Atlas Resource Partners: On The Brink

| About: Atlas Resource (ARP)

Summary

Atlas has a $143.7 million borrowing base deficiency that it needs to pay back starting with a $35.9 million installment on July 11.

It also has significant interest payments due in July and August.

This puts Atlas at risk of running out of cash by August, resulting in a high chance that it elects to take the 30-day grace period for its interest payments.

Atlas is expected to generate around $21 million in positive cash flow (before borrowing base deficiency payments) in 2H 2016. The borrowing base issue is difficult to solve though.

Without hedges, Atlas is looking at a break-even point of around $3.90 natural gas and $60 oil.

Atlas Resource Partners (NYSE:ARP) appears to have a good chance of filing for restructuring soon. It does have a decent hedge position (especially for oil) until 2018, but without hedges would require around $3.90 natural gas and $60 oil to break-even. Even with its hedges, it will fall well short of being able to pay back its $143.7 million borrowing base deficiency. As a result, I think there is a good chance that Atlas will elect to take the 30-day grace period on its July and/or August bond interest payments.

Break-even Without Hedges

I think it is instructive to look at how a company would perform without hedges. There have been quite a few companies that have ended up restructuring recently because their debt situations were untenable after the hedges ran out. Atlas does have significant hedges until 2018 and a smaller amount of hedges in 2019, but also requires much higher gas and oil prices to reach break-even without hedges.

Atlas Resource Partners would generate approximately $371 million in revenue at $3.90 natural gas and $60 oil. This is based on 231 Mcfe per day in production, slightly below Q1 2016 levels. Atlas does have quite a few shut-in wells, but its production has been declining several percent per quarter. Therefore, Q3 2016 production would likely be below 231 Mcfe per day, and Atlas would need to bring some wells back online just to get back to 231 Mcfe per day.

Units

$/Unit

$ Million

Natural Gas [MCF]

69,138,300

$3.70

$256

Oil (Barrels)

1,686,300

$55.00

$93

NGLs (Barrels)

843,150

$16.00

$13

Other Net Revenue

$9

Total

$371

Click to enlarge

I have used Q1 2016 operating expenses as part of the calculation for Atlas's total expenses, which is probably a bit generous to Atlas given that operating costs are partially correlated with gas and oil prices, and Q1 2016 had particularly low prices for both.

I've also used $54 million for maintenance capital expenditures, which is what Atlas indicated would maintain production margins in 2015, but also is probably not enough to purely maintain production levels.

Largely as a result of its high interest costs, Atlas's unhedged break-even point is estimated at roughly $3.90 Henry Hub natural gas and $60 WTI oil. This break-even point will become higher if Atlas is unable to maintain production levels, which is a concern given its tight liquidity situation. This also does not factor in any distributions, which are assumed to remain suspended indefinitely.

$ Million

Lease Operating Expenses

$105

Production Taxes

$22

Transportation And Compression

$22

Cash G&A

$60

Maintainence CapEx

$54

Cash Interest

$106

Total

$369

Click to enlarge

The Second Half Of 2016

If we were to model out the second half of 2016 using an average of $3 Henry Hub natural gas and $50 oil over the back half of the year, and including Atlas's hedges, the estimate would be for $205 million in revenue for Atlas.

Units

$/Unit

$ Million

Natural Gas

34,569,150

$2.80

$97

Oil (Barrels)

843,150

$45.00

$38

NGLs (Barrels)

210,788

$13.00

$5

Other Net Revenue

$5

Hedges

$60

Total

$205

Click to enlarge

Subtracting $184 million in expenses results in an estimated $21 million in positive cash flow for the second half of the year.

$ Million

Lease Operating Expenses

$53

Production Taxes

$10

Transportation And Compression

$11

Cash G&A

$30

Maintainence CapEx

$27

Cash Interest

$53

Total

$184

Click to enlarge

Atlas had $36 million in cash on hand on June 7, and also is required to pay approximately $35.9 million per month in four equal monthly installments starting July 11. Atlas's cash flow is not going to be sufficient to deal with those installments. It may be able to make the July credit facility installment and the July interest payment on its 7.75% notes. It will potentially be $40 million short of being able to make its August credit facility installment and August interest payments. Therefore, it would not surprise me if Atlas elected to take the 30-day grace period on its upcoming July interest payment.

Conclusion

Atlas is in a tight position with its borrowing base deficiency and the required payments to address that deficiency. Atlas's credit facility lenders probably wouldn't look favorably on interest payments going to junior creditors while there is still a borrowing base deficiency, so I think that it is likely that Atlas will be forced to restructure soon. It is hard to think of a plausible solution to Atlas's current issues that doesn't create longer-term damage and more problems later on. It is also notable that Atlas's unsecured bonds are trading at levels that are fairly similar to Linn's (NASDAQ:LINEQ) and Breitburn's (OTCPK:BBEPQ) when they elected to take the 30-day grace period on their interest payments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.