Yes, this is why the Saudi's have mentioned the fear of a supply shortage. This is not just them talking their book. I think the Saudi's are indeed shocked that oil went this low. I think they were hoping to push it down into the $60's, shake out 1 million bpd of shale oil and then let pricing climb back up. Instead, we are in the $40's, US production is down 500k bpd, (note, a 200k bpd increase from the GoM and a 700K bpd shale and conventional decline inland) and pricing has been flat.
The Saudi's can keep this up for 1 more year, but most of the other OPEC countries cannot. Something has to give. I think the drop in supply will start to show up sooner or later. Of course, everyone is banking on 1.2 million bpd of growth in demand. If that does not materialize, the Saudi's will likely be forced to make some cuts because this could drag out another 12-18 months past 2016. The Saudi sovereign wealth fund is diminishing by the day.
All of these reasons are why I feel so strongly that late 2016 crude starts to move up into the high $50's and maybe even into the low $60's. The weak will have collapsed by then (another 2 borrowing base determinations will have come and gone).
I hear what you are saying about the revisions, and I still wonder how that could happen, I have not looked in detail at it. One would think that an error of that size should not really happen, certainly not a second time.
I keep thinking that at some point we will have a slow and steady decline week over week..but it never seems to materialize. In any event, it is difficult to know what the "builds" in inventory are outside the US. I think one can assume that "most" storage is being utilized but Cushing continues to show declines in utilization. I think this means that the Goldman $20 call won't happen, or at least yet. Storage needs to fill up before production starts getting shut in en masse. And of course, we would only need to shut in less than 2 million bpd.
The "frack log" of wells waiting to be completed appears to be another issue. It really is quite amazing to think that this oversupply caught so many off-guard, including the analysts!
I think the consensus is for US production to decline to 8.7-8.8 million bpd. Who really knows though. We may end up forcing a lot of the off shore (Norway, North Sea, West Africa) projects to be slowed down or delayed. As the boys at Core Labs have said "decline is real and it never sleeps". I have no doubt the supply and demand imbalance will be corrected. It may take another year to 18 months, but it will happen. Investment is dropping and will drop below the point at which increased efficiencies can overcome it. Economics still works wonders when there are shortages and surpluses.
Thank you. I was looking on the "weekly" production page, which had not yet updated.
I agree with lucios.rodin however, a 17,000 bpd drop is "noise". We seem to be stuck between 9.1 and 9.2 million bpd. This has got to be disconcerting to the Saudi's, and makes me believe they will not cut, if they do cut, it will be insignificant, on the order of 200K bpd or something, essentially shutting off some of their "surge" production.
It further strengthens the lower for longer thesis.
As I stated previously, the company appears to be accumulating cash at a rate of $2-$3 million per month. Of course, we are not privy to all of the capital expenditures until they are announced, but I think we know generally that MCEP is likely to be conservative until the borrowing base issue is known.
I have to agree with luscious.rodin, it could very well be possible that the delay is because they are going to be over the base and the deficiency reduction plan is being discussed.
While this is an issue, I think that the absolute amount it is lowered to will not be lower than $170 million. Of course, this is simply my opinion and I could be completely wrong. If you look at the NAV of the company assuming a price deck of $40, the banks are covered, but not comfortably so if you assume a lower for longer scenario it could be lower than $190.
I do believe we could see a reduction to something like $180 million, which would be a meaningful drop from the current $220 million level.
I think the banks would like for MCEP to term out the debt and they may be "pushing" them in that direction by insinuating that the next redetermination will also result in a reduction. It's called staying one step ahead of the banks. I saw this unfold with Sanchez Production Partners (the old Constellation Energy Partners) where the banks did not want to force a default, but also wanted to slowly unwind their exposure and give the company time to monetize or recapitalize. It worked.
I expect MCEP lenders will walk this down slowly, which will limit MCEP's ability but not push them into a death spiral like many others find themselves in (XCO, HK, SD, MHR, PVA, CHK). The capital structure at MCEP is clean (only bank debt), they operate well over 95% of their properties, their production is 90%+ oil, which means little NGL processing exposure or natural gas. It should be a very "easy" analysis for the lenders. It also helps that they are concentrated into just a few basins.
Given that the management team has been prudent in eliminating completely, I would expect that the banks will not force an insolvency event. I don't want to understate the "risk" but look at the leniency given to ARP, to SD to many other E&P's.
As luscious.rodin stated, if the base is reduced significantly, one must remember that they have already paid down to $190 million, with the base at $220 million if my memory is correct. So, they were already $30 million under the base. I would imagine that they may be hoarding cash right now, to the tune of $2-3 million per month. If the base is cut to say $170 million, they would be $20 million in the hole. That would however be a very large reduction.
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.