Atlas Resource Partners: Valuing The Unsecured Notes

| About: Atlas Resource (ARP)

Summary

Atlas Resource Partners is progressing towards a Chapter 11 filing after it elected to utilise the 30-day grace period on its 2021 unsecured notes.

The company has a lot of undeveloped acreage, but many of its assets are of marginal value in the current pricing environment.

Overall, its assets probably wouldn't command significantly more than PV-10. Atlas's PV-10 at $3 natural gas is $650 million.

Atlas's first- and second-lien debt appear to be generally covered. The unsecured bonds may receive minimal to 30% coverage depending on whether 1.0x or 1.3x PV-10 is used.

Unsecured bonds will probably receive something in the end, and appear to be a high-risk, high potential reward play. Preferred and common equity appear too far out of the money.

I've discussed Atlas Resource Partners (NYSE:ARP) a couple times in recent weeks as it edges towards a Chapter 11 filing. The company has currently delayed making its first borrowing base deficiency payment, and has also elected to utilize the 30-day grace period related to the July 15 interest payment for its 7.75% Senior Notes due 2021.

At this point, the focus should mainly be on what the unsecured bonds are potentially worth. Atlas's common and preferred units appear to be significantly out of the money at $3 natural gas, but its unsecured bonds could have some value.

Undeveloped Acreage

Atlas has a very large amount of undeveloped acreage (742,944 net acres), but it appears that most of that acreage is in areas that are in limited demand currently. For example, the majority (455,630 net acres) of that undeveloped acreage is coal-bed methane areas such as the Raton Basin.

Coal-bed methane natural gas production was 1,404 Bcf in 2014 and accounted for approximately 5.5% of total dry natural gas production in the US in 2014. This is down from 1,966 Bcf in 2008, when it accounted for 9.8% of total dry natural gas production. In a 2013 report, the EPA determined that natural gas prices were far below the levels required for the targeted 17% rate of return for coal-bed methane projects in all major basins. Another article mentioned that Powder River Basin coal-bed methane activity probably wouldn't pick up until $5 natural gas.

Other areas that Atlas has significant holdings in include the Barnett Shale (which has limited activity right now) and Appalachia (although it appears that most of the company's Appalachian assets are outside the Utica and Marcellus Shale).

Atlas appears to have a limited amount of assets in areas that may currently be desirable. It has positions in the Eagle Ford, Utica Shale and Marcellus Shale, but those positions appear to only be a few thousand net acres each (developed and undeveloped combined).

Value Of Atlas's Properties

A look at Atlas's asset locations indicates that the company doesn't have a significant amount of assets that are in high demand. Areas such as the Permian can command prices well above PV-10, but in Atlas's case, we can use PV-10 as an approximation for the value of its properties.

The company's PV-10 was $502.8 million at the end of 2015 with SEC pricing of $2.59 natural gas and $50.28 oil. The oil price appears reasonable given where oil futures are at. The 2016 futures prices are lower than $50, but 2017 averages out to around $50 and subsequent years are higher. Natural gas prices tend to run a bit higher than SEC prices, with 2017 and beyond averaging a bit above $3.

Adjusting Atlas's PV-10 for $3 natural gas instead (and allowing for some depletion) might bring its PV-10 up to around $650 million. There have been asset sales in not particularly desirable areas for slightly above PV-10, so $650 million may reflect the lower end of the company's property value. Using 1.3x PV-10 at the higher end would make Atlas's properties worth approximately $650-850 million.

Determining Bond Value

We can use that property figure to get a rough estimate of Atlas's value. It had $32 million in cash at last report, while its hedges were worth $244 million in my calculations from last week. This leads to an estimated value of $926 million to $1.126 billion for the company.

$ Million

Low

High

Cash

$32

$32

Oil and Gas Properties

$650

$850

Hedges

$244

$244

Total

$926

$1,126

Offsetting that, Atlas currently has approximately $674 million in first-lien debt and $250 million in second-lien debt. It also has $668 million in unsecured bonds outstanding. This adds up to $1.592 billion in debt, indicating that the preferred and common units are probably well out of the money.

Given Atlas's relatively low cash position and maxed out credit facility, it will probably need DIP financing. The interest costs for the DIP financing and the bankruptcy costs will probably exceed the positive cash flow that the company can generate without other interest costs or hedges.

Debt Type

$ Million

First-Lien

$674

Second-Lien

$250

Unsecured Bonds

$668

Total

$1,592

This means the first-lien debt should be covered in a $3 natural gas futures scenario, while the second-lien should be mostly covered if Atlas's properties are valued at PV-10 and $3 natural gas, and allowing for bankruptcy costs.

The value of the unsecured bonds will come down to how the company's properties are valued. At a value of 1.0x PV-10, the unsecured bonds are slightly out of the money. At a value of 1.3x PV-10, the unsecured bonds probably have around 25-30% coverage.

Conclusion

Atlas doesn't appear to have assets that would improve its market value significantly above PV-10. However, its 2015 PV-10 is likely a bit understated due to the lower natural gas price used for those calculations. Adjusting for $3 natural gas gives a PV-10 value of $650 million for Atlas's oil and gas properties.

The unsecured bonds may have some value although this is a risky play. A natural gas slump and/or valuing Atlas's oil and gas properties at PV-10 could leave the unsecured bonds with a pretty limited recovery. Natural gas improving to above $3 and/or a more favorable valuation (above PV-10) of the company's oil and gas properties probably results in a recovery that could be double or triple current prices. The unsecured bonds are likely to be converted into new equity, but negotiations with the second-lien lenders will likely determine what percentage of the new equity the unsecured bondholders will receive.

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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.

Additional disclosure: I am still considering Atlas's unsecured bonds.