Skip Olinger

The Nine Best Natural Gas, Oil Pipelines for Income and Capital Gains

You are a little light on explanation about why you would purchase the companies you recommended. Are they selling at a cheap price to fair value? What is the fair value? You also don't go into much information about GP companies vs LP companies. You don't discuss hedging positions for gathering pipelines nor contract details about how a company generates revenue. There is a big difference between a keep whole agreement for a gathering pipeline and a long term transport agreement for a long haul pipeline.

Natural Gas Companies Increasingly Important

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.

Atlas Pipelines: I'm Out of Here

I spoke to Ed as well, nice guy. Funny, he didn't mention the possibility of default to me either. Their 4Q call was interesting in the fact that they announced quite happily that they were close to selling 3 assets but did not mention anything about their covenants. It wasn't until the Q&A that the subject came up. I have been in Ed's shoes and you want to present the information in the best possible light but you don't want to omit key facts either. I threw in the towel. I know Baupost significantly reduced their position. The Coopermans followed this one all the way down as well. We are not alone. The lessons are understand how a company makes it money and where the risks are, be ruthless about getting out if the stock goes down, set a bail out point ahead of time and just because a smart guy invests still do your own homework. Oh, one other, complexity is not your friend. Thanks for the comment


On Mar 17 09:40 PM turbo47 wrote:

> Skip,
> Thanks very much for your thoughtful analysis. I wish both of us
> had "been out of here" a lot sooner. My problem was I heard what
> I wanted to hear. ..had a nice chat with Ed Begley when the stock
> was at 7...as I recall a Citicorp analyst had blown the whistle about
> possible debt covenant problems in '09, so I called the company
> and heard what I wanted to hear. Nobody misled me, but me.
> Sorry for both of us. Thanks again fror your take.
> Turbo

Atlas Pipelines: I'm Out of Here

Thanks for the compliment. The only problem is that the company may be running out of time and unable to wait for the market to improve.


On Mar 17 03:09 PM Jack Walker wrote:

> Skip,
>
> This is a thoughtful and well-prepared article. We may well be near
> the bottom of natural gas prices but the complexity of this company
> and all of the financial engineering materially increases the risk
> and certainly increases the time necessary trying to understand the
> risk.
>
> Jack
>
>

Atlas Pipelines: I'm Out of Here

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.

Atlas Pipeline Partners: A Painful Lesson in MLP Investing

Good question. I am getting ahead of myself. I would like to do a bit more investigation before doing a full write up. However, APL's original attraction was that they had a percentage of proceeds contract with Atlas Energy Resources ATN where they got 16% of the sales price of the NG sold by ATN in exchange for building out the gathering pipelines to get their gas to market. And they still have that contract. The problem is that this represents a very small portion of their current revenues. They bought this much bigger operation in the Mid Continent with the keep well contracts that over shadow that favorable, easy to understand arrangement. I believe they said they were selling an asset in Appalachia as well as their Ozark pipeline and something else. Appalachia is their home turf and a growth area. It is where the Marcallas Shale is located and if you listened to the ATN call the same group of guys were jumping up and down about how great the future is there for NG and how much growth will take place at ATN. The Ozark pipeline is a regulated interstate pipeline and therefore it makes it money on tolls, just like you would think. So I am initially concerned about their selling these assets as they, I believe, have good growth and fee income, both goals they say they are pursuing.

Bottom line, it ain't good when a company has to sell assets to avoid default. Things are probably worse than they appear in the 4Q statements. But at this point the analysis is simply can the company survive. If it does the upside will take care of itself. If it does not, kiss your $2 good bye. I held my position all the way down so I am going to do more research. I'll keep you posted.

My big lessons here: use stop losses, know how a company makes money, and beware leverage, especially now.


On Mar 06 11:12 AM jpau wrote:

> Perhaps Marc or SkininCA can shed light on this, but if I understand
> this correctly, are the assets APL is attempting to shed, are they
> the assets most related to NGLs? Perhaps they are trying to migrate
> their strategy toward piping the bounty of gas that ATN is finding?
>

Atlas Pipeline Partners: A Painful Lesson in MLP Investing

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.

Hedge Fund Tracking: Seth Klarman & Baupost Group, Q3 2008

Very good work. It is concise and useful. Thanks for taking the time to do this and sharing the work.

Atlas Pipeline: Call Option on Oil

Big picture you are correct. However, oil/gas may move up but NGL's stay low due to lack of refinery and feedstock demand. My point is that there are better ways to play increasing energy prices. LINE and LGCY are direct plays on oil/gas and much less complex. I think the reason to invest in pipelines is that it is you are buying a tolling business and get paid on throughput, not to speculate on energy prices.

I should have listened to my own good advice. And, I am holding as you get paid a very big yield and it looks like they won't go bust.

Did you look at the GP (AHD)? I think you can get a bigger bang on dividend increases owning that rather than the LP. But again, it is difficult to analyze.


On Nov 26 01:03 PM Tim Plaehn wrote:

> Skip in CA, I do think your analysis is correct. APL is a complicated
> company that has a lot of moving parts. I still believe that increasing
> energy prices will bail them out. The stock price has a lot of upside
> if the scenario works out. If energy prices stay low I think they
> will struggle.

Atlas Pipeline: Call Option on Oil

Tim,
I think you have missed a key point. I spoke with the company a week ago to try to understand how they do, in fact, generate revenues. It is more complex than it looks. You are right, they do make most of their GP on the sale of NGL's.

However, the key point is that the correlation between the price of NGL's and the price of oil has broken down. The company got in trouble a few months ago as a result. They hedged their NGL's using crude oil as a proxy. However, oil went up (remember?) and NGL's did not so the company was underwater, had to break the hedges right at the peak oil price and raise $200M to pay off the hedges.

As I understand it, NGL prices remain low as a result of 2 things: 1) the hurricanes badly damaged several gulf coast refineries so they are unable take NGL's. This has driven down the price substantially. 2) there has been a general drop in the demand for the refinery products made with NGL's due to the economy. So even when the refineries get fixed there is no guaranty that demand for NGL's will pick up.

The next point is that one should understand that NGL's are hard to hedge out much past 6-9 months. So the company remains exposed to price fluctuations on NGL's gong forward.

My final point is that I have to admit I screwed up here big time buying this company. I bought the stock (not a big position) and I did not fully understand how the company generates its GPM or revenues and what the risks were. My Bad! It is VERY complicated to figure that out with APL. You have to know how much NGL's they generate from the gas they buy and/or transport. You have to know the price of NG as they have to buy NG in some contracts to offset the amount of NGL's they strip out. You have to know how much volume they transport for each of the 3 types of contracts they use. You have to know the price of NGL's. Lastly, you have to know how much they have hedged, at what price and what contracts they apply to. It is a very complex algorithm.

In conclusion, APL is not a proxy for oil price increases at all. It is a proxy for NGL's. It is also a proxy for NG pricing as they make more money when NG prices are high. They get a % of the proceeds. And, it is a proxy for how well they have hedged. If I were doing it again, I would buy Energy Transfer, a big pipeline that makes its money from tolls fees, not the sale of NGL's or I would buy E&P MLP's that produce oil, gas and to a lesser extent NGL's and just sell them. No complex stripping out NGL's and replacing with NG.

Investing in ETFs to Accommodate Change

Sorry, but I do not know what your point is in the first 3 paragraphs. Are you saying that the majority of tax payers under report their capital gains and cheat the government? I can't figure out what the problem would be if brokerage houses reported costs as well as sales data. I must be missing something. thanks for your help