Contributor since: 2012
Griffin, I very much appreciate your making this available to us. You've done a lot of excellent work.
To me the big question is how long oil/ gas prices will take to return to the levels of 1st half 2014 (100 oil/ 3.5 NG). I believe we'll be back to those levels by 2nd half 2016. Am I right in thinking that your work supports the idea that if energy prices recover to 100/3.5 by 2nd half 2016 then MEMP will have no problem maintaining a DCF of 1.0x for 2016?
Personally, I don't expect MEMP do ever drop their distribution. They have consistently said they won't do that unless absolutely needed. It appears that they will come "close enough" to their 1.0x guidance for 2015 to maintain their distribution this year, and I believe the energy price recovery in 2016 will keep them in good shape to maintain the distribution in 2016. Truth is, I won't be surprised to see MEMP increase their distribution in 2nd half 2016 because I believe in a big energy price recovery by then (possibly in excess of $120 oil).
Thanks for the input. This is the original 1.00x they guided to in the 2/25 press release. We (or at least I) don't know of any change in guidance based on Q1 results.
I was disappointed as well. I've sold about 60% of my position between the day before earnings were released and the market opening on May 6 (conference call date). I was actually able to get around 17.60 for these sales. On small volume stocks like these MLPs it can often take up to two market sessions before the results get fully reflected in the price.
One thing that kept me from selling the full position was that the yield, at about 13%, seems to have the low coverage ratio built in. If MEMP were to cut their distribution by 25% then the coverage ratio would be about 1.0x and the yield would be 9.75% which is about right (actually a little high) for the first rate upstream MLPs.
I was looking for a guide to the FY coverage ratio, but I couldn't find it. Can you point me to it? Was it in the release or the conference call?
Griffin you wouldn't be complaining and neither would I, but plenty of analysts on the conference call would be asking something like "couldn't you increase distributions faster if you didn't hedge out all your future upside". I listened to plenty of upstream MLP conference calls where questions like that were asked.
It's important to understand that the MEMP hedging policy comes (or at least came) with a cost. Before the drop in oil's price at the beginning of July of 2014 upstream MLPs that were relatively well hedged underperformed. Their peers could take advantage of the increasing price of oil to continue to increase their distributions.
Now the tide has turned and MEMP looks like geniuses. In fact, they were merely deliberately limiting their upside in order to more safely promise their distributions. If the price of oil had remained at $100 the same analysts that were congratulating them for the hedging would have been complaining that their hedging was keep down their returns.
I disagree completely. The only thing that is happening is that a lot of units are being offered for sale at once. No additional units are being created. I too bought more units this morning. I'm hoping to see the units revert to their old price of about 17.25 within a week. After all, 4 million units have traded hands already today, and only 4.6 million are being offered for sale immediately, plus a possible 550K within 30 days.
Once again, please keep in mind that the total number of units will stay the same (about 84.1 million in the last quarter report).
Most of the comments seem to imply that something terrible is going on with this non-dilutive secondary. I see it differently. Secondaries are a fact of life with MLPs, and particularly with upstream MLPs. My rule has always been to have enough capacity to buy some when the inevitable secondary happens. I've traced out many of these and usually the secondary has been fully bought and the price has reverted to the old price within a week. Thus, I bought some shares this morning at 16.45, and later this morning for another account at 16.62.
It's 2:00 pm now and almost 4 million shares have traded hands, vs about 600K on an average day. To me this means the entire 4.6 million secondary will have been placed by the end of tomorrow. I'm hoping to see 17.25 within a week, at which point I will probably sell some or all of the shares I bought today.
BBEP is a mess. They cut their distribution twice in three months. That by itself makes me question whether they will eliminate the distribution for a time. In addition, I'm really shocked that their preferred is as high as it is.
Albert, great article as usual. I agree with bayou that the market is pricing in a cut. I just feel that the market is wrong, and I would bet you share this feeling.
I'm hopeful that MEMP will again tell the analysts that they are not going to cut the distribution in the first quarter conference call. I figure that once the market believes the $2.20 distribution is safe then the shares will get to at least 22. In the meantime I will wait and collect my 0.55 a quarter.
FTR, I'm maxed out on MEMP. I will probably have to sell a small portion of my shares on the way to 22 as MEMP becomes to large a part of my portfolio.
When I look at the middle east I see Saudi Arabia vowing to crush the economy of their mortal enemy Iran. They can, and are, doing this by pumping their oil at or close to their maximum rate to keep the price down. I believe the middle east situation actually keeps oil prices down, as Saudi's interest in crippling Iran's economy than their interest in maximizing their own oil revenue.
I used to think that Saudi needed to keep the price of oil up since they can balance their budget with oil less than about $93 a barrel. Since then, I've learned that the Saudi's have years of reserves to allow them to run deficits as they work to cripple Iran's economy. This will also bankrupt a few shale oil companies in North American, but that's a bonus for the Saudis.
I don't know which elements of "that list" you mean are worse. VNRCP, as well as the other VNR preferred have almost fully recovered to 25, which make sense since they have demonstrated that their reduced common is secure. Remember, VNR, along with almost everyone else, can't make any common distribution without being fully paid up on the preferreds. Similarly, LGCYO has said more than once they will cut their common distribution if needed to make the common secure. The fact that LGCY management feels they can make the common secure makes the preferred very secure.
As for GDPpC, those preferreds is probably not more secure as BBEP, but it's selling for less that 12. GDPpC just announced another distribution with an ex-date of 3/11. That's a spec I'm will to try with a small amount of money.
Griffin, you comment indicates that LGCY can't cut their distribution going forward. They can, and have announced that the distribution policy is under review. As the author notes above, LGCY has prepared the market for a distribution cut, and a supportable cut of 50% or less would probably increase the price of the stock.
I bought a tiny amount (less than 0.5% of the portfolio) at 12, where the yield on the current distribution is 20.2%. I'm waiting to see the actual distribution cut, and how they support it, before I buy any more.
That said, if the price gets down to 11, I may stick another toe in the water.
I've never cared about the EPS numbers for MLPs. To me it's all about the DCF/ unit and the coverage ratio. If the MLP is collecting enough cash to pass through their distribution I've never worried about the EPS. Is this wrong?
Personally I'm astounded that the preferred stock (BBEPP) has held up so well. This is partly because I caved on BBEPP at 18.50 and have not bought it back. I've chosen to invest in LGCYO, VNRCP, and now a small amount of GDPpC (a spec I bought at 8.38 last week; I think of it as as equity, not fixed income) and MHRpD. So far so good on these four.
I think it's important to note that BBEP make their forecast of 1.35x coverage assuming WTI would average $60, and Brent would average $65, for 2015. I'd want to see these assumptions changed to at least current strip pricing before I put any money in either the common or preferred units of BBEP.
I'm taking a small (0.5% of the portfolio) flyer on GDP-C, which yields over 30%. I'm treating it as a stock, not a preferred. The ex-date on last quarter's 0.625 divvy was 11/26, so hopefully we'll hear about the next dividend, which will be paid out on 3/15, any day now.
Truth is that preferred divvies must be made up before common dividends can be paid (not that they are paying common dividends), so I'm not sure how much the preferred stock will go down from it's current value of 8 even if the board decides not to pay the dividend when due.
I'm delighted to report that I have the same problem. I'll keep dribbling out shares as needed until the price gets up to about 23.
Meanwhile, for those of you who haven't backed up the truck yet MEMP under 19 is still a steal.
That was a very good trade since MMEP is currently trading for 18.27 while VNR has dropped to 16.85. I've been surprised by how well VNR has held up since their distribution cut. I'm using VNR as the measure of where an upstream MLP should trade, and they're yielding a little less than 8.5%. Based on that I feel that MEMP should yield no more than 9.5%, which puts them at an eventual $23. Meanwhile, I'll collect 0.55 a quarter while I wait.
That's not what Vanguard says. The three securities are identical except for the distribution amount. I emailed VNR and they confirmed this.
The BBEP 1.35 number also assumed $60 WTI for all of 2015. WTI was selling for less than $53 when the release was issued.
LGCY said they will be reviewing their distribution for the next quarter so you can't really compare the LGCY yield to anything unless you develop an expected distribution going forward. Personally I'm looking for about a 50% distribution cut but that's strictly seat of the pants. I'm not considering a purchase before they report next week and we get a better feeling or actual guidance on the distribution going forward.
BBEPP currently (at 21.97) yields 9.39%. LGCYO currently (at 20.40) yields 9.80%. If I had BBEPP and no LGCYO I'd sell all the BBEPP and use the proceeds to buy LGCYO. I have a feeling you may be doing the same thing.
I'll be very interested to know how you feel about LGCY, particularly their preferreds. I'm not comfortable buying their common until I know (or at least have a better idea) how much they will cut their distribution.
Thanks very much for publishing your work. I looked it over and it was nice to see backup that MEMP, which I'm very long, should not have to reduce their distribution. We'll know for sure next week when they report.
Thanks very much for publishing your work. I looked it over and it was nice to see backup that MEMP, which I'm very long, should not have to reduce their distribution. We'll know for sure next week when they report.
Brietburn makes me nervous, especially since they have suspended the common distribution before (in 2008). I'm afraid they may have to cut the common distribution again or suspend it altogether. They are very close to their limit on their lending facility. I'm staying away from BBEPP.
I'm fully invested in LGCYO as well as VNRCP. LGCY did not cut their common distribution this quarter but they have basically promised they will next quarter. The active promise on the common, similar to the VNR guidance last month, gives me comfort that the preferred, which currently yields almost 10%, will continue without problems.
I called VNR with the same question about the difference in price between the "A's" vs. the "Bs" and "C's". They gave me the same answer. There is no difference between the three securities except for the distribution paid. The A's are just mispriced vs. the other two securities.
This isn't really true. Almost half of their revenues for the first nine months of 2014 came from oil.
Me too, I commented on this in Alfonso's summary of the distribution cut and revised forecast published yesterday afternoon. This article was also published yesterday afternoon and this article should have taken the new distribution and forecast into account. It is disappointing that it did not.
Thank much for this summary. I listened to the call in real time and reviewed the transcript this morning. I don't own any common units, but I'm basically full up on preferreds (VNRCP). To me the most interesting thing about the cut is the market's reaction. If the unit price holds around 18 then the market is saying that a believable 8% yield is OK.
My only upstream common exposure right now is MEMP where I'm currently at "puke level", meaning if the price goes up much more I'll need to puke up a few units to keep my overall exposure tolerable (i.e., puke level means I'm really confident in the stock). MEMP has been implying for months that they are in good shape, and they have the hedge book to prove it (e.g., 2014 production is 92% hedged for 2015 at oil/gas/NGL prices of 90.79/4.32/43.13; 82% hedged for 2016 at 85.83/4.40/43.02; very significant hedges for 2017 - 2019).
MEMP is currently yielding 12.69%, if they keep their distribution at 2.20 and they are repriced to 9% that would take the unit price from the current 17.35 to over 24.
Similarly the VNR preferred (at least VNRAC) is currently yielding more than the common, and that can't last. Either the common's coming down to less than 15, VNRCP is going up to 24+ or some combination of both.
I'm waiting to see what Vanguard publishes before I decide that a distribution cut of 40% is inadequate. They may be able to demonstrate that a 40% distribution cut combined with a cut in capex and lower expenses is enough to produce an acceptable coverage ratio. If so, buying VNR right now would be a bargain.
That said, all I own from VNR is the preferreds, which I own in size. I've got VNRCP and a small amount of VNRBP. I don't see any reason why the yield on the VNRAP should be any significant amount lower than the yield on the other two, and neither does the company (I asked, and they confirmed thiis). The three all have the same provisions except a slight difference in the distribution amount. I'm looking for VNRBP and VNRCP to get back to $25 over time.