The Cardinal/Redbird acquisition of remaining interest is one of those love/hate transactions.
It is clear, that based on what they invested originally, coupled with what they paid to acquire the remaining, including the assumed debt, that Martin is getting a very low return. In fact, they would have probably been better off not purchasing the remaining and simply letting the cash flow delever. However, now they can take disributions, but the deal was only marginally accretive. I think it added stress and risk to the balance sheet, but if they can turn it around it might work out ok.
The WTPL acquisition was pricey, but looks like a long term money maker. It is actually funny to see how this ownership stake has changed hands over the years from Buckeye I believe to Atlas and then from Atlas to Martin. Oneok bought the portion that Chevron has held for years.
I think the only real reason to hold MMLP is on the chance that Alinda finally decides to drop the Houston Fuel Oil Terminal down to MMLP. That would be a game changer and significantly change MMLP. It will be hard for that to happen with 10% equity capital. No doubt storage is in high demand, so Alinda may strike while the value is high. Alinda owns 50% of the IDRs, so clearly helping MMLP grow while also monetizing an asset is a win-win.
Really, MMLP just needs to get folded into someone like a Kinder Morgan or Enterprise Products.The partnership has done a decent job of growing the business, but if Cardinal/Redbird flops, it is going to severely cripple the company. They sunk way too much capital in gas storage, and while they are premium facilities that are well located the returns are terrible.
I'd expect it to be much better than .60x, they did guide to 1.0x 4Q coverage previously, however, the drop in NGL pricing is likely going to delay them achieving 1.0x.
I think 2015 is going to be a year of building volumes and trying to get to 1.0x by year end.
And for a little fact checking, since November 21 (the week before the Saudi's decided not to cut production and the awakening for the market that supply/demand equillibrium would not be "managed" by OPEC) the Baker Hughes rig count report (released on Fridays at 12:00 CST) showed 1372 Horizontal rigs in service and 352 vertical rigs in service. As of last Friday, horizontal rig count stood at 1052 (a drop of 320) and vertical rig count stood at 210 (a drop of 142).
It simply amazes me how lazy journalists have become, especially with data that is readily accessible.
Now, it is certainly true, and numerous producers have commented on it during earnings season, that we will see more of the following: high grading of drilling locations (producers simply choosing to drill their core acreage and delay field delineation, more pad drilling meaning fewer rigs, longer laterals, more focus on completion improvements and of course, squeezing service companies for pricin concessions. All of this will serve to help counter the sheer drop in rigs but there is absolutely a correlation between rig count and production. It may not be linear and it must be adjusted for completion lag, but a view of US production over the past 5 years against rig count reveals clear correlation.
I suspect we continue to see meaningful decreases in the rig count and would not be surprised to see us go to 800 oil directed rigs (a full 50% decline from peak) and perhaps even lower. To say that all of those are not efficient rigs is preposterous. Ask HP if they consider their state of the art FlexRigs inefficient old and unproductive!
Your data is incorrect. You can pull the Baker Hughes rig count data directly from their website.
As to unproductive areas..the fact that US production has been booming, makes me believe that producers are not working unproductive areas.
It is true however that SCR rigs are being jettisoned for AC drive.
Rig count is a leading indicator, it will require patience, however production will wane as rig count continues to fall week after week, it simply takes time, perhaps as much as a year (after all, it took nearly 4 years of breakneck drilling to get us into the glut).
I agree with your analysis. Cushing will fill up in less than 2 months if the build continues (even if the weekly build numbers are waning).
That inventory will need to be worked off. I still believe that recovery will take into 2016. We may see $60-$65 oil at year end but it remains to be seen how supply/demand will equalize.
Hmmm....so you want oil to go to $10-$20 bucks for 2-3 years. It seems highly unlikely that it will go that low and if it did it would only set the industry up for a super spike well over $100 and then the cycle will repeat.
No, ultimately, Americans should want oil to settle at the cost of production of the incremental marginal barrel of oil. I expect that to be around $75/bbl, but recognize it could be lower.
As for cleaning out the banks, that is highly unlikely. It Is the high yield market that will take it on the chin and really for the overleveraged small cap E&P's, the debt holders will simply assume ownership in bankruptcy and the equity holders will be wiped out.
Well, Libya is producing only 200-350,000 bpd at present, a far cry from the 1.6 million they produced before the civil war began in 2011.
This will likely give the market a shot in the arm, or, the Saudi's, in keeping with their stated intentions of maintaining OPEC market share, may simply increase production, and it is well recognized that SA has at least 2 million in production that is currently offline.
As a long term investor, these geopolitical issues only muddy the waters. It is highly possible that within a few years, Libya will be back producing pre-Civil War volumes.
However, producers can consider this a gift and take it while it lasts.
Or as Warren Buffett likes to comment...it is only after the tide goes out that you find out who has been skinny dipping.
And the collapse of Linn showed us that Rockov was playing with margin. It appears he did not better of a job with his personal finances as he did with Linn's.
I think the conference call will be quite revealing to say the least. He'll certainly be the laughing stock of the analysts if nothing else.
Which is why it may take until 2016. Most c-corps are drilling within cash flow and we still have a huge tailwind in terms of wells waiting to be completed. It simply takes time.
I have no doubts whatsoever that the market will be very efficient in removing excess capacity.
What we aren't seeing are the countless private companies that are reducing cap ex. Plus, with flat production in 2015 and lower prices, they will see lower cash flow in 2015.
I think what we can take away from the past 3 or 4 weeks is that producers are reducing drilling capital and focusing on only the lowest risk, highest returning projects. The theme for 2015 looks like it will be pad drilling, longer laterals, cost pressure on service companies.
As for the decline, I continue to believe it goes to 800, perhaps lower.
Once Cushing fills up and most of the refined product storage terminals along Plantation, Colonial and the east coast are full things might get very interesting.
Once rig count forms a bottom, I'd look for producers to begin getting very selective. You might see a lot of SCR rigs being idled and AC rigs being reactivated. If you are interested in service companies, someone like an HP might be interesting. I prefer, as I have for the past 15 years, the midstream MLPs.
Probably a good opportunity to pick up Legacy Reserves, one of the better managed E&P MLPs. They however, like most of the E&P MLPs did not hedge enough.
EVEP is also intriguing in part due to their ownership stake in UEO, which almost certainly will be monetized and converted to mature production.
In other unrelated news, Targa reported good numbers yesterday. Looks like they will manage 2015 with close to a 1.0x coverage (including distribution and dividend increases). While they aren't in the league of EPD, they are quality managers and it shows why Energy Transfer tried to acquire them. An Energy Transfer/Targa combination would have created a company that still would have been #2 behind Enterprise (a testament to the superb job the late Dan Duncan did in building a moat around his business) but would have certainly been a fierce competitor. Energy Transfer rolling in Regency, their continued ownership stake in SXL (and all of those Mariner projects), their potential LNG export make them worthy of being mentioned in the same sentence of KMI, EPD, MMP and PAA.
Yes, rig counts are down which will eventually lead to reduced production, but first I think we have to see what happens when Cushing fills up and the refineries enter maintenance season.
However, generally speaking, higher prices now and lower rig counts help position ARP and others to weather the storm.
I do however expect that post the Targa deal, ARP will cut the distribution. It simply blows my mind that Cohen did not us this opportunity to consolidate the GP and ARP, eliminate the IDRs, which won't be terribly valuable after a distribution cut. It is typical greed of Cohen thinking everything will recover.
You can pull all of the data directly from Baker Hughes website. It is quite informative.
But in summary, horizontal rigs have fallen by 347 since 11/21/14 vs 142 verticals from the same date. It really amazes me the level of disinformation floating around because people are unwilling to do the research.
I've seen some people claiming that producers will get more production with fewer rigs. I'd ask a really simple question, why not do that before? Absolute silliness from the unlearned. Yes, high grading is happening. Producers are moving back into the core areas. And why not, if you cut your budget in half, why not focus on the highest IRR acreage rather than trying to lock up less productive acreage.
We will see more pad drilling, longer laterals, better completion techniques and of course, the least efficient rigs and crews will be idled. Production is scheduled to rise in 2015, but this is a function of the sheer number of rigs, the back-log of wells awaiting completion and of course, increases in productivity..but a reduction in rig counts will absolutely result in a drop of production, it will simply take time, time which many impatient investors are unwilling to wait for. Unfortunately, it may take until the end of this year, or even into 2016 for it to happen..but rest assured, decline is real and will rear its ugly head. This fact is in part why crude has not dropped lower. Astute investors understand that underinvestment can lead to reduced supply and pricing will rebound (just look at the strip). So, it is just a battle between the panicky and the astute. When Cushing finally fills up, things will become more critical, especially as refineries enter maintenance season.
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.