Atlas Energy: More 'Criminally Undervalued' Than Cramer Realizes 14 comments
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As many of you know, I have been a longtime fan of the Atlas family of companies. For those that are interested you can find a brief write up of mine of the parent company, Atlas America (ATLS) here. Of the Atlas America subsidiaries, Atlas Energy Resources (ATN) has been catching the eye of members of the investment community of late. One of its more vocal proponents has been Jim Cramer.
Mr. Cramer’s involvement and discussion of the stock means that the investment thesis behind Atlas Energy Resources is becoming increasingly understood by mainstream investors, which is a great thing for those shareholders that got into the stock long ago. Nevertheless, market pundits such as Mr. Cramer are still failing to differentiate Atlas Energy Resources from its peers. Regarding Atlas Energy Resources Mr. Cramer recently stated that, “Atlas Energy is criminally undervalued" and that at its current price it is an absolute steal.
According to Mr. Cramer, the company is a steal because it has 6 trillion cubic feet of domestic natural gas reserves, which give it a $19 upside from its current levels. In addition, Mr. Cramer correctly states that Atlas Energy Resources manages an additional 900 billion cubic feet for other companies, and that it has identified 4-6 trillion more cubic feet of natural gas in Appalachia. Mr. Cramer would have you buy ATN now and cash in on the 7.5% dividend "while you are waiting" for The Street to catch on. In doing so, you are in fact getting a steal as Mr. Cramer suggests but you are at the same time dramatically underestimating the stocks future potential.
Mr. Cramer's primary reason for recommending Atlas Energy Resources is the company’s substantial Marcellus Shale acreage. If you have read my previous article on the Marcellus Shale companies you will remember that Atlas Energy Resources has the second most exposure to the Marcellus of any publicly traded company. That article can be found here. I believe that in order to properly understand the Atlas Energy Resources story you must first understand the company’s competitive advantages over its peers.
If you can achieve this you will not be tempted to sell out on the stock’s next short term advance and will instead be more willing to hold on for the security's likely long term gains. Development of the Marcellus Shale has been slow, even with heavyweights involved in the play such as Range Resources and Chesapeake Energy. The two biggest challenges in developing the Marcellus Shale is the lack of pipeline infrastructure and the limited access to water that is needed to frac the wells.
While both of these issues will be resolved eventually, most Marcellus drillers are seeing delays in their development plans and their stock prices are suffering as a result. Atlas Energy Resources is different, although its unit price is also suffering, suggesting that investors are only following the story’s short-term hype instead of its longer term potential. Atlas Energy Resources already has access to the substantial pipeline infrastructure of Atlas Pipeline Partners, which has been operating in the region for many years.
Even more importantly, Atlas Energy Resources owns its own water treatment plants so it has access to all the water it needs. Unlike many other Marcellus drillers, Atlas Energy Resources' Marcellus Shale development plans are running full steam ahead. The company is not limited by the lack of infrastructure or accessible water and as a result deserves a premium multiple.
I believe the most interesting part of the company’s story and something that Mr. Cramer completely missed is that Atlas Energy Resources uses other people’s money to fund its drilling operations in the company's Appalachians operations. This provides the company with a much healthier balance sheet and allows it to explore other opportunities at the same time that it builds out its Marcellus portfolio.
An ordinary natural gas well in Appalachia has an internal rate of return of about 20% at $8.50 gas, which is not too exciting. However, Atlas Energy Resources rate of return is many times higher because of its use of a partnership drilling program in which it develops and contracts with investment partnerships composed of wealthy investors. Atlas Energy Resources guarantees a rate of return to the investors somewhere below the return on the whole well and Atlas Energy Resources then pockets the excess return from the well that hasn’t been guaranteed to investors.
As a result, instead of Atlas Energy Resources paying for all of the drilling by itself and getting a 20% annual return, Atlas Energy Resources pays for a very small amount of the drilling costs and keeps a disproportionably large amount of the return. This allows the company to achieve a 72% annual return on its investment. This system works so well because the types of wells Atlas Energy Resources are drilling are very predictable and because the company is spreading the risk over many different wells in the Appalachians. Below you will find a helpful chart courtesy of Deutsche Bank, it will come into discussion a little later on. Click to enlarge:
How many natural gas companies can get a 72% annual return on their investment you wonder? Not a lot, but the ones that can do it do not do it with boring predictable Appalachian basin wells, they do it by being first movers on the hottest gas plays in the country such as the core Barnett Shale and the Haynesville Shale. If you are not securing leases at the rock bottom prices that only a first mover can get you aren't going to be realizing annual returns on investment anywhere near Atlas Energy Resources levels.
With current lease rates, the Marcellus Shale has the highest return on investment of any known shale play with a whopping 86% annual return at $9.00 NYMEX gas (see chart above). This is many times higher then what a typical Appalachian well would get that is not being operated through Atlas Energy Resources partnership program.
The rate of return in the Marcellus is the highest known internal rate of return because most companies do not have the needed pipeline infrastructure and access to water needed for large-scale development, with the notable exception of course being Atlas Energy Resources. If an 86% return on Atlas Energy Resources' Marcellus wells is not exciting enough, it gets even better. Atlas Energy Resources is soon going to start financing the development of its Marcellus wells using its partnership drilling programs.
As with Appalachian wells drilled under the partnership program, you can expect the annual return on Marcellus wells drilled under the partnership programs to be a few times more profitable than wells drilled on a standalone basis by the company’s competitors. In my opinion, we are likely looking at an internal rate of return for the company of 200% to 300% on Marcellus Shale wells drilled under Atlas Energy Resources' partnership drilling programs.
Atlas Energy Resources continues to raise record amounts of capital from outside investors in its partnership drilling programs. In fact, Atlas Energy Resources keeps increasing its own guidance for the amount of partnership capital it will be able to raise. This is a good sign for the company’s unit holders as it means that management will be able to continue its history of delivering outsized gains for its stakeholders.
More important than Atlas Energy Resources' significant Marcellus acreage is Atlas Energy Resources' ability to significantly enhance the rates of return on any oil or gas well via its partnership drilling programs. This is an incredibly significant competitive advantage and something that Mr. Cramer should look into. The fact that they have access to the regions best infrastructure only makes the story more exciting.
As Mr. Cramer suggests, I am content to cash in on Atlas Energy Resources' 7.5% distribution while I wait for The Street to catch on. But Atlas Energy Resources seems to be even more "criminally undervalued" than Mr. Cramer realizes.
Disclosure: Long ATN, AHD, ATLS
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This article has 14 comments:
‘Buy America Energy’ should be our focus for the future.
We could have $2.50 gasoline from our own local supplies.
The American oil shortage is political, not geological.
In the U.S., the local, State and Federal governments prohibits drilling offshore, effectively blockading American companies from supplying oil to Americans so that foreigners can make obscene profits from our energy stupidity.
Half the home sales in America are foreclosures because we are sending all our money overseas for foreign oil, when it could be staying here creating millions of safe American oil and local jobs.
The entire economy and our communities are facing collapse because of the irrational ongoing attack on American Energy.
Our entire modern society is build on fossil fuels. The population is so brainwashed by the "Sierra Club Gang" they don't realize that if the much maligned oil companies went on strike, within a month half the population would be dead;
Without hydrocarbons fuel you would soon be walking. You couldn’t be driving cars, and it wouldn’t do any good to call the maintenance or repair people because they wouldn’t be able to get there, as they would be walking too.
The food distribution system would quickly grind to a halt as cold-storage warehouses stockpiling perishables went offline due to lack of electricity.
Most of the things we depend upon would be gone, and we would literally be depending on our own food assets and those we could reach by walking to them.
Without hydrocarbons fuel people in hospitals would be dying faster, because they depend on electrical power and natural gas for warming to stay alive. But then stoppages would soon include water, food, civil authority, emergency services. And we would end up with a country with many, many people not surviving.
ANWR: Could quickly replace 10% of America's oil imports.
OIL SHALE: There's 3 trillion barrels of oil in Shales in Colorado, The technology to remove the oil was developed back in the mid 1980s. This Area could supply 20-30% of America's oil needs within a decade, with modest environmental impacts. It only takes 3 barrels of water to make one barrel of shale-oil. It take 85 barrels of water to make one barrel of ethanol!
CALIFORNIA FACT; There is between 2-3 billion barrels of proven-probable barrels of oil within 20 miles of the Santa Barbara County shores alone.
See; www.strategicnine.com/...
CALIFORNIA FACT; This area alone could produce 300,000 to 500,000 barrels a day for 10-20 years, replacing more than half of California's oil imports, while generating billions in County, State and federal royalties, and make Santa Barbara County the wealthiest in the nation.
NATURAL OIL SEEPS POLLUTION; The Santa Barbara County continues to suffer 6,000 tons per year or airborne pollution from natural oil-gas seeps and does not get a nickel in revenues or health benefits from natural oil seeps and instead continues bankrolling Americas competitors and enemies.
Change is urgently needed, or the American economy will soon disintegrate.
The OPEC-Russia-Chavez oil cartel is not just looting the United States, but the whole world, and will accumulate over $1.5 trillion in net profits this year. At their current rate of take, OPEC-Russia will acquire enough cash to buy majority control of every leading company in the United States within six years. And you are voting into power the very American-energy-traito... who are doing this to you and your country.
Its high time to Put American’s Energy Supplies First.
Vote all the energy-idiots out of local state and federal governments.
www.arcticoag.com/
How does $8 gas impact the rates of return, and the attractiveness to the investors who put up the moeny to drill the wells?
Can the "guranteed return" to the investors completely eliminate any return to ATN if the gas price goes low enough?
Jack
With their IRR so leveraged, a minor drop in gas prices should greatly decrease IRR, correct?
With IRR so leveraged, wouldn't a minor decrease in gas prices kill the stratospheric IRR? The low price of the stock seems to reflect this risk.
No amount of dreaming, wishful thinking, name calling and carrying the ball for the oil and gas lobby - promoted by the "drill here/drill now" guy Knut Gingrich or anyone else - will lead us to some fancied promised land where we can be the masters of our fate based on fossil fuels. And the notion that we can magically make use of oil locked up in Colorado shale conveniently ignores the environmental devastation (that's right, DEVASTATION) that would result from an undertaking similar in scope to that under way in Canada. This is the Colorado Rockies, not northern Alberta, where the moose and mosquitos play. As for drilling along the Santa Barbara coast, here's a thought ... let's first drill along Jeb Bush's Florida coast, and see how far that idea goes. The operative term here is NIMBY and, even if we could meaningfully close the gap between consumption and demand - which we can't - it wouldn't begin to solve the long-term problem that we, as a nation, have to get off the dime and get serious about energy alternatives to fossil fuels.
As to the "domestic enemies of the usa" - here's one whose comments are worth noting. This domestic enemy said:
" America has fallen well behind European nations such as Germany, Spain and the Netherlands that already reap huge percentages of their power from wind.
'We're very ignorant in this country about other forms of energy (than fossil fuels),' he said."
This domestic eneny of the USA went on to say that "the United States has 4 percent of the world's population and 3 percent of known oil reserves, but is responsible for 25 percent of world oil consumption.
That means the country spends $700 billion on imported oil each year, which will be unsustainable as prices keep rising.
And, he said, oil prices are unlikely to drop long-term because world demand of 86 million barrels a day exceeds the world's production of 85 million, which is about as high as the industry can go."
In other words, cut out the propaganda, bring a halt to the dead-end policies and wishful thinking that have brought us to this point and the American auto industry to the brink of financial disaster: get serious about a long-term national energy plan that will REDUCE our dependence on oil and natural gas - while using the far more domestically-oriented and cleaner natural gas as a bridge fuel, for some years to come.
And the "domestic energy of the USA" I've quoted is T. Boone Pickens.
What you say about Atlas may be true, but trying to make sense of the organizational structure for the Atlas family of companies makes my head hurt. Does this structure have a valid business purpose?
Or is it some type of Ponzi scheme perpetrated by the Cohens? Also, can someone whose primary experience is in real estate, effectively manage a natural gas exploration and development company?
good ol' US of A?? NOPE...I don't think more drilling will help anyone but the HUGE oil companies and their bigshots.
HUGE oil will profit along with their bigshots
On Aug 22 07:36 PM philipcarl3 wrote:
> Better idea: Check out SMS, a metals recycler. Growth estimate is
> 30% for next year, yet the forward P/E is only 10. Dividend is 3.5%.
> Company raised guidance recently and earnings are being reported
> next week. Great time to buy. Catch the pop before it happens.
On Aug 22 07:36 PM philipcarl3 wrote:
> Better idea: Check out SMS, a metals recycler. Growth estimate is
> 30% for next year, yet the forward P/E is only 10. Dividend is 3.5%.
> Company raised guidance recently and earnings are being reported
> next week. Great time to buy. Catch the pop before it happens.