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Nawar Alsaadi

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  • Epsilon Energy: Shareholders In Charge [View article]
    Thanks for the comments Rockefeller. To best answer your question, I will paste the mid-stream excerpt of the report prepared in collaboration with Adam on Epsilon and posted on VIC:

    Midstream Valuation

    Epsilon owns a 35% working interest in the Auburn Gas Gathering System (GGS), along with partners Statoil (21.125%) and Access Midstream Partners (43.875%). This GGS connects the local gas wells to Kinder Morgan's TPG 300 pipeline. The "anchor shippers" are Epsilon, Chesapeake, and Statoil, who have collectively dedicated 18,000 acres to the Auburn GGS. The system can currently handle up to 300 mmcf/day with current dehydration and compression systems, but it's scalable to 500 mmcf/day if Epsilon spends another $15M-$20M for its share of the upgrade cost.

    This GGS business appears to be very desirable. Epsilon-Midstream earns a very high 79% EBITDA margin on the gathering fee revenue according to the Q3 2013 financial statements. Furthermore, almost no maintenance capital is required to keep the operation functioning since there are very few moving parts other than the compressors, which are rented. The gathering fee revenue is a per-mcf tolling charge that is theoretically independent of fluctuations in commodity prices, so this is indeed a very high quality cash flow generator. One does need to keep in mind, however, that a GGS has a limited geographical scope and that eventually the NG volume produced from a specific region will decline due to depletion.

    The Auburn GGS is currently running at around 200 (gross) mmcf/day with intermittent spikes up to 300 mmcf/day depending on pipeline pressure variations. Using slide 12 from Epsilon's August investor presentation (Projected Annual EBITDA Sensitivity), 200 mmcf/day corresponds to around $8.9M of annualized EBITDA net to Epsilon-Midstream.

    Potential Sources of Near Term Growth

    Currently only the Epsilon/Chesapeake/Sta... JV is utilizing the Auburn GGS to reach the TPG 300 pipeline, but there is good reason to think that will change in the not-too-distant future.
    Chesapeake is currently producing 825 mmcf/day of NG net to its interest (around 1 Bcf gross) in the Northern Marcellus area (Slide 15 December presentation). On November 1 of this year Kinder Morgan added an additional ~600 mmcf/day of capacity on the TPG 300 line serving the Northern Marcellus area. All of this new capacity has been allocated to Chesapeake and its partner Statoil. As a result of that expanded takeaway capacity, Chesapeake is expected to ramp up drilling in its "core of the core" acreage in Northwest Wyoming county, Southwest Susquehanna county and Southeast Bradford country. There are 3 key gathering systems serving this geography: Rome, Overfield and Auburn.

    Based on my research both Rome and Overfield are maxed out in their connection to the TPG 300 line, thus Chesapeake is considering connecting its Overfield system to Auburn in order to move more gas through the TPG line. If Chesapeake opts not to connect to the Auburn system and to build a new gathering system instead, it would take around 18 months and would certainly be less cost effective than connecting to the existing Auburn system.

    Additional sources of NG volume for the Auburn gathering system is increased drilling by the Epsilon/Chesapeake/Sta... JV jointly or separately in the gathering area acreage, or additional volume from smaller independent E&P operators in the area who have already expressed an interest in connecting to the Auburn GGS. Epsilon management seems confident that additional volume will flow through the system in 2014 and beyond, and they've said it's reasonable to expect they'll spend the $15M-$20M in 2014 for the capacity upgrade. Considering the prolific nature of production in the area and the steady increase in takeaway capacity, it seems highly unlikely that any gathering system with significant gathering capacity will remain unused for an extended period of time.

    My midpoint estimate for Midstream volume and EBITDA ramp is as follows: 300 mmcf/day and $13.5M EBITDA in 2014, 400 mmcf/day and $18.0M EBITDA in 2015, 500 mmcf/day and $23.0M EBITDA in 2016. The low case would be a 4 year ramp rather than a 3 year ramp: 225 mmcf/day and $10M EBITDA in 2014, and the next 3 years as above. The high case would be a 2 year ramp: 300 mmcf/day and $13.5M of EBITDA in 2014, 500 mmcf/day and $23.0M EBITDA in 2015.

    Midstream Comparables

    The best recent comp for the Auburn GGS is the February 27, 2013 announcement by Western Gas Partners (WES) that they were acquiring: (a) the Liberty and Rome gathering systems from parent Anadarko Petroleum (APC) for $490M, and (b) a 33.75% interest in the Larry's Creek, Seely, and Warrensville gathering systems from an affiliate of Chesapeake for $133.5M. The acquisition from the parent was priced at 7.6x forward EBITDA and the third-party acquisition was priced at 9.7x forward EBITDA. A blend of the two yields an 8.7x multiple, which I think is a reasonable midpoint for valuing Epsilon-Midstream, with 8x on the low end of the range and 10x on the high end.

    There are also many publicly traded MLPs with assets similar to the Auburn GGS. According to a very informative research piece from Morgan Stanley dated April 17th, 2013 (page 60), the "Processing and Gathering" peer group trades at an EV / 2016E Adj. EBITDA of 13.1x (after accounting for the 34% average rise in EV since the report was written). So I think it's clear my range of 8x-10x is not at all unreasonable.

    If we assume a sale at YE 2015 at an 8.7x forward EBITDA multiple, with estimated 2016 EBITDA of $23.0M, the implied valuation is $200.1M. I discount that by 1/1.1^2 to account for the 2 year delay, add in the PV10 of 2 years of expected after-tax cash flows generated during the ramp, and deduct the $17.5M of capital spending required to expand capacity. The net result is a Midstream present value of $166.3M. Using the low-case assumptions of a 4 year ramp and a 8.0x multiple gives a present value of $143.8M. The high-case assumptions of a 2 year ramp and a 10.0x multiple gives a present value of $193.5M.

    Regards,
    Nawar
    Dec 28 11:49 AM | 1 Like Like |Link to Comment
  • Epsilon Energy: Shareholders In Charge [View article]
    Thanks for the comment Joshua. Indeed CHK is transitioning to 80% PAD drilling in 2013 in the northern Marcellus (Slide 15 - http://bit.ly/wLG6V3), this transition is in line with CHK increased focus on capital efficiency. In my conversation with Epsilon's management, they expressed great satisfaction with CHK current approach to cost effectively develop our Marcellus reserves and maximize recovery. I expect Epsilon's results in 2014 to reflect many of those improvements and thus translate into strong stock price performance.

    Regards,
    Nawar
    Dec 17 12:11 PM | Likes Like |Link to Comment
  • ECA Marcellus Trust I: A Forecast Of Future Distributions [View article]
    Thanks for your input. I do believe that Epsilon is considering such conversion for its upstream assets to shield its upstream assets from future tax liability.

    Regards,
    Nawar
    Dec 14 03:12 PM | Likes Like |Link to Comment
  • ECA Marcellus Trust I: A Forecast Of Future Distributions [View article]
    Thank you for the write up. I am currently researching Trust structures for the Marcellus. One of my investments (Epsilon Energy) holds a passive position in the Marcellus sweet spot (Susquehanna County) its wells are operated by Chesapeake.
    In a recent conversion with management, they have indicated an interest in possibly converting into a Trust. However, the company is also a part owner in a gathering system, thus I am not sure if a gathering system could also be included in such a trust? or do they have to liquidate that part of the business first?.

    Here is my write up on the company, I would appreciate any input you may have on their suitability for an eventual trust conversion:

    http://seekingalpha.co...

    Regards,
    Nawar
    Dec 12 06:24 PM | Likes Like |Link to Comment
  • Platts Bentek Highlights The USA / Canada Big Picture  [View instapost]
    Very useful presentation, thanks for sharing.

    Regards,
    Nawar
    Dec 11 11:38 PM | Likes Like |Link to Comment
  • Cabot Oil And Gas: Marcellus The Unstoppable [View article]
    Thanks Richard, your work on COG and the Marcellus sweet spot has been of great help in my due diligence on companies in the area.

    Dec 10 12:00 PM | 1 Like Like |Link to Comment
  • Epsilon Energy: Shareholders In Charge [View article]
    Key upper Marcellus update from Cabot Oil & Gas this morning:

    "Two Upper Marcellus wells were completed on the pad with a total of 37 frac stages with an initial production (IP) rate of 32 Mmcf per day and a 30-day production rate of 24 Mmcf per day. These wells were spaced 1,000' apart in the Upper Marcellus and were offset 500' by a Lower Marcellus well. "We continue to monitor these wells to evaluate the productivity of the Upper Marcellus; however, based on the results to date, we continue to believe that the Upper Marcellus across our acreage position will provide rates of return that rival or exceed most unconventional resource plays," explained Dinges."

    http://yhoo.it/1bxgKVP

    Cabot also lowered drilling and completion costs to $5.8m, both the update on the upper Marcellus and the continued lowering of drilling and completion costs in the lower Marcellus provide an excellent read through to Epsilon, it is worth noting that Epsilon is sitting on a potential 240 Bcf of upper Marcellus contingent resource net to its interest on its acreage.

    Regards,
    Nawar
    Dec 9 02:56 PM | 1 Like Like |Link to Comment
  • Epsilon Energy: Shareholders In Charge [View article]
    Hi Sinan,

    Thanks for your comment. I was able to find out the capex range after further talks with the management, the estimated capex to expand the mid-stream to 500 mmcf is $15m to $20m and should be ready to flow gas during Q4/2014 if the expansion is commenced in June 2014. In my analysis I am using the mid-point of $17.5m as a baseline cost projection.

    Furthermore, I was able to locate an interesting comp for their mid-stream asset. Western Gas paid between 7.9 Ebitda (for a drop down from Anadarko) and 9.7 Ebitda for a third party acquisition of a Marcellus GSS in March:

    http://bit.ly/IOBz4H

    I was also able to confirm that US based mid-stream MLPs trade at an average 14.6 Ebitda multiple, while I don't think Epsilon will sale its mid-stream asset at such multiple, I believe a range between 8 and 10 is very reasonable.

    Regards,
    Nawar
    Dec 4 04:46 PM | 1 Like Like |Link to Comment
  • Lightstream Resources - Two Options To Eliminate Debt And Potentially Triple Its Share Price [View article]
    River,

    Thank you for the kind words, it is heart warming to know that my contribution at Equal has been appreciated by many.

    I will continue to keep an eye on Lightstream, and I hope it events will develop to the benefit of the shareholders.

    Best Regards,
    Nawar
    Nov 28 03:00 PM | 3 Likes Like |Link to Comment
  • Lightstream Resources - Two Options To Eliminate Debt And Potentially Triple Its Share Price [View article]
    Devon,

    I enjoy your articles, but I must disagree with some of your assumptions.

    I don't believe the Canadian M&A market can swallow assets the size of Lightstream's Cardium holdings. It is much easier to sale a condo in a condo tower than selling the tower. LTS Cardium position is massive and the pool of potential buyers is very small and considering the uncertainty about Canadian landlocked oil, this small pool of buyers is yet more reticent, not to mention the steady growing protectionism against Asian companies buying Canadian assets.

    I also disagree with your comp. The Equal asset sale can not be compared to a sale of LTS Cardium assets. Equal had few hundred barrels of production in the sweetest spot in the Cardium at Lochend. LTS has a massive land base and over $20K of Cardium production, not all this land is in the sweet spot, even LTS itself was surprised by the higher NG content in their Cardium production. My guess LTS would get something around $80K per flowing for their Cardium assets in a transaction (under current market conditions).

    In early November, I considered buying a large position and pressuring the management to better align their strategy with their debt load, but I decided to pass due to the lack of good options. I pretty much came to the same conclusion they came out with on November 21st: cut the dividend, cut capex and slowly de-leverage; ideally they should have also cut executive pay, rolled few heads and held who brought them to this point accountable.

    I believe at some point the shares of LTS will present good value, but I doubt we are at this point yet, unfortunately I see the stock dipping to a yield of 10% (at the current reduced dividend) before the stock rebounds, so we are talking a price in the $4s; buying at that reduced price could yield a 100% return if their plans is executed as advertised.

    During the Q3 conference call, a caller asked John Wright, "I don't know why the stock keeps sinking?" and John says something along the lines "we don't know, we are also scratching our heads"... really John? You don't know about the debt elephant in the room?.

    But, to his credit, later in the call he said that "he takes responsibility for taking the debt to where it stands today". My question is: does that responsibility taking come with a price? or is it just an oral stream?.

    Regards,
    Nawar
    Nov 28 01:03 PM | 7 Likes Like |Link to Comment
  • PetroLogistics: This High Yielder Should Yield A Higher Price [View article]
    Douglas you mention in your article the following:

    "stocks of propane are still relatively high, particularly in the Midwest where midstream build-outs are still lagging new shale production."

    Actually propane stocks in the Midwest are almost at 10 years low: (http://bit.ly/16NqwxR), today Conway propane prices hit a new high for 2013.

    I believe the premise of abundant and cheap propane is false, while propane production has increased materially in the last 2 years, the big build up in propane storage in 2012 was caused by the non-winter of 2011/2012 and record low corn crop during the same year (which cut propane drying demand), after 18 months of increased exports and rising petrochemical demand this excess 2012 inventory has finally been worked of.

    Going forward increased propane supply will be met by increased export capacity, this will greatly diminish the risk of a major increase in storage. Propane prices can rally up to 130c and still be competitive with international propane prices which are currently trading at 160c to 170c (http://bit.ly/16NqvtE). Transportation costs range from 20c to 30c, however by 2015 transportation costs to Asia will half as a result of the widening of the Panama canal, meanwhile between 2014/2015 we will get a flurry of new LPG export terminals:

    Markwest Mariner East - 20K per day - Q2/2014
    Targa Phase 2 - 65K per day - Q3/2014
    Energy Transfer Nederland - 200K per day- Q1/2015
    Vitol - 100K per day - Q1/2015
    DCP Midstream 50K per day - Q1/2014
    Enterprise Phase III 50K per day - Q1/2015
    Enterprise New Terminal 205K per day - Q4/2015

    Total new export capacity: 690K per day.

    To put the above in prospective the current export capacity is around 330K, while current propane production is 1400K per day and is expected to rise to 1600K by 2015.

    Also By Q2/2014 the Cochin propane import pipeline from Canada will reverse (will be used too export condensate to Canada instead) this will remove between 40K and 80K propane barrels from the Midwest. I am also not counting Enterprise and Dow Chemical PDH plants slated for Q2/Q3-2015 and will consume over 60K barrel per day.

    To make a long story short, propane prices will continue to head higher in 2014/2015 due to much faster growth in export capacity, reduced imports and increased PDH demand. This will inevitability compress PDH margins, I strongly advice hedging a PDH position with upstream dividend paying propane producers such as EQU, NSLP and PLT.UN.

    Regards,
    Nawar



    Oct 30 05:45 PM | 3 Likes Like |Link to Comment
  • A Tale Of Two Natural Gas Liquids: Divergent Outlook For Ethane And Propane Prices [View article]
    Thank you for the excellent overview on the NGL market. I have published an article last year on SA expecting a strong rebound in NGL prices as a result of rising exports (http://seekingalpha.co...) so far the scenario has played out as expected.

    I continue to expect further upside to propane prices especially in the near term with Targa (NGLS) adding an additional 2m barrels a month (4 VLGCs) in LPG export capacity in October, this is combined with above average propane demand for corn drying due to an expected record crop this year (My numbers indicate 3m to 4m barrels in incremental propane demand for corn drying above the 5 years average this seasons). My target propane price for year end is 130c/gal to 140c/gal, this price is sufficient to maintain exports, it costs 20c to 30c to export a barrel of propane, international propane prices are between $1.7 and $2/gal.

    The best way to get exposure to higher NGL prices as a result of rising exports and incremental petrochemical demand would be the NGL heavy upstream companies, my top picks would be: Equal Energy (EQU), New Source Energy (NSLP) and Parallel Energy Trust (PEYTF.OB), those three companies have 50% to 65% NGL weighting in their production and they all pay a steady dividend.

    To give you an idea about the sensitivity of those companies to higher NGL prices, lets take a look at Equal Energy. Equal Energy is projecting $33m in cash flow at 90c/gal propane prices, each 10c upward move in the propane price would add around $3m in cash flow, currently Conway propane is trading at 110c, and I expect it to rise to 130c by year end, this means close to 40% rise in Equal Energy cash flows going forward, at 6 times cash flow multiple gives us a price of $7 a share from $4.5 currently. It is worth noting Equal Energy is also subject to take a takeover bid and the company announced that it received expressions of interest from multiple bidders.

    An excellent way to hedge the trade above is through going long PetroLogistics (PDH) the company margins are highly dependant on propane prices as their only business is to convert propane into propylene, a decline in propane prices would have an out-sized impact on their cash flows. PDH also pays a healthy dividend.

    Thanks again for altering investors to the key changes taking place in the NGL market.

    Regards,
    Nawar
    Sep 19 01:16 PM | 2 Likes Like |Link to Comment
  • Major Drilling: A 'Major' Global Metals Driller Trading Near Book Value [View article]
    Great article Dennis, MDI is on my watch list, I believe the stock is indeed very attractive at current levels, however their CEO recently mentioned that their current quarter is likely to be weak as the industry adjust to lower gold price, my guess there would be a chance to buy the company at book or even under book over the next couple of quarters.

    Regards,
    Nawar
    Sep 17 11:34 AM | 2 Likes Like |Link to Comment
  • Low-Priced Stocks To Avoid: Round 6 [View article]
    AAV decline in revenues from 2008 is largely due to the collapse in natural gas prices (the company is almost 100% NG). Currently AAV is undergoing a strategic review and they will likely be sold in the next few months, the company holds valuable Montney acreage where key players invested recently (Petronas, Exxon). If AAV fails to get a deal done, they will likely liquidate their 45% position in Longview Oil through a corporate transaction for that company and use the funds to develop their extensive resource base; their 2015 plan is to double production and the Longview Oil funds will permit them to do that.

    Basically, AAV is a longer term play on the exports of LNG from Canada to Asia, it will either be bought out for this purpose or be developed for this purpose.

    Regards,
    Nawar
    Sep 16 12:51 PM | 4 Likes Like |Link to Comment
  • It's Peak Oil For U.S. As China Takes Greater Share [View article]
    Great article, I have been interested in the matter of "cheap" peak oil since 2007 and have positioned my portfolio as such. It is good to see informative analysis about the massive oil demand potential in Asia. The Chinese government seems to be peak oil aware and they have been buying as much oil assets as they can where they can.

    Regards,
    Nawar
    Sep 10 09:09 PM | 3 Likes Like |Link to Comment
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