Success and long-term profitability for Atlas Resource Partners, L.P. (NYSE: ARP) can best be described through the development of over 12,000 producing natural gas and oil wells.
During the 3Q, 2013, the company connected 8 additional wells in Lycoming County, PA., and 5 wells in Utica-Point Pleasant formation in Harrison County, OH. The production from these wells demonstrated strong initially flow rates, and a higher level of high-grade condensate than was expected. With additional oil finds near Jack County, Texas, the early results demonstrate positive flow rates. The company is continuing to develop these finds through 3-D seismic testing and test wells. The company also states that as of December 31, 2012, Atlas had proven natural gas and oil reserves of 1.4 trillion cubic feet equivalent (Tcfe). Current production is over 250 Mcfe per day. In San Francisco on October 1, 2013, the company gave a detailed presentation of the company's well locations, production reports and reserves that support the long-term production capability of the company.
Atlas Resource Partners, L.P. is a master limited partnership, and as an independent developer and producer of natural gas, crude oil and natural gas liquids, with operations in the following areas: the Barnett Shale and Marble Falls play in the Forth Worth Basin in northern Texas; the Appalachia basin, including the Marcellus Shale and the Utica Shale; the Mississippi Lime and Hunton plays in northwestern Oklahoma; the Chattanooga Shale in northeastern Tennessee, the Niobrara Shale in northeastern Colorado, the New Albany Shale in southwestern Indiana, and the Antrim Shale in Michigan.
Several key points were discussed by the President of Atlas Resource Partners during the quarterly conference call. Matthew A. Jones, President of ARP, said, "Our results this quarter continue the substantial growth our company has experienced over just a short period of time. Having expanded our operations through accretive acquisitions and by the drill bit over the past year and a half, we have significantly grown our proved reserves (+700%)."
One of the huge increases was that average net daily production for the third quarter 2013 was a record 261.4 million cubic feet of natural gas equivalents per day ("Mmcfed"). This was an increase of approximately 96% from the second quarter 2013. The increase in net production from the second quarter 2013 was due primarily to the recently acquired producing assets from EP Energy in July 2013, located in the Raton Basin (New Mexico), Black Warrior Basin (Alabama) and County Line region (Wyoming). Production also increased from additional wells connected in the third quarter in several of ARP's key operating areas, including the Marcellus Shale, Utica Shale, Marble Falls and Mississippi Lime.
The 3Q financial report speaks volumes about the focus of the company. The three points here are important to understand the capability of the company to move forward.
- "ARP generated adjusted earnings before interest, income taxes, depreciation and amortization (adjusted EBITDA), including discretionary adjustments by the Board of Directors of the General Partner, of $60.7 million(1) for the third quarter 2013;
- On a GAAP basis, net loss was $39.7 million for the third quarter 2013 compared to a net loss of $10.1 million for the prior year comparable period. The loss for each period was caused principally by non-cash expenses, including depreciation, depletion and non-cash compensation expense.
- ARP declared a cash distribution of $0.56 per limited partner unit for the third quarter 2013, an approximate 4% increase, over the second quarter 2013 and a 30% increase from the prior year third quarter distribution. The third quarter 2013 ARP distribution will be paid on November 14, 2013 to holders of record as of November 6, 2013. ARP expects to distribute between $0.58 and $0.62 per unit for the fourth quarter 2013, and also expects full year 2014 distributions to be in a range of $2.40 to $2.60 per unit."
The first take away is the growth in income over the last year. This is from increased production from more wells coming on line. Some of the increase was due to the purchasing of producing fields, but the cash flow increase will continue for the company.
The second number is the GAAP net loss, which is highlighted by non-cash expenses. Atlas is using a fast depreciation process and depletion against the accounting process, but this does not affect the payable amount in dividend to the unit holders.
The third and most positive figure for investors is that the dividend has increased over the last two years, and the company is anticipating the dividend to increase through 2014 as well. To highlight the opportunity you have right now, let me demonstrate some numbers for you. Granted, this is just an estimate based on what the company expects, but this translates to numbers.
The unit price on the market today is $19.76 (midday trading on November 15, 2013). With the last dividend of $0.56 that would make the yield 11.3%. If the dividend went to $2.50 per year ($0.62 per month) the yield would then be 12.6%. Would buying into this investment, given that the company is projecting to increase the dividend next year, be a bad decision? Not with the financial report the company produced for the 3Q 2013. .
Here is a chart of the dividends paid over the last 7 quarters.
The one negative throughout the report was the debt. As of September 30, 2013, ARP had $948 million of total debt, including $425 million outstanding under its revolving credit facility. ARP had approximately $410 million available on its revolving credit facility as of the end of the third quarter. Cash interest expense was $7.9 million for the third quarter 2013, an increase of $4.5 million compared to the second quarter 2013. The increase was primarily due to the recent issuance of $250 million of 9.25% senior notes due 2021, which were used to partially finance the acquisition of natural gas assets from EP Energy in July 2013. We expect the company to reduce the amount of debt going forward. This is not expected to affect the dividends, but is simply a normal part of doing business over time.
Atlas Resource Partners, L.P. shares displayed both attractive valuation metrics and strong profitability metrics. For example, the recent ARP share price of $19.76 represents a price-to-book ratio of 1.0 and an annual dividend yield of 11.3%. Atlas has a favorable long-term multi-year growth rates in its key fundamental data points.
Additional disclosure: I have no position at this time but through my research may invest prior to the end of the year. We always recommend to our readers they evaluate the risks with any investment and ensure the investment meets your risk criteria.