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Elliott Gue

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  • Linn Energy: Don't Believe The (Negative) Hype [View article]
    A look at Note 7 in the 10-K reveals that Linn paid $583 million for put option positions in the year ended December 31, 2012. But it also states that these puts cover the period from 2012 through 2017.

    In 2012, spot natural gas hit a low of under $2/MMBTU in mid-April. But, even with spot and front-month gas prices under $2/MMBTU at the lowest levels in more than a decade, futures expiring in 2015, 2016 and 2017 were trading at much higher prices.

    Using April 19, 2012, an extreme low for spot gas prices, I see that NYMEX gas futures expiring in April 2015 were trading at $4.15, futures expiring in January 2017 more like $4.75/MMBTU. And this was the case if one had tried to hedge on the very day that natural gas prices hit extreme lows.

    Those claiming that Linn is purchasing "in the money" put options fail to recognize that there is a big difference between the spot or prompt price of natural gas and the price of natural gas to be delivered 2, 3 or even 4 years in the future. A look at the five year average futures prices is a far better guide of what's in the money for a company looking to hedge production over a multi-year period.

    So, let's take a closer look at these numbers. According to their 10-K covering the year ended 12/31/2011, Linn had puts covering total volumes of 30,660 due to expire in the year 2014. The average hedge price on those puts was $5.50. By the end of 2012, they had put hedges covering 79,628 MMMBTU due to mature in 2014. The average price on that entire position was $5/MMBTU.

    So, just doing the maths suggests they hedged around 48,968 MMMBTU of 2014 gas production volumes over the course of 2012 at a price of roughly $4.69. This certainly doesn't suggest they're buying deep in the money puts to manufacture earnings; there were several occasions in 2012 when 2014 NYMEX futures prices were trading well above $4.50/MMBTU.
    May 9 04:16 PM | 6 Likes Like |Link to Comment
  • America To The Rescue: Saving The World From $200 Oil [View article]
    Yes, I still like PER. While there are some real and legitimate concerns about well results in SandRidge's Mississippian play I see no real evidence that the Permian wells are coming in below expectations. The production shortfall n Q4 appears to be related to the reduction in the number of rigs drilling in the region and a spike in the number of wells that have been drilled but have not yet been placed into production.
    Feb 7 03:08 PM | 1 Like Like |Link to Comment
  • Why Eni Is A Better Buy Than ExxonMobil Corp [View article]
    Yes, the pullback in Eni's shares is due to a weak showing from Saipem, an oil-related engineering and construction firm in which they own a 43% stake. I think the weakness at Saipem is temporary (due to contracts signed in a weak pricing environment). Eni also said that the company's dividend policy is based on their long-term cash flow outlook, which suggests this will have no impact on their payout. I still like Eni.

    I am long E
    Jan 30 08:32 AM | 1 Like Like |Link to Comment
  • SandRidge Permian Trust: What Every Investor Needs To Know [View article]
    My numbers are based on forecasts of future commodity prices so they're forecasts, not a deterministic value. But, I feel my numbers reflect conservative assumptions and build in a significant margin of error.
    Jan 9 11:00 PM | 1 Like Like |Link to Comment
  • SandRidge Permian Trust: What Every Investor Needs To Know [View article]
    Thanks, I will try to post analysis of more trusts in future.
    Jan 9 10:57 PM | Likes Like |Link to Comment
  • SandRidge Permian Trust: What Every Investor Needs To Know [View article]
    Thanks again. Sure, let me try to answer those queries:

    1. Basically, the only cash withheld from the trust cash flows consists of $1.0 million in its first quarter for the establishment of an initial cash reserve, post-production expenses such as gathering and compressing, property and Texas franchise taxes, and trust administration expenses paid to the trustee and SandRidge. I don't think they're really building a war chest but do reserve cash each quarter for the payment of future taxes.

    2. Yes. The trust's current estimate is that the final value of the trust units will be $1.80 each due to the sale value of the remaining reserves. I just adopted that estimate in my analysis but it really doesn't matter all that much to the valuation target as $1.80 paid in 2031 is worth less than $0.50 per unit discounted to a present value at 7.5%.

    The NPV calculation simply estimates future distributions, discounts them using a particular rate and then sums up these payments to give you a current dollar value.

    What I think many people are missing when it comes to the trusts is that it doesn't matter that the units lose value as the termination date approaches. If I sold you a piece of paper for $10 that pays a total of $1.50 per year for 10 years and then is absolutely worthless, you are still earning an return on your investment over your holding period even though the piece of paper has no value at expiration.

    3. Basically, yes. that is how I performed the calculation. To estimate the value of the hedges you need an assumed price for WTI-Cushing, the total amount of hedges that are part of the trust and the price at which oil was hedged. This information is provided in summary form in the prospectus.
    Jan 9 10:56 PM | 3 Likes Like |Link to Comment
  • SandRidge Permian Trust: What Every Investor Needs To Know [View article]
    Thank you for the kind comments. I actually do a similar analysis for all publicly traded trusts on an ongoing basis in my newsletter, The Energy and Income Advisor, including SDR, SDT and CHKR and update my buy recommendations accordingly. I have a free report on my site that covers SDR.

    I'll try to post more trust-related analysis on SA in future.
    Jan 9 10:32 PM | 4 Likes Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    I did not say that drop-downs are contingent upon IDRs. And it's certainly true that sponsors get paid partly due to their stake in the LP.

    But, you will find that the vast majority of MLPs set up to grow via drop downs are structured with IDRs. If you look at the industry over the past few years you'll find that many of the fastest growing MLPs share a similar trait: they began their growth spurts as newly listed MLPs that are still in the low tiers of their IDR structure but have a sponsor with MLP-able assets. As the sponsor drops down assets to the MLP, they can quickly move the MLP through the tiers and generate even more rapid growth in their IDRs.

    More broadly, understanding IDRs and how they're calculated is important. That's why I wrote this article on the topic. However, IDRs are not the only fundamental factor of importance when analyzing MLPs. If you had ignored all of the MLPs with an IDR structure over the past five years you would have passed up on several of the best-performing MLPs of all.
    Dec 29 03:16 PM | 1 Like Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    Thanks for the kind comments.

    SBR, PBT and CRT are all US royalty trusts, not MLPs. While I haven't covered these three before, I have written about the group in general on Seeking Alpha in the November 2, 2012 piece "US Oil and Gas Royalty Trusts: Good Buys for Disciplined Investors." http://bit.ly/TvmkOo

    I'll be writing more about trusts early in the New Year.
    Dec 28 07:10 PM | 1 Like Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    I agree that some of the MLPs and LLCs that have eliminated their IDRs are solid investments and have posted impressive growth rates over the years.

    However, I disagree with you on the IDR issue and think there is considerable merit to the argument that IDRs offer an incentive for GPs.

    In fact, over the years some of the best performing and fastest-growing MLPs I've covered are drop-down growth MLPs. For anyone unfamiliar with drop-downs, I covered this concept in a free article on my website about MPLX LP (NSDQ: MPLX), a recent IPO http://bit.ly/VIEZ75 that's ultimatelty run by Marathon Petroleum Company (NYSE: http://bit.ly/rnof7p)

    Basically, these drop-down MLPs are typically set up by a company that owns a large number of assets that generate steady cash flows and are, therefore, ideal for the MLP structure. Typically the parent company IPOs the MLP with a few choice assets and acts as the General Partner. Over time, the GP sells its remaining MLP-able assets into the MLP (known as drop-downs) at prices that are immediately accretive to distributable cash flow and, therefore, distributions.

    One example of this is Western Gas (NYSE: http://bit.ly/UruCrM) and the MLP's GP Anadarko Petroleum (NYSE: http://bit.ly/Jr1Qou). WES went public in May of 2008 and was trading around $16 per unit. At that time, it was paying a quarterly distribution of $0.30 per unit.

    Over the ensuing years, it has received a steady stream of drop-downs from Anadarko starting with its December 2008 acquisition of the Hilight and Newcastle gathering system. As a result of the additional cash flows it generated from these new assets, WES has grew its distribution by 10% in 2009, 15.2% in 2010, nearly 16% in 2011 and 19% over the past year alone. Management expects growth of 15% next year as well. Since distribution growth tends to drive performance in this group, the stock has generated an annualized return of over 33% since its 2008 IPO, among the best in the MLP group.

    WES has grown consistently even as it has climbed straight through its IDR structure and is now in the high splits (above $0.45 Anadarko takes 50%). In fact, it is this very IDR structure that provided the incentive for Anadarko to continue dropping down assets into the MLP as the firm benefited directly from these deals in the from of higher fees.
    Dec 28 07:03 PM | Likes Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    While it's true that some MLPs pay more than their cash flows and some have probably borrowed money to maintain their payout, that's definitely not true of most of the names in this group.

    One has to be very careful in defining and calculating what's meant by paying out more than they earn. I still see a lot of commentary out there that discusses earnings and earnings per share (EPS) with reference to MLPs and that's just plain wrong. Earnings measures include a host of non-cash charges like depreciation that must be eliminated before calculating a particular MLP's payout ratio.
    Dec 28 04:10 PM | 1 Like Like |Link to Comment
  • MLP Investing Basics: Incentive Distribution Rights Explained [View article]
    Thanks for the comment. No, the analysis doesn't include the temporary reduction in the MLP's IDRs the GP agreed to as a result of the Sunoco merger or the 2% GP interest.

    My goal was to explain how IDRs are calculated and what impact it has on an MLP's cash flows as I believe there's a lot of confusion out there about this.

    And, you're right MLP math can definitely fill up a spreadsheet.
    Dec 28 04:06 PM | 2 Likes Like |Link to Comment
  • Profiting From A Second Golden Age For Refiners [View article]
    The intent of the article wasn't to detail every cost a particular refiner faces in converting crude into gasoline or diesel fuel but to explain the Crack Spread and the basic way refiners earn their profit. Crack spreads are the single most widely watched fundamental when it comes to the refining sector and if you plot a particular refiners profit margins against the crack spread you will find that they correlate nicely. Ignore them at your own peril.

    Moreover, the costs you mention such as transport, storage, labor etc aren't as relevant to an analysis of these companies. That's because these costs are smaller than the cost of feedstock, tend to remain relatively constant over time (certainly less volatile than oil prices) and would tend to be similar for refiners in a particular region of the country.

    When I analyze a sector or a particular stock, I tend to try and identify which fundamental factors catalyze movement in those stocks over time. In this case, the crack spread is far more important than labor costs.
    Dec 28 04:03 PM | 6 Likes Like |Link to Comment
  • Profiting From A Second Golden Age For Refiners [View article]
    Thank you. PADD 2 (the Midwest) certainly benefits from the factors I outline here but I also think some of the benefit will expand into PADD 3 (the Gulf Coast) as additional pipeline capacity allows more oil to find its way from the inland to the coast.

    PADD 5 (the West Coast) appears to be the least attractive market for refiners here.
    Dec 28 03:57 PM | 1 Like Like |Link to Comment
  • Profiting From A Second Golden Age For Refiners [View article]
    Thank you and all of the other commenters here for your kind words about my article.

    As I explain in a December 26, 2012 Seeking Alpha article "MLP Investing Basics: Incentive Distribution Rights Explained" http://bit.ly/X0hmxL Incentive Distribution Rights (IDRs) are fees paid by a limited partner (LP) to their general partner (GP) as compensation for managing the assets of the MLP.

    Because IDRs are based on the distributions paid to LP unitholders, they help align the interest of the LP and GP. In other words, the GP gets higher IDRs when the LP generates higher distributable cash flows for its unitholders. That said, IDRs do raise an MLP's cost of capital because the GP is essentially taking a share of the LPs cash flows.

    I have no specific knowledge why Alon decided not to include IDRs for the MLP they created. I'd assume that two factors influenced1. their decision:

    1. Alon USA Partners is one of the first of a handful of new variable distribution MLPs. Unlike traditional MLPs, these partnerships aren't set up to provide a minimum quarterly distribution and consistent growth over time but simply pay out the majority of their cash flows as distributions. Since investors aren't particularly familiar with this concept just yet, I suspect Alon wanted to sweeten the package a bit to make its MLP more attractive.

    2. Sine Alon already owns 84% of the MLP, they already have plenty of incentive to grow the MLPs' distributions over time.
    Dec 28 03:54 PM | 2 Likes Like |Link to Comment
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