The Saudi's should be worried. US crude oil production has been essentially flat now for 10 weeks (look at EIA weekly crude oil production chart). It has actually modestly increased over the past several weeks, but week to week data can be noisy and 4 week average data is typically more reflective of the trend. While production has declined from 9.6 million bpd in April, the flattening over the past 10 weeks is proving that shale producers, and conventional producers alike are finding ways to reduce drilling costs and improve EURs, meaning that the US is lowering the price of the incremental marginal barrel of oil while keeping production at levels above what the Saudis expected 12 months in. You see, they neglected to account for the incredible ingenuity and resilience of the American worker. Will US production continue to decline, absolutely. Does that mean that the Saudi's "won" the battle? Yes, but they will end up losing the war. They forced the world wide industry to get lean. Producers are seeing efficiency gains in terms of drilling time of 40-50% from just last year. All of the bloated cost structures have been removed. Frac sand is "dirt" cheap. Producers are no longer paying massive per diems to workers. Wages are reverting to normal day rates. All of this is taking wind out of the Saudi's sail. They have incredibly low lifting costs allowing them to pocket the huge delta in the price of their oil vs the incremental marginal barrel.
That means the house of Saud is going to have to continue borrowing or make drastic cuts to their budget. Oh, and did anyone mention that SA also is now seeing higher costs, thanks in part to higher water cuts in some fields. Funding cap ex, massive social welfare programs and fighting ISIS backed groups in Yemen is straining their sovereign wealth fund. The days of the House of Saud are numbered, as is the equity in Linn..
Yes, it seems quite likely that Linn will divest "non core" assets.
The South Texas assets are a likely candidate in part due to not having scale in the region. They will keep most of the production where they have size/scale and can drive down LOE.
I'm fairly sure that if Linn does survive, it will be due however to massive dilution from a debt for equity swap. I do not think second lien debt is going to get it done.
Bright spot? The Eagle Ford may be the best asset that they have, but the returns are not that great, even with the promote (carried interest) via the drilling partnerships.
Cohen was at it again, always murky on details, always teasing the bagholders with pending announcements in the coming "days, months and years".
I continue to state that Mark Schumacher is the only executive on staff that knows anything.
Distribution is going to get whacked, but it is clear that they will pay out as much as they can as long as they can, in order to allow ATLS to continue to build cash.
I assume you are herlod.glitch as well.
I think it is actually 10 weeks now that production has been essentially flat week over week. Yes, it has moved around, but you are correct, producers are proving to be remarkably resiliant.
If the Saudi's don't cut in December, and I suspect they won't, then the market could be looking at another 12+ months of low prices. Eventually, the Saudi's will either force the weak players out of the market by bankruptcy or reduced capital, or the world will realize that a new equillibrium price is at hand.
I personally think it is $60-$65, but you are correct, it could very well be end of 2016 before supply and demand fundamentals bring about a shift. The surplus will only prolong the agony as much of it needs to be worked off, at least until it falls back in line with the 5 year average storage values.
As for survivors, I can only assume you refer to MCEP and LGCY.
I certainly isn't LINE or BBEP. I don't follow VNR enough to know post EROC and LRE if they can surive if they cut to 0.
EVEP will likely suspend entirely but I think they survive.
ARP will indeed need to merge with ATLS in order to save ATLS, which in turn will necessiate a complete suspension, but only AFTER the merger.
ATLS did report decent cash flow from Lightfoot (via Arc Logistics) but I do not think it was a quarterly amount, but rather a 1 time disbursement, probably from Cohen begging Lightfoot to drop down some cash.
ATLS is terribly leveraged (84 million I believe), with ARP cash flow at $24 million annually and set to drop probably by half in 2016. Yikes. And then there is AGP, bleeding cash with negative ebitda.
I keep wondering when we see asset sales, but I think they exhaust all options before that happens, aside from the divestiture of small packages like the non-operated County Line cbm.
The San Juan cbm will have a lot of value to PE players, low operating cost and modest decline.
Yes, this is why they stopped buying notes after the 2nd Q. It's been discussed for several months that it was likely to happen and now they have put it into place.
In essence, Franklin moves up the ladder and they probably bought a great number of the notes at under 40 cents on the dollar, they actually recognize a modest gain, pick up similar interest (only a $16 million annual reduction). It is a win win for both parties and as you mention, allows them to keep the lights on a little longer as they wait for the much anticipated bounce in oil prices (and gas).
There is however, far more to do as 2016 cash flow is going to drop due to hedges being both lower in value and in quantity. The $16 million interest expense reduction helps. I suspect we see yet another round, perhaps with other parties that are large holders. Asset sakes might be next, with non-core holdings, likely undeveloped acreage being likely candidates.
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.
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.
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.
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.
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 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!
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.
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.
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.
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.
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.
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.
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.