Atlas Resource Partners: Beware Of CODI

| About: Atlas Resource (ARP)


Atlas has voluntarily filed for Chapter 11 after coming to a restructuring agreement with debtholders.

Common and preferred units are to be cancelled likely sometime in September.

Any common unitholders of record when the units are cancelled (Plan Effective Date) will be allocated CODI estimated at near $6 per unit.

It appears that selling and settling Atlas units prior to the Plan Effective Date will avoid CODI allocation. However, there may be minimal demand for Atlas units nearing that date.

Near-term oil future options offer a much better return than Atlas units if one wanted to speculate on a massive increase in oil prices during the next month.

Atlas Resource Partners (NYSE:ARP) has now filed for Chapter 11 as it previously indicated that it would. I've discussed the value of Atlas's unsecured bonds before and will now discuss the common and preferred units. Atlas anticipates canceling the units (making them worthless) by the end of September, and it appears that there is very little chance that this will not be the outcome. Atlas also mentions that CODI (cancellation of debt income) will be allocated to unitholders of record as of the Plan Effective Date.


Atlas is planning on emerging from Chapter 11 quite quickly, as it mentions that it expects to "consummate the Plan and emerge from Chapter 11 before the end of the third quarter of 2016". That would mean that the common and preferred units will be cancelled on the Plan Effective Date, which is expected to be by the end of September and perhaps sooner. Atlas anticipates that the plan will be confirmed by the bankruptcy court within 30 to 45 days and the Plan Effective Date will be fairly soon after. That would put the Plan Confirmation Date around late August to mid-September and the Plan Effective Date somewhere in September.

CODI will be allocated to unitholders of record as of the Plan Effective Date, although I believe that CODI will only be allocated to the common unitholders and not the preferred unitholders. However, I am not a tax professional and would suggest consulting a tax professional if you are contemplating holding your units until near the Plan Effective Date.

I estimate that the CODI allocated per common unit will be approximately $5.74 per unit. This is based on Atlas's estimate that the $668 million in unsecured notes are receiving a 12% recovery under the restructuring plan. As Atlas states:

"The Partnership's unitholders are not entitled to any recovery pursuant to the Plan and all Partnership units will be cancelled without the receipt of any consideration. As a result, upon consummation of the Plan, holders and purchasers will have a resulting cash tax liability that will be significantly in excess of their economic return with respect to their Partnership units."

Plan Approval Chances

The chance of the restructuring plan being approved by the bankruptcy court is very high. The plan has the support of lenders holding 100% of the first-lien and second-lien debt and bondholders holding 80% of the unsecured notes. The unsecured notes are considered highly impaired and are now trading for around 15 cents on the dollar, and there is really no effective argument that can be made for the equity receiving a recovery given the current market situation.

The short time frame envisioned for the plan approval and emergence from Chapter 11 significantly reduces the chance of a major shift in oil and gas prices, leading to a reworking of the plan. Natural gas prices are unlikely to see a major movement upwards before the winter heating season, and Atlas's future NGL production is anticipated to be fairly small. That basically leaves a massive increase in the price of oil over the next month as the only thing that could significantly affect Atlas's valuation. Even then, it seems pretty doubtful that the preferred or common equity would be in the money. Oil would need to increase by at least $50 before the unsecured debt is fully covered based on a 6x EV/EBITDA multiple.

This would need to happen before the Plan Confirmation Date, so anyone purchasing/holding the units for purposes other than short-term trading purposes are betting on a massive geopolitical event happening within a month that pushes oil to around $90+. While there is a non-zero chance of this happening, the chance of oil getting to $90+ in a month is extremely small and probably overestimated by most people. As well, even if oil does hit $90+, that would theoretically only put Atlas's equity slightly in the money, so the units still might not be worth much. One would be better off buying out-of-the-money oil futures options if one really wanted to bet on oil hitting $90 within a month. The September 2016 WTI oil call options with a $55 strike price trade for around $0.03, so the return would be over 1,000x if oil did actually hit $90 within a month. Certainly a much better return than on Atlas's equity for a long-shot bet on an extreme rise in oil prices.

Notes On Trading

Based on the information Atlas has provided, it is probably okay to trade its equity for now as it mentioned that unitholders of record as of the Plan Effective Date would be allocated CODI. However, any trading needs to be done with the knowledge that the underlying equity is extremely likely to be rendered completely worthless in a finite amount of time.

As the Plan Confirmation Date approaches, I'd assume that it will become more difficult to trade units. This would be especially true near the Plan Effective Date as the only buyers would potentially be people who haven't paid any attention to Atlas's situation. Atlas mentions that "there can be no assurances as to whether, or at what price, a unitholder (including any prospective purchaser of units who purchases but then wishes to sell its units) may be able to sell its units."

Atlas also mentions that unitholders wishing to sell before CODI allocations are made "are highly encouraged to consult their brokers as soon as possible to make appropriate arrangements to ensure that there is sufficient time for their brokers to process such sales, and for such sales to settle, no later than the business day prior to the Plan Effective Date. Atlas expects to publicly announce the Plan Effective Date at such time that it is known, however, there can be no assurance that there will be sufficient time between such announcement and the Plan Effective Date for sales of units to be processed and settled."


Atlas's preferred and common units are extremely likely to be cancelled within a couple months. Even if they aren't cancelled, the returns from the units are likely to be significantly less than out-of-the money oil future options. There is also going to be an allocation of CODI for any common unitholders of record when the restructuring plan becomes effective. Preferred unitholders likely will just have worthless units and no CODI allocation, but if you are planning on holding preferred units until near the Plan Effective Date, I'd advise contacting a tax professional to make sure.

Thus, holding Atlas units for the long term offers a very asymmetric risk/reward to the downside. Short-term traders can probably avoid CODI allocation, but there is the risk of a lack of demand (and a high level of supply) for the units as the Plan Effective Date approaches.

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