flow coming in.
It really does surprise me how little many investors know about the business.
Legacy is a very prudent operator. Their sparse development budget means they are battening down the hatches and will not fritter away cash. The fact that over the past 4 weeks over 250 oil rigs have been idled means that Legacy is in good company and that a number of producers are making prudent decisions. I'd look for further massive declines in rig count over the next coming months.
Indeed, a nice quarter. Full coverage for both Q4 and full year is an accomplishment for them after having to dig out of the asphalt/refining problems.
What is more important is that 2015 guidance seems to point towards strong EBITDA in both storage and pipeline segments. Given the current commodity price backdrop, any sign of strength going into '15 is a positive. I think NuStar's exposure to the Eagle Ford shale will be beneficial.
I don't look for distribution growth in '15 but it does appear that the balance sheet is back in order and they are above 1.0x coverage.
Looks like from the recent presentation that both the pipelines and terminals are nearing 90% utilization.
They have a fairly large scope of growth for '15 at over $400 million.
Brad Barron is doing a nice job of slowly turning NuStar around, back into a "boring" pipeline and terminal company that takes little commodity risk and focuses on fee based services.
Looks like EPD had a fairly good 4Q, especially in light of the commodity turmoil.
DCF coverage was actually higher than I expected, coming in around 1.50x. Not only does that provide a nice cushion for the distribution, it provides them with equity growth capital. They held back $1.5 billion and spent $4.1 billion on expansions. That means they only needed to externally source around $2.6 billion, which means fewer equity offerings and less debt.
I do not know how long the malaise of low commodity prices will last, my guess is 12-18 months before oil gets back to $65-$70 (prices at which most producers can do well, especially with lower D&C costs coming). I believe EPD is one of the best situated midstream companies to ride through the storm.
I expect continued modest distribution increases, perhaps some slight slow down on projects, the backlog may diminish a bit but I look for EPD to trudge through '15 and into '16 in decent shape and perhaps by mid to late '16 the supply demand imbalance will be nearing equilibrium or have even swung the other direction as the Saudi's are now warning that underinvestment will cause an upward swing. Either way, if you want energy exposure without having to own a E&P, EPD offers a nice play on it, not totally insulated, but certainly offering critical, necessary services. Oil and gas production in the US may flatten, it might even fall in a year or so, but it isn't going away as the Saudi's don't have enough oil to supply the whole world, OPEC only controls around 40%. 2015 won't likely be a banner year, but I do expect them to survive and prosper again when pricing returns to levels that are consistent for sustainable supply.
MMLP is starting to look quite interesting at these prices.
The recent Cardinal/Redbird deal wasn't pretty, but it did get the cash flow unencumbered. MMLP should be close to achieving 1.0x coverage. They desperately need to make sure that future deals are financed with equity rather than debt as their leverage is too high. Still, the potential to land assets from Alinda,including the very attractive Houston Fuel Oil Terminal is promising.
Their equity cost is too high right now, but a few quarters of above 1.0x coverage will help and make it more competitive.
EPD's business isn't immune to falling crude, NGL and natural gas prices. They have commodity exposure, however, they have managed their business quite well, terming out much of their debt, running with excellent coverage and generally focusing on fee based assets. I expect them to report well above 1.0x coverage.
EPD is the largest MLP in the sector. They are going to take their lumps during the downturn, but should do well. I expect continued modest distribution growth of 4-5% over the next year.
Yes, you are losing out on immediate income. As I said, I am sitting on a minor capital loss and will simply take the ETP units. I've been investing in MLPs since 2000. I've been the beneficiary of many GP buy-outs. I haven't been right on every transaction and not every deal works out in my favor, but overall, I pleased to see RGP being rolled into ETP. The downturn in commodity prices was going to hurt the G&P side of RGP. We could have seen even more price deterioration and likely little to no distribution growth. RGP never managed to obtain an investment grade credit rating, which they had been trying to do for some time.
As you said, you can do other transactions to lessen the pain. At least RGP unit holders get equity in what is now the second largest MLP behind EPD.
I expect at least 4-5% distribution growth and perhaps we will be surprised as see 5-7%. Not much we can do about the terms, I suspect that they will receive enough votes to make it happen.
Overall the deal is ok for Regency holders. The "cut" in distribution stinks, but clearly ETP is a much stronger company that is far more diversified than RGP. The collapse in oil will hurt RGP. RGP has been trying to get to investment grade for years. They have some good things going for them, but clearly taking on PVR, which was a turn around play, didn't really help them. The Hoover and Eagle Rock deals are probably too early to really know. Their Haynesville lines aren't full and volumes have been dropping. Everyone knew RGP and ETP would merge one day. That day arrived. Distribution growth was likely to slow down to 2-3% a year in a low crude price environment. On the other hand, ETP will likely grow at 5-6% annually. ETP is getting RGP at the bottom, but RGP holders are getting equity in a much stronger enterprise.
I'm holding RGP at slightly higher than today's close. I'll gladly take the ETP and let it ride. I expect distribution growth at ETP to make up for the cut within 2 years.
As an owner of ETE, I view this as simply part of the roll-up.