BTW, should have added, I used this mornings plunge in LNCO to pick up some 10% yielding LNCO to go along with the tranche I picked up yesterday.
I agree that absent a divestiture of the Wolfberry or another large acquisition, the distribution is likely going to be flat in '14.
The company based the DCF on baseline production and hedges. The Permian (Wolfberry to be more specific) is the "wild card". It remains to be seen if they will monetize, JV, trade for existing production. It also remains to be seen how long this will take, if it will be done in parcels or as one whole package.
It is similar to EVEP monetizing the Utica acreage. It takes a lot longer than people realize. So, I think at minimum, you can expect a flat distribution, depending on when/if they monetize,exchange,farm out orJV the Wolfberry, you will likely see some potential for upside, but it also depends on timing. If this happens in 3Q, it likely won't impact the distribution in '14.
If nothing else, the company getting off the treadmill and slowing down the average corporate decline rate is a huge improvement. It's what the analysts have been concerned with for some time and now is being addressed through reduced drilling, but may be further assited by jettisoning high decline existing production and PUDs for mature long lived production.
B of A is bailing out of all of the trusts. I think someone had posted a reason on one of the boards. I think perhaps they are not interested in being exposed to suits (ala HGT) for managing a trust (not an excessively lucrative role as trustee).
I just picked up a large amount of LNCO (due to the curious discount).
The market has once again mispriced the Linn entities. The sell off from the 4th Q announcement shows just how little the market understands Linn post Berry.
Yes, Linn is projecting a slightly higher than 1.0x annual coverage ratio with Berry, but many people forget Linn was struggling to achieve 1.0x before Berry (NGL pricing, midstream bottlenecks in Permian and of course the debacle known as the Hogshooter). This foolishness I have seen people spewing about Berry not being accretive is laughable.
All of those issues are either resolved or are no longer driving factors. Plus the 1.0x coverage is a base case, not counting any pending divestiture of Wolfcamp acreage/production.
The scale back on capital spending will have the net benefit of reducing overall company decline rate, which if anyone had noticed, was becoming difficult to manage (not untenable, but difficult for an E&P MLP). The inclusion of Berry allows Linn to be more capital efficient (simply put, Berry's PUD inventory has much higher IRRs due to being more oily) and that allows Linn to achieve comparable returns while spending less money. Also note that it appears the Hogshooter (that funny word again) thankfully isn't a material part of the companies drilling budget anymore. So, no more betting the company on an unproven play.
Instead, they will be milking California's ultra low decline, high margin steam flood oil properties as well as the Permian legacy production.
The pending/possible divestiture of Wolfcamp acreage and production should reduce Linn's decline rate by removing high decline production and by replacing it with very low (read mature) decline production, which is a double win.
What appears to be lost of a lot of investors is that Berry had very little impact on the 4Q. They will begin to see the impact in the 1st Q, and likely more so in the 2nd Q as things get digested.
I view SBR as one of the steadiest royalties, along with Dorchester Minerals (DMLP). Both of these firms hold enormous amounts of true "top line" royalties (as opposed to working interests and net profit interests). SBR and DMLP have volatile payments but overall, these 2 are great to buy and hold and simply collect the income stream.
I suspect that unless things get very bad, EPB will maintain the flat $2.60 distribution for the next 3 years. I also expect KMI to complete the drop down of assets into EPB, which will likely help EPB achieve and maintain a 1.0x or close to 1.0x coverage ratio. I don't think the drop downs will result in distribution growth, but rather working to shore up the shortfalls. This should help EPB stabilize.
A cut in the distribution hits KMI especially hard, as KMI owns such a significant portion of the LP units of EPB, plus they are well into the 50/50 splits, so they get a double whammy. I'd expect KMI to make reasonable efforts to help EPB "survive" until '17, when some of the bigger expansions (Elba LNG) start kicking in and growth is projected to return. So, I think at some point EPB bottoms and the market builds in a discount that reflects 3 years of stagnant distribution growth. At $30, you are getting a 8.7% yield. Is that enough discount? Compare to buying something like SXL where you have 3.5% yield that is growing at 20% a year. On one end of the spectrum you have high growth (and little room for error = high expectations), on the other end, you have no growth and what some might consider deep value. I think $30 is close to the bottom. It might dip down to $28ish. At 9% yield, for an MLP with growth on the horizon (2017), I think that the value investors probably step in and collect 9% for 3 years and then try to capture a yield compression back to say 7.5% yield...
If you are looking for a good MLP, and want to stay in the E&P sector, I'd strongly suggest you do some due dilligence on Legacy Reserves (LGCY). They aren't splashy, but they are focused on the long term, they under promise and over deliver, year after year. They aren't a homerun type company, they seek to grow the distribution by 3% a year, and they typically achieve 3-4% a year. They are well capitalized and management has a large stake and no incentive distribution rights.
They have a large position in the Permian basin and lots of opportunities to grow through the drill-bit if they desire, though they prefer to drill very little, to manage decline.
They are some of the most methodical operators in the E&P MLP sector. They are not cheap at current price, but yield is still close to 9%. I view it as a stable income generator.
Yes, they alluded to January being bad during the conference call. At present, yield is around 8.9%. Probably a little bit of room for yield compression, but not too much
What will be interesting to see (in late '14, or early '15) how the horizontal Wolfberry starts to impact them. They will be balancing declines with the higher returns. What may end up happening is they will simply have to increase their maintenance capex to stem the declines..but with the long term benefit of increased production and reserves.
I still believe LGCY is one of the shining stars in the E&P MLP sector. They aren't just an asset aggregator, but have a strategic plan.
Also, they appear to be looking at gas deals, since many of the larger players are looking to divest gas to redirect that cash into oil programs. I like that they are trying to be contrarian and going after the best deals, even if it does move them away from being so oily.
I have to agree. Legacy's management is among the best in the E&P MLP sector. They are not aggressive and they are not afraid of sticking to their original plan, which is to provide steady distributions and maintain a strong balance sheet and capital structure. Growth of production, reserves and of course, cash flow and distributions comes second. They are patient and seem to be willing to wait for well priced deals. As one cane see, they closed a little over $100 million in deals in '13, but the average size was around $6 million. These are essentially "off the radar" deals that others are not interested in pursuing as it is not worth their time (Linn for example). Legacy can do 10-15 of these $6-$7 million dollar deals every year and add meaningful reserves and production without taking on much risk as these are true bolt-on acquisitions.
I expect Legacy will continue to under-promise and over-deliver, as usual. Distribution growth will likely continue to be marginal, but one must remember, they only swing for the fences when a deal comes along that is fantastic (like the Rockies Concho deal).
Otherwise, I'd expect for them to continue to grow distributions at 3% annually, continue to add moderately to their reserves and production and keep patiently waiting for the next big deal.
Well, with the limited data provided, it certainly looks like the kind of deal that most of us expected/hoped they would be making. Looks to be priced competitively, overlaps with an existing area of operations (think synergy) and isn't terribly large (lower risk, easier to integrate).
Accretion is probably minor but hey, every bit helps.
I would say the chance of a distribution cut at EPB is remote. Kinder Morgan Inc has already earmarked multiple drop downs of assets to EPB that are intended to essentially replace a lot of the lost cash flow. Also keep in mind that KMI collects a very healthy IDR stream from EPB, and being in the 50/50 splits means KMI takes a good hit directly plus via exposure to the EPB units that it owns.
Now, none of that says that it won't happen, but EPB and BWP are drastically different cases, even if their cash flow shortfalls are similar. BWP's GP (Loews's) does not receive nearly as much IDR from BWP, plus they have numerous other investments and they have very little in the way of drop down dowry for BWP. KMI does have assets to be dropped down, unfortunately, the accretive cash from those drop downs will be plugging holes due to EPB's current short fall.
I think KMI will make reasonable (but not unreasonable) attempts to maintain EPB's distribution to the extent that it is in KMI's best long term interests. It would not surprise me to see EPB pick up some projects that may have originally been earmarked for KMP, if only to help EPB get back stabilized, but that is purely speculation on my part. Keep in mind that KMI runs with a very tight "coverage ratio" as well, so any shortfall at EPB means a reduction in the growth of the KMI dividend and under severe circumstances could mean no growth or perhaps a cut (highly unlikely). KMP may be the most favored child, but EPB still contributes a signficant amount of cash to KMI and keeping it at least steady is likely there game plan. Growth is scheduled to resume in '17.
I'd throw out a guess:
The market is simply adjusting the price of EPB to reflect the fact that it will likely have a stagnant distribution for '14, '15 & '16, with growth likely returning in '17 (per Kinder Morgan Analyst conference, and also in the ppt which is archived on the website).
The market pays up for growth. Companies that are growing their distribution at a 5% or better annual clip, get rewarded with a lower yield (a higher valuation on that rising income stream).
EPB's in a rough patch. They have drop downs that will help them weather the storm (see BWP). I have no idea of knowing where the bottom is, but based on other midstream MLPs that have either low or no distribution growth, I'd say the 8.5%-9.0% yield seems fitting. With that being said, I think EPB is likely getting close to the bottom (but hey, the market may overreact and prove me wrong).
I think those that are looking for high growth may be bailing out, but at this point, they've left a lot of cash on the table and one has to wonder if they are really going to recognize that much of a loss or ride it out.
For income seekers, it isn't fun to watch capital erosion, but most will likely keep collecting the distributions every quarter and look forward to '17...
No problem. You are one of the few who have taken the time to dig into the details. So much nonsense gets posted on many of these boards that don't understand the IDRs etc.
Anyway, back to EPB. Taken a real beating lately. I think Kinder may need to rethink directing some growth projects towards EPB in order to help push distribution growth forward from '17.
It is actually starting to look like a good bargain at these prices, even without distribution growth for years.
Well, EROC didn't drop below $5.00
Yield of 11% at present. Not enough premium when you can buy much better run E&P MLPs for 9%-10%.
EROC needs to convert to a monthly payer and then they need to focus on high grading their portfolio.
And since it is difficult for you to find in the 10-K, the one from last year is available on the sec.gov website. You can go to page 149 and find the IDR tiers.
What is being overlooked is that incremental income requires financing. Each unit of KMP that is issued delivers $4.60 of incentive distribution rights to KMI. For EPB, each incremental unit only delivers $1.02. If we adjust for the unit prices, as KMP is 2.54x the price, then they would need to issue 2.54 units of EPB to raise an equal amount of cash. That would mean $2.59 in incentive distribution rights to KMI. As you can see, KMI rakes in an additional $2.01 on an adjusted basis via the equity raise to finance the projects that generate your hypothetical incremental dollar. When you run through the math, and again, the offer still stands for me to send you copies of both the KMP and EPB Incentive Distribution tiers. When I run the model, KMI consistently generates more cash by raising through KMP than through EPB due to the very high IDR load on KMP. In a model I just ran, assuming KMI doesn't buy the KMP or EPB units issued to finance the deal, KMI garners about 40% of the incremental accretive cash and under KMP it collects about 47%.
You see, simply looking at the 50/50 splits level won't cut it.
I'll pull the spreadsheets up later and post results, but again, you are going about it the wrong way. Trust me that Kinder knows which is best for KMI. KMP is so deep into the 50/50 splits, that the IDR is almost equal to the LP distribution! If you follow MLPs, you will understand the enormous growth that it took to push KMP to that realm.
The company has sold off its crown jewels. Now they must learn to execute on the E&P side. These guys really don't have a tremendous suite of high grade assets. This one is a value under $5.00 but not an orphans and widows stock.