You don't seem to address the fundamentals of peak oil or the ability of suppliers to bring production into balance with demand. This was not a well reasoned article and forgive me, but a good example of the worst side of SA.
Atlas Pipeline Partners: A Painful Lesson in MLP Investing [View article]
I think your categorical condemnation of MLP's is a little extreme. Your point that you had better understand how a company makes its money is spot on. I sure did not understand this company's business. Another lesson is not to rely on other "smart guys" like Mr. Cooperman or Seth Klarman. It looks like Baupost punched out in 4Q of a substantial part of its holdings. Take a look at Linn Energy LINE, they have hedged 100% of current production out 3 years at approximately $80 bbl and $8 mcf. I think it is a much more straight forward business.
My brief analysis on APL is that no one including management realized how dependent the company was on NGL prices. Most of the profit from the company comes from the Mid Continent business they acquired a few years ago. Much of that business is under keepwell contracts where they get to extract the NGL's and sell them for their profit and have to maintain the NG flowing though. So this is not a simple business of just taking a toll on gas passing through its pipes. The company tired to hedge its NGL exposure when it made the acquisition using oil futures as a proxy for NGLs. This worked for a while until a hurricane shut down Gulf refineries for almost a year so there was no demand for NGLs and demand and prices dropped significantly. Therefore, the price relationship between NGLs and oil broke down. The company was left naked to a large amount of hedges that were rapidly going against it with rising oil prices last summer. The company raised $200M of equity to buy back the hedges at the top of the market. Perfect timing; just then oil prices fell like a rock. They basically threw the $200M out the window - bad luck. Now they appear unhedged for NGLs and are taking it in the shorts (technical term). You can only hedge out 6-9mos on NGLs vs 5 years with oil or gas. Now they are facing covenant breech and are forced to sell assets. If they can sell assets in this market the assets 1) have to high quality and 2) have to be sold a low prices. Not good for shareholders in the long run. The company said it is going to try to restructure its contracts to "fee based" going forward ie get a toll on the through put volume. Good luck. Oh, and as for the write down of the assets, to me that simply means they way way overpaid for a large acquisition whose business they did not understand. So it looks to me that this management has destroyed about $895MM of shareholder equity. Bad luck
What we pathetic shareholders are left with is Hope (which seems to be a reoccurring them these days and one that does not make a good basis for investment or running a country) Hope that they will be able to sell off good assets to avoid breeching their covenants. Hope that NGL prices return to more normal levels. Hope that they can rewrite contracts so the company is not so dependent on unhedgeable NGL prices. I hope management's luck changes.
Any comments or corrections on my analysis of the business would be appreciated.
Annaly: What Is Going On (The Finale) [View article]
I am going to chime in here because I think the author missed a key point about NLY. mREITS generally trade off of P/BV and their net interest margin (NIM). Because they utilize mark to market accounting, the reported balance sheet numbers of their investments is a pretty good representation of their actual value. NLY has roughly traded at low of 90% of BV to a high of roughly 110%. So, you want to buy the company when it is trading at a discount.
However, the dividend and price are a function of what they can earn on their investments less what they have to pay for funding in the repo market. They borrow short and lend long, just like a bank. A falling interest rate environment is their "high cotton" days, like '08. this is because their funding costs, ST debt, fall faster than their longer term investments. Therefore the NIM increases as does the dividend. Also the price of bonds increases therefore the BV of NLY will increase. However, in a rising interest rate the environment, the exact opposite happens. As rates rise, bond prices fall as will the BV of NLY. Also, their funding cost on their ST debt will rise faster than they can reset the rates on their investments. The prices of the bond investments will have fallen so they have less money to invest. The result is their NIM gets squeezed and their dividend gets reduced. This is a key point!!
Somebody commented that NLY has always made money so they must be OK. WRONG. Go back to '98-'99. The stock traded down to $6 from $13. Why? Because rates rose. In '99 rates on the 10 year T's rose from 4.7% to 6.5%. (Wouldn't 6.5% be great right now!!!) NLY got hammered.
So where does this leave us today? I think it is safe to say that we are pretty damn close to the bottom of where interest rates can go. The Fed has manipulated rates to historical lows and we have had a ~30 year bond bull market as rates have fallen. The Fed recently thru operation twist has pushed long term rates lower so the yield curve is very flat. kenpittman, ask yourself can NLY make money borrowing short and lending long in an environment of a flat yield curve where the spread between the two is low? What will happen is that as their bond investments mature they will have to reinvest the proceeds at lower rates, thereby decreasing their NIM. Most importantly, as rates begin to return to "normal" as economic activity picks up and inflation that we are told does not exist returns, NLY will have to swim against the tide. Their BV will decline as will the dividend. Not good for the stock price. Even a 14% yield does not help a 50% drop in stock price.
Lastly, NLY has a great track record managing agency paper investments. They probably learned a lot from their '98-'99 experience. They employ hedging. They have reduced leverage. All good stuff. But they will be going against the current. It will be tough to make money. I have no idea when rates will go up. The Fed has said they will keep them low for a long time. If you believe that NLY could be OK for a while. However, their higher rate bonds will run off and their NIM will decrease if the yield curve does not change. If the recent improvement in the economy is real, rates may go up faster than people think. A return of (or recognition of) inflation could increase rates despite the Fed's efforts. Gentlemen, that call is yours. I have owned NLY and others. I do not own them now for the above risks. Hopefully kenpittman, this may give you a chance to get out before it is too late. At least you can understand the risks. What institutional investor owns this stock is totally irrelevant to me and does not, in my opinion, constitute sound research.
Sorry to have taken up your time here but I have felt that most of the chatter on this stock misses the risks inherent in the stock in today's environment. For the record, I do own Colony Financial CLNY. It is a play on the company's management being able to identify cheap paper in the commercial real estate market. Best regards to all
Natural Gas Companies Increasingly Important [View article]
Marc, You are long on opinion and short on detail here. How much cash is APL getting from Williams to pay down their debt? Is not the goal to pay down debt to avoid covenant breech? I see no mention of that. How did you or your mentor come up with $400M for the sale of NOARK? What effect on Adj EBITDA will that sale have. NOARK is one of their few assets that generates revenue from fee or toll contracts so the sale further exposes the company to commodity risk. And, could you please enlighten us all as to why your favorite pick of all the NG transportation companies is APL? If you like transportation and distribution, why on Energy Transfer or Enterprise Products. They are bigger, not in financial peril. They make much more of their revenue from fee based contracts, not keepwell contracts. I have to be blunt here in the interest of trying to keep high quality analysis on SA; I don't care about your "feelings" about a company. I am interested in hard analysis as to why APL is now a deep value play with little downside risk and very large upside. I see nothing here that tells me how and when APL will raise sufficient capital to pay down debt to avoid default. It won't matter how much they earn if the bank defaults their loan. This is an interesting story so do some real analysis before you publish. There is no value in putting up a piece that tells readers to look at the company's powerpoint.
Why Teekay Is Overvalued And Its Dividend Is Not Safe [View article]
I am amazed at all the well reasoned comments here. Unusual for SA. Very good job. Don't have anything to add. This appears to be a case of a jamming numbers into a model where the analyst does not understand the what is really going on in the financials let alone the underlying business.
I wish I could figure out a way to use any of the obvious information in your article. Exactly what challenges will MLPs face next week? Volatility has increased. There is a flight to safety. MLP's may go down as a result. Boy, that's insight!!!
Very well done. Nothing like a big dose of algebra with my coffee.
You did not mention NG imports from Canada. We import not an insignificant amount now, I believe. We also import LNG. This would add life and availability to the equation.
Al Neider's comments were interesting. Are you going to investigate?
Credit Card Crunch: Creating a New Generation of Subprime [View article]
Interesting detail on FICO but this is old news and not very helpful in stock picking. How bad can the credit card losses get at JPM? What effect on earnings will that have? Will it take the company under? Are they under reserved? At $12 per share, there could be an awful lot of pain baked into that price. Is there a value investment opportunity there even if write offs go to 10-12%? What happens of consumer spending improves in 2-3 years? Or will the company go under?
How this information affects specific stocks would be more helpful.
I will reiterate what has been said above, this is not a well thought out piece and lacks facts and statistics to back it up. In short, this was a waist of time to read. By the way, if you actually read the quarterly press releases, many of the MLP's show the reconciliation from net income to EBITDA and then to distributable cash flow. Try a little research sometime.
Follow up to MATT: Thanks for the insight on NG wells depleting faster than oil wells. I need to research that further. There are 3 general types of MLP's: E&P and gathering companies tied to the price of commodities (hedging really matters here), pipeline companies that make a toll on throughput and propane distributors (tied to seasonal demand and to some extent their ability to hedge prices). Toll companies should be the safest and least volatile to energy prices. As I understand it, it is harder to shut off a gas well when prices are low than it is an oil well. Therefore, in most markets, a long haul pipeline will still get throughput and thus revenues. In theory this should make their distribution stream more stable. Look, if I could get my portfolio to grow at 10% a year, I'd be a happy man. So looking at Energy Transfer and Enterprise Products, I get temped here.
MLPs Entering 2009: High Yields Carry High Levels of Risk [View article]
I would have liked to see some greater depth to your analysis such as which companies have the greatest risk of having their dividends cut, what a worst case scenario might look like in terms of oil and gas prices and what to look for in a good MLP. Simply citing general market prices does not add much value. Thanks
2 Reasons Why Income Investors Should Ignore Warren Buffett's Dividend Argument [View article]
Dear Mr. McAleenan, You did a very good job explaining the couple of points that Mr. Buffett did not cover in his dividend explanation. However, I look at both your article and Mr. Buffett's explanation as a lesson in corporate finance. It really gets at the heart of investing. And that is what is a company's Return on Incremental Capital. At what rate of return can a company redeploy its free cash flow into new projects or investments? And, that rate should be in excess of its cost of capital; otherwise, management is destroying intrinsic value. I thought the guy above who talked about how is father and his partners allocated their grocery stores' free cash at the end of the year was great. It really makes the importance of capital allocation clear.
The unique thing that BRK has been able to do is to re-deploy its free cash flow very effectively even when faced with the headwinds of really big numbers. Very few other managers can run as highly a diversified company as Mr. Buffett. Many poor managers make bad capital allocation decisions investing in businesses at high prices or do not produce their expected returns. A great example of this are the large mining companies (Value, Rio Tinto, Barrick, BHP Bilton) many of whose CEO's are now gone because the investments and acquisitions are not paying off. So, understanding what a company's reinvestment opportunities are (or are not) is key in determining intrinsic value.
This leads me to another point I'd like to make about dividending vs share repurchases. Many investment managers get very excited when a company repurchases their own stock. Like Mr. Buffett's dividend example, repurchasing stock at below intrinsic value or better yet, book value, is a sound use of capital. However, the problem arises when CEO's basically believe their own BS and buy stock above intrinsic value. This destroys value of the company. To avoid this trap, I prefer that a company return excess free cash flow to investors (that's ME). I'll assume responsibility for redeploying the cash, thank you. I see this as one advantage to the MLP and REIT structures. Again, this gets back to one of the keys of investing - being able to tell if a management can redeploy cash effectively.
Lastly, I'd like to point out large tech companies like Microsoft and Apple that just let free cash flow pile up, neither reinvesting it nor dividending it out to shareholders. I could be wrong on this, but it seems to me that tech companies that have "made it" and produce prodigious amounts of free cash flow from their core operations do not do a good job discovering other technologies or diversifying. I certainly understand the safety that a cash hoard provides but enough is enough. Just one man's opinion.
Again, nice job in explaining what Mr. Buffett left out in his simplified explanation, especially for such a young kid like yourself. Best regards Skip Olinger
Microsoft: Can You Really Find a Better Risk / Reward Scenario? [View article]
I agree with Mr. Lau's and your conclusions and I have a few comments and observations on MSFT's valuation.
First, I would like to point out that you jumped from Cash flow from Ops to Free Cash Flow without mentioning cap ex. FCF is CFFO - Cap ex. However, I believe you took it into account in determining your FCF yield as CFFO for '10 was $24B but you used $21B for FCF so I assume you estimated $3B for cap ex. If that is true, then your calculation of FCF yield of 10.9% is correct. And, that assumes on growth, which Mr. Lau points out is quite possible.
So let's make some assumptions of FCF growth for 5 years and a terminal value. If you use TTM as of 12/31/10 as proxy for FY 6/11 and grow CFFO by 3% per year, assume cap ex for the next 5 years is $3B per year (it has averaged $2.8B p/y for the last 3 years) then FCF would grow about 2.7% per year for 5 years. If you add a terminal value assuming 0% growth in perpetuity and discount that stream back at 10% and add $31B in net cash divided by 8.7B fully diluted shares you get a value of $32.68 per share.
If it takes 3 years for the market to recognize the value discrepancy and you pay $24.80 per share today and receive $0.64 dividend per year and sell the stock for $32.68 you would generate an IRR of 12%.
Seems like a reasonable return from a AAA credit. Who knows maybe they will actually create some new innovative products or buy some and growth may be higher than 3%.
I am long MSFT Used Morningstar for financial figures
Buddy, you seem a bit short on facts yourself. Rather than waste space and reader time with your less than clever retorts, why don't you start writing intelligent, well reasoned articles. Like the good republican I am sure you are, you spend all of your time condemning people without offering alternatives. I suggest that you spend a few days writing an article supported with facts (maybe even include a cite from a professor or two) about why we should continue to remain dependent upon foreign oil, burn more coal, and increase CO2 emissions. Your comments are unhelpful, not intelligent and written only to improve your opinion about yourself.
On Apr 30 03:20 PM ArtfulDodger wrote:
> My Dear Fitzy: > > You wrote: “one thing we both can agree on is that i wouldn't get > far convincing you.” > > You are looking at me through your own eyes. Take a break; don’t > be so defeatist. It makes me think you could be mentally lazy. For > you can certainly convince me—that is, if you present a proper argument > with well-presented facts in a well-written and well-reasoned paper. > > > But you don’t have to convince me. You have to convince literate > people who’re used to taking advice from people who know how to present > it properly. Although, as I noted, this most recent article is far > above your previous ones, you’ve still not presented a proper argument > for all your positions. > > Whoever edited this article for you, get them to continue helping > you. If you did it yourself, keep working on your writing, and perhaps > before we run out of oil, you’ll be an argumentative writer of the > highest import. > > You see Fitzy I like people who are passionate about what they're > doing and also honest. And on these two points—as best I can tell—you > get an A+. > > And so, just as you've put it on yourself to save the whole US, all > I want to do is help little, old you a tiny bit. And again, as I've > noted, with the lofty goal that you have, you need lots of help. > > > Indeed, leftists are very sensitive people and almost universally > refuse to listen to anybody except people who present them with negatives. > They want someone to agree with them or they immediately begin slandering > such folks or grouping them with someone all leftists hold in total > scorn, such as Rush and Bush. > > Do you really think you're going to get anywhere by bashing Bush? > Or even Obama. So, leave out the personal pejoratives. > > I don’t like Big Oil either—not for the same reasons you don’t, but > nonetheless, I don’t like them. But when you toss a shot in a paper > against them, you’re only throwing meat to the eco-maniacs. No one > else cares. So, leave out the industry slanders—no matter how sly > they are. > > Moreover, you’re going to need both political parties to achieve > your goal of turning America into a natural gas grid. So, leave out > your politics. > > The way I see it (and others should comment in this vein), Fitz, > you have three things to prove to move the nation in your direction: > 1) that NG is the best way to go over all else; 2) that C02 is a > serious pollutant; 3) that “peak oil” is real and the world is headed > down that hill already. > > You can’t simply say that C02 is a dangerous pollutant, Fitz; you > have to show that it is, for merely because you have it in your mind > that it is, does not mean most of the rest of the nation does. <br/> > > And you can’t simply say, Professor X says C02 is deadly and that > the planet can’t last much longer if we don’t control it. We’ve all > heard those tales before. You have to show how C02 is detrimental, > what it’s already done, and what it may do in the future. Show! Don’t > tell! > > As far as arguing for NG, you did a good job toward that end in this > paper, but I’d consider it a rough draft. I hope you’re not firing > your articles out to members of Congress and the Senate, or other > people who have readers filtering their mail. For as soon as they > see the bad transition, paragraphs stacked with multiple subjects, > the unsubstantiated claims, and your punctuation, they’re not going > to send your papers upstairs to the boss. They're going to get tossed > pretty quickly. > > I don’t mean to talk down to you Fitz, but just as I am not an engineer > and would need your help in that area, you are not a writer—and that’s > where you need help if you’re ever going to get anyone on your side > powerful enough to help you. > > You do certainly write, but you are not a writer, especially of the > type you need to be, say, on the order of Rachel Granby (SA editor), > whose writing is perfect—to say the least about it. She’s an editor; > perhaps she would look over your papers for you. > > Writing is a series of processes that literate humans use to produce > a product that enables them to communicate with others. So then, > punctuation, syntax, transition, grammar, spelling, sticking to a > subject, and editing are all required to complete the writing process. > > > Writing is an acquired craft, Fitzy. And you’ve not yet acquired > it to the point that you need to so that you can save our great nation. > > > Hey, it’s not too late, Fitzy. You’re an intelligent, passionate > person. A little cynical—but you mean well. Loosen that stiff neck > of yours a mite, humble yourself, and get to work. > > That’s my bit to help you, and I hope it does. > > The best to you and to your effort to change the nation for what > you see as the better. > > If you stay passionate and honest, others will come along who're > much much smarter than I am (and that doesn't take much!), and they'll > be able to help you moreso than I. > > But you have to be ready with an excellent product to present to > them.
AUTHOR RESPONDS: Thank you all for your comments and questions. I will attempt to answer all questions in this reply.
As to some people bidding up the stock, I don't know anything about short term movements, reading sheep entrails or tea leaves. The company could sell its assets as planned and avoid defaulting on its bank debt and the stock will trade up, probably by a lot. However, if they don't and do default there won't be much left for the shareholders after the lenders get through. I will leave that type of investment to Bill Ackman or Marty Whiman. I try not to invest in companies that have a downside of $0. That leads to "gamblers ruin".
As to conflicts of interest and new management at APL, yes Mr Dubay is the new CEO of AHD and APL; however, if you look at the companies you will see that Ed Cohn and his son Jonathan still hold the positions of Chairman and Vice Chairman at APL and Mr. Ed is still CEO at ATN and ATLS. To me, it seems that the Cohns might still have some influence around there. I would also comment that a business model and management are interlinked. You might have a great business model but will not do well if management cannot execute. Furthermore, management in all 4 companies is virtually the same. There are numerous inter-company agreements including the sales contract between ATN and APL, the incentive distribution rights between APL and AHD, and the new preferred stock issued from APL to AHD. Are they really arms length, probably, but who knows.
As to compensation, let's say we don't have to worry about where the Cohn's next meal is coming from. There are about 20 pages in APL's 10K dedicated to explaining management's compensation programs. I did not have the time nor stomach to go into all 4 company's comp plans but it looked like shareholders took some dilution to their ownership percent over the years. From management's perspective, why work with one company when you can have 4 to get paid by?
Regarding rising NG and NGL prices, it sure can't hurt. If they went back to $80/bbl and $8/mcf I would think the company would be profitable. But remember, the company needs NGL prices to follow oil and gas prices and there needs to be a market for them. I make absolutely no prediction on the short term movement of energy prices or the weather. But, it is the next few months that really matter.
As to finding a jv partner, you might be confusing ATN with APL. ATN raises investor program money to fund well development costs. APL lays pipe to connect to new wells and then processes the gas and moves it to big long distance pipelines. Yes APL, along will all other domestic E&P companies, are capital constrained due to debt environment. However, the big issue here is not when their line expires but whether they go into default in the next few months. If they do default, the lenders will call the line immediately and may force liquidation of the company to repay the loans. You as a shareholder are at the bottom of the heap.
Atlas America is the parent company of all the other entities. Their income is a function of the distributions they receive from the down stream companies like APL. Yes they are affected by the fortunes of the other companies.
Atlas Energy Resources is probably the best of the lot. The downside is that their investor programs may get hurt by the new tax laws eliminating the upfront expensing of Indirect Development Costs. They are hedged for about 60-70% of production for this year and part of next (please confirm that on your own) but they are no Linn Energy that has it production hedged out 3 years.
My conclusion is that this company has a very bad record of capital allocation and has destroyed a lot of value for shareholders. They are very close to defaulting on their debt and that would bring down the whole company. I personally don't want to invest in a company that has a chance of going to $0 (not matter what the tea leaves or market might currently be implying). There have to be better investments than this company if you want yield and some upside from rising energy prices over the next 3 years. If you are comfortable with the odds that they will finalize 3 asset sales in a few months at prices sufficient to pay down enough debt to avoid default, put your money on the table. Best of luck.
For the record, I am out of all Atlas positions.
On Mar 17 11:24 AM User 213076 wrote:
> Kinder Morgan is similar to Atlas, a lot of incestuous relationships. > Management uses these relationships to seek over-compensation and > control.
'AAA' Rated Companies: And Then There Were Six [View article]
A few comments: - I'll go out on a limb here, Freddie MAC is not AAA. In fact it and Fannie Mae are virtually insolvent save for Government support. You may be looking a certain trenches of their securitized debt which may be rated AAA. But the company is not, unless you think the US Gov will support all its paper.
- If Moodys downgraded Pfizer, then they ain't AAA anymore. I think you need both to be in the club. They took a big bite with Weyth
Your Oil Stocks Aren't Coming Back [View article]
Atlas Pipeline Partners: A Painful Lesson in MLP Investing [View article]
My brief analysis on APL is that no one including management realized how dependent the company was on NGL prices. Most of the profit from the company comes from the Mid Continent business they acquired a few years ago. Much of that business is under keepwell contracts where they get to extract the NGL's and sell them for their profit and have to maintain the NG flowing though. So this is not a simple business of just taking a toll on gas passing through its pipes. The company tired to hedge its NGL exposure when it made the acquisition using oil futures as a proxy for NGLs. This worked for a while until a hurricane shut down Gulf refineries for almost a year so there was no demand for NGLs and demand and prices dropped significantly. Therefore, the price relationship between NGLs and oil broke down. The company was left naked to a large amount of hedges that were rapidly going against it with rising oil prices last summer. The company raised $200M of equity to buy back the hedges at the top of the market. Perfect timing; just then oil prices fell like a rock. They basically threw the $200M out the window - bad luck. Now they appear unhedged for NGLs and are taking it in the shorts (technical term). You can only hedge out 6-9mos on NGLs vs 5 years with oil or gas. Now they are facing covenant breech and are forced to sell assets. If they can sell assets in this market the assets 1) have to high quality and 2) have to be sold a low prices. Not good for shareholders in the long run. The company said it is going to try to restructure its contracts to "fee based" going forward ie get a toll on the through put volume. Good luck. Oh, and as for the write down of the assets, to me that simply means they way way overpaid for a large acquisition whose business they did not understand. So it looks to me that this management has destroyed about $895MM of shareholder equity. Bad luck
What we pathetic shareholders are left with is Hope (which seems to be a reoccurring them these days and one that does not make a good basis for investment or running a country) Hope that they will be able to sell off good assets to avoid breeching their covenants. Hope that NGL prices return to more normal levels. Hope that they can rewrite contracts so the company is not so dependent on unhedgeable NGL prices. I hope management's luck changes.
Any comments or corrections on my analysis of the business would be appreciated.
Annaly: What Is Going On (The Finale) [View article]
However, the dividend and price are a function of what they can earn on their investments less what they have to pay for funding in the repo market. They borrow short and lend long, just like a bank. A falling interest rate environment is their "high cotton" days, like '08. this is because their funding costs, ST debt, fall faster than their longer term investments. Therefore the NIM increases as does the dividend. Also the price of bonds increases therefore the BV of NLY will increase. However, in a rising interest rate the environment, the exact opposite happens. As rates rise, bond prices fall as will the BV of NLY. Also, their funding cost on their ST debt will rise faster than they can reset the rates on their investments. The prices of the bond investments will have fallen so they have less money to invest. The result is their NIM gets squeezed and their dividend gets reduced. This is a key point!!
Somebody commented that NLY has always made money so they must be OK. WRONG. Go back to '98-'99. The stock traded down to $6 from $13. Why? Because rates rose. In '99 rates on the 10 year T's rose from 4.7% to 6.5%. (Wouldn't 6.5% be great right now!!!) NLY got hammered.
So where does this leave us today? I think it is safe to say that we are pretty damn close to the bottom of where interest rates can go. The Fed has manipulated rates to historical lows and we have had a ~30 year bond bull market as rates have fallen. The Fed recently thru operation twist has pushed long term rates lower so the yield curve is very flat. kenpittman, ask yourself can NLY make money borrowing short and lending long in an environment of a flat yield curve where the spread between the two is low? What will happen is that as their bond investments mature they will have to reinvest the proceeds at lower rates, thereby decreasing their NIM. Most importantly, as rates begin to return to "normal" as economic activity picks up and inflation that we are told does not exist returns, NLY will have to swim against the tide. Their BV will decline as will the dividend. Not good for the stock price. Even a 14% yield does not help a 50% drop in stock price.
Lastly, NLY has a great track record managing agency paper investments. They probably learned a lot from their '98-'99 experience. They employ hedging. They have reduced leverage. All good stuff. But they will be going against the current. It will be tough to make money. I have no idea when rates will go up. The Fed has said they will keep them low for a long time. If you believe that NLY could be OK for a while. However, their higher rate bonds will run off and their NIM will decrease if the yield curve does not change. If the recent improvement in the economy is real, rates may go up faster than people think. A return of (or recognition of) inflation could increase rates despite the Fed's efforts. Gentlemen, that call is yours. I have owned NLY and others. I do not own them now for the above risks. Hopefully kenpittman, this may give you a chance to get out before it is too late. At least you can understand the risks. What institutional investor owns this stock is totally irrelevant to me and does not, in my opinion, constitute sound research.
Sorry to have taken up your time here but I have felt that most of the chatter on this stock misses the risks inherent in the stock in today's environment. For the record, I do own Colony Financial CLNY. It is a play on the company's management being able to identify cheap paper in the commercial real estate market.
Best regards to all
Natural Gas Companies Increasingly Important [View article]
You are long on opinion and short on detail here. How much cash is APL getting from Williams to pay down their debt? Is not the goal to pay down debt to avoid covenant breech? I see no mention of that. How did you or your mentor come up with $400M for the sale of NOARK? What effect on Adj EBITDA will that sale have. NOARK is one of their few assets that generates revenue from fee or toll contracts so the sale further exposes the company to commodity risk. And, could you please enlighten us all as to why your favorite pick of all the NG transportation companies is APL? If you like transportation and distribution, why on Energy Transfer or Enterprise Products. They are bigger, not in financial peril. They make much more of their revenue from fee based contracts, not keepwell contracts. I have to be blunt here in the interest of trying to keep high quality analysis on SA; I don't care about your "feelings" about a company. I am interested in hard analysis as to why APL is now a deep value play with little downside risk and very large upside. I see nothing here that tells me how and when APL will raise sufficient capital to pay down debt to avoid default. It won't matter how much they earn if the bank defaults their loan. This is an interesting story so do some real analysis before you publish. There is no value in putting up a piece that tells readers to look at the company's powerpoint.
Why Teekay Is Overvalued And Its Dividend Is Not Safe [View article]
MLPs Enter Challenging Week [View article]
Is There Enough Natural Gas? [View article]
You did not mention NG imports from Canada. We import not an insignificant amount now, I believe. We also import LNG. This would add life and availability to the equation.
Al Neider's comments were interesting. Are you going to investigate?
Credit Card Crunch: Creating a New Generation of Subprime [View article]
How this information affects specific stocks would be more helpful.
Nervous About MLPs [View article]
Follow up to MATT:
Thanks for the insight on NG wells depleting faster than oil wells. I need to research that further.
There are 3 general types of MLP's: E&P and gathering companies tied to the price of commodities (hedging really matters here), pipeline companies that make a toll on throughput and propane distributors (tied to seasonal demand and to some extent their ability to hedge prices). Toll companies should be the safest and least volatile to energy prices. As I understand it, it is harder to shut off a gas well when prices are low than it is an oil well. Therefore, in most markets, a long haul pipeline will still get throughput and thus revenues. In theory this should make their distribution stream more stable. Look, if I could get my portfolio to grow at 10% a year, I'd be a happy man. So looking at Energy Transfer and Enterprise Products, I get temped here.
Best,
Skip
MLPs Entering 2009: High Yields Carry High Levels of Risk [View article]
2 Reasons Why Income Investors Should Ignore Warren Buffett's Dividend Argument [View article]
You did a very good job explaining the couple of points that Mr. Buffett did not cover in his dividend explanation. However, I look at both your article and Mr. Buffett's explanation as a lesson in corporate finance. It really gets at the heart of investing. And that is what is a company's Return on Incremental Capital. At what rate of return can a company redeploy its free cash flow into new projects or investments? And, that rate should be in excess of its cost of capital; otherwise, management is destroying intrinsic value. I thought the guy above who talked about how is father and his partners allocated their grocery stores' free cash at the end of the year was great. It really makes the importance of capital allocation clear.
The unique thing that BRK has been able to do is to re-deploy its free cash flow very effectively even when faced with the headwinds of really big numbers. Very few other managers can run as highly a diversified company as Mr. Buffett. Many poor managers make bad capital allocation decisions investing in businesses at high prices or do not produce their expected returns. A great example of this are the large mining companies (Value, Rio Tinto, Barrick, BHP Bilton) many of whose CEO's are now gone because the investments and acquisitions are not paying off. So, understanding what a company's reinvestment opportunities are (or are not) is key in determining intrinsic value.
This leads me to another point I'd like to make about dividending vs share repurchases. Many investment managers get very excited when a company repurchases their own stock. Like Mr. Buffett's dividend example, repurchasing stock at below intrinsic value or better yet, book value, is a sound use of capital. However, the problem arises when CEO's basically believe their own BS and buy stock above intrinsic value. This destroys value of the company. To avoid this trap, I prefer that a company return excess free cash flow to investors (that's ME). I'll assume responsibility for redeploying the cash, thank you. I see this as one advantage to the MLP and REIT structures. Again, this gets back to one of the keys of investing - being able to tell if a management can redeploy cash effectively.
Lastly, I'd like to point out large tech companies like Microsoft and Apple that just let free cash flow pile up, neither reinvesting it nor dividending it out to shareholders. I could be wrong on this, but it seems to me that tech companies that have "made it" and produce prodigious amounts of free cash flow from their core operations do not do a good job discovering other technologies or diversifying. I certainly understand the safety that a cash hoard provides but enough is enough. Just one man's opinion.
Again, nice job in explaining what Mr. Buffett left out in his simplified explanation, especially for such a young kid like yourself.
Best regards
Skip Olinger
Microsoft: Can You Really Find a Better Risk / Reward Scenario? [View article]
First, I would like to point out that you jumped from Cash flow from Ops to Free Cash Flow without mentioning cap ex. FCF is CFFO - Cap ex. However, I believe you took it into account in determining your FCF yield as CFFO for '10 was $24B but you used $21B for FCF so I assume you estimated $3B for cap ex. If that is true, then your calculation of FCF yield of 10.9% is correct. And, that assumes on growth, which Mr. Lau points out is quite possible.
So let's make some assumptions of FCF growth for 5 years and a terminal value. If you use TTM as of 12/31/10 as proxy for FY 6/11 and grow CFFO by 3% per year, assume cap ex for the next 5 years is $3B per year (it has averaged $2.8B p/y for the last 3 years) then FCF would grow about 2.7% per year for 5 years. If you add a terminal value assuming 0% growth in perpetuity and discount that stream back at 10% and add $31B in net cash divided by 8.7B fully diluted shares you get a value of $32.68 per share.
If it takes 3 years for the market to recognize the value discrepancy and you pay $24.80 per share today and receive $0.64 dividend per year and sell the stock for $32.68 you would generate an IRR of 12%.
Seems like a reasonable return from a AAA credit. Who knows maybe they will actually create some new innovative products or buy some and growth may be higher than 3%.
I am long MSFT
Used Morningstar for financial figures
Is There Enough Natural Gas? [View article]
On Apr 30 03:20 PM ArtfulDodger wrote:
> My Dear Fitzy:
>
> You wrote: “one thing we both can agree on is that i wouldn't get
> far convincing you.”
>
> You are looking at me through your own eyes. Take a break; don’t
> be so defeatist. It makes me think you could be mentally lazy. For
> you can certainly convince me—that is, if you present a proper argument
> with well-presented facts in a well-written and well-reasoned paper.
>
>
> But you don’t have to convince me. You have to convince literate
> people who’re used to taking advice from people who know how to present
> it properly. Although, as I noted, this most recent article is far
> above your previous ones, you’ve still not presented a proper argument
> for all your positions.
>
> Whoever edited this article for you, get them to continue helping
> you. If you did it yourself, keep working on your writing, and perhaps
> before we run out of oil, you’ll be an argumentative writer of the
> highest import.
>
> You see Fitzy I like people who are passionate about what they're
> doing and also honest. And on these two points—as best I can tell—you
> get an A+.
>
> And so, just as you've put it on yourself to save the whole US, all
> I want to do is help little, old you a tiny bit. And again, as I've
> noted, with the lofty goal that you have, you need lots of help.
>
>
> Indeed, leftists are very sensitive people and almost universally
> refuse to listen to anybody except people who present them with negatives.
> They want someone to agree with them or they immediately begin slandering
> such folks or grouping them with someone all leftists hold in total
> scorn, such as Rush and Bush.
>
> Do you really think you're going to get anywhere by bashing Bush?
> Or even Obama. So, leave out the personal pejoratives.
>
> I don’t like Big Oil either—not for the same reasons you don’t, but
> nonetheless, I don’t like them. But when you toss a shot in a paper
> against them, you’re only throwing meat to the eco-maniacs. No one
> else cares. So, leave out the industry slanders—no matter how sly
> they are.
>
> Moreover, you’re going to need both political parties to achieve
> your goal of turning America into a natural gas grid. So, leave out
> your politics.
>
> The way I see it (and others should comment in this vein), Fitz,
> you have three things to prove to move the nation in your direction:
> 1) that NG is the best way to go over all else; 2) that C02 is a
> serious pollutant; 3) that “peak oil” is real and the world is headed
> down that hill already.
>
> You can’t simply say that C02 is a dangerous pollutant, Fitz; you
> have to show that it is, for merely because you have it in your mind
> that it is, does not mean most of the rest of the nation does. <br/>
>
> And you can’t simply say, Professor X says C02 is deadly and that
> the planet can’t last much longer if we don’t control it. We’ve all
> heard those tales before. You have to show how C02 is detrimental,
> what it’s already done, and what it may do in the future. Show! Don’t
> tell!
>
> As far as arguing for NG, you did a good job toward that end in this
> paper, but I’d consider it a rough draft. I hope you’re not firing
> your articles out to members of Congress and the Senate, or other
> people who have readers filtering their mail. For as soon as they
> see the bad transition, paragraphs stacked with multiple subjects,
> the unsubstantiated claims, and your punctuation, they’re not going
> to send your papers upstairs to the boss. They're going to get tossed
> pretty quickly.
>
> I don’t mean to talk down to you Fitz, but just as I am not an engineer
> and would need your help in that area, you are not a writer—and that’s
> where you need help if you’re ever going to get anyone on your side
> powerful enough to help you.
>
> You do certainly write, but you are not a writer, especially of the
> type you need to be, say, on the order of Rachel Granby (SA editor),
> whose writing is perfect—to say the least about it. She’s an editor;
> perhaps she would look over your papers for you.
>
> Writing is a series of processes that literate humans use to produce
> a product that enables them to communicate with others. So then,
> punctuation, syntax, transition, grammar, spelling, sticking to a
> subject, and editing are all required to complete the writing process.
>
>
> Writing is an acquired craft, Fitzy. And you’ve not yet acquired
> it to the point that you need to so that you can save our great nation.
>
>
> Hey, it’s not too late, Fitzy. You’re an intelligent, passionate
> person. A little cynical—but you mean well. Loosen that stiff neck
> of yours a mite, humble yourself, and get to work.
>
> That’s my bit to help you, and I hope it does.
>
> The best to you and to your effort to change the nation for what
> you see as the better.
>
> If you stay passionate and honest, others will come along who're
> much much smarter than I am (and that doesn't take much!), and they'll
> be able to help you moreso than I.
>
> But you have to be ready with an excellent product to present to
> them.
Atlas Pipelines: I'm Out of Here [View article]
Thank you all for your comments and questions. I will attempt to answer all questions in this reply.
As to some people bidding up the stock, I don't know anything about short term movements, reading sheep entrails or tea leaves. The company could sell its assets as planned and avoid defaulting on its bank debt and the stock will trade up, probably by a lot. However, if they don't and do default there won't be much left for the shareholders after the lenders get through. I will leave that type of investment to Bill Ackman or Marty Whiman. I try not to invest in companies that have a downside of $0. That leads to "gamblers ruin".
As to conflicts of interest and new management at APL, yes Mr Dubay is the new CEO of AHD and APL; however, if you look at the companies you will see that Ed Cohn and his son Jonathan still hold the positions of Chairman and Vice Chairman at APL and Mr. Ed is still CEO at ATN and ATLS. To me, it seems that the Cohns might still have some influence around there. I would also comment that a business model and management are interlinked. You might have a great business model but will not do well if management cannot execute. Furthermore, management in all 4 companies is virtually the same. There are numerous inter-company agreements including the sales contract between ATN and APL, the incentive distribution rights between APL and AHD, and the new preferred stock issued from APL to AHD. Are they really arms length, probably, but who knows.
As to compensation, let's say we don't have to worry about where the Cohn's next meal is coming from. There are about 20 pages in APL's 10K dedicated to explaining management's compensation programs. I did not have the time nor stomach to go into all 4 company's comp plans but it looked like shareholders took some dilution to their ownership percent over the years. From management's perspective, why work with one company when you can have 4 to get paid by?
Regarding rising NG and NGL prices, it sure can't hurt. If they went back to $80/bbl and $8/mcf I would think the company would be profitable. But remember, the company needs NGL prices to follow oil and gas prices and there needs to be a market for them. I make absolutely no prediction on the short term movement of energy prices or the weather. But, it is the next few months that really matter.
As to finding a jv partner, you might be confusing ATN with APL. ATN raises investor program money to fund well development costs. APL lays pipe to connect to new wells and then processes the gas and moves it to big long distance pipelines. Yes APL, along will all other domestic E&P companies, are capital constrained due to debt environment. However, the big issue here is not when their line expires but whether they go into default in the next few months. If they do default, the lenders will call the line immediately and may force liquidation of the company to repay the loans. You as a shareholder are at the bottom of the heap.
Atlas America is the parent company of all the other entities. Their income is a function of the distributions they receive from the down stream companies like APL. Yes they are affected by the fortunes of the other companies.
Atlas Energy Resources is probably the best of the lot. The downside is that their investor programs may get hurt by the new tax laws eliminating the upfront expensing of Indirect Development Costs. They are hedged for about 60-70% of production for this year and part of next (please confirm that on your own) but they are no Linn Energy that has it production hedged out 3 years.
My conclusion is that this company has a very bad record of capital allocation and has destroyed a lot of value for shareholders. They are very close to defaulting on their debt and that would bring down the whole company. I personally don't want to invest in a company that has a chance of going to $0 (not matter what the tea leaves or market might currently be implying). There have to be better investments than this company if you want yield and some upside from rising energy prices over the next 3 years. If you are comfortable with the odds that they will finalize 3 asset sales in a few months at prices sufficient to pay down enough debt to avoid default, put your money on the table. Best of luck.
For the record, I am out of all Atlas positions.
On Mar 17 11:24 AM User 213076 wrote:
> Kinder Morgan is similar to Atlas, a lot of incestuous relationships.
> Management uses these relationships to seek over-compensation and
> control.
'AAA' Rated Companies: And Then There Were Six [View article]
- I'll go out on a limb here, Freddie MAC is not AAA. In fact it and Fannie Mae are virtually insolvent save for Government support. You may be looking a certain trenches of their securitized debt which may be rated AAA. But the company is not, unless you think the US Gov will support all its paper.
- If Moodys downgraded Pfizer, then they ain't AAA anymore. I think you need both to be in the club. They took a big bite with Weyth
- Note that Fitch downgraded Berkshire from AAA