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memshu
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I have supported my family by trading for the last 25 years. I'm not here for fun - I do this in order to eat. I come here to learn what others are doing and why, and in return I share what I know.
  • Understanding The E+P Mlp Business Model 2 comments
    Mar 18, 2014 4:37 AM | about stocks: ARP

    I am a happy holder of ARP units which I bought last summer during the LINE sell off. I am so happy in fact, that I have decided to understand the business model a little better with the view to increasing my position substantially.

    But, reading through the 10K, I have encountered some difficulty in trying to understanding the business plan. I am sure it is a good plan, I just would like to understand it! Can anyone help?

    Here are numbers taken from ARP's latest 10K:

    Gas and oil production revenues 2013: $ 266,783
    Gas and oil production expenses 2013: $97,237

    Clearly, production operations are cash flow positive. However,

    Depletion, depreciation and amortization 2013 associated with gas and oil production: $129,729
    Total SGA: $78,063

    Clearly, only a portion of SGA apply to Gas and oil production. Since gas and oil production are 56% of revenues, I suppose we could assume that SGA costs associated with gas and oil production are perhaps $78,063 x .56 = $43,715.

    If so, then the net result of the gas and oil production would appear to be negative $3,898 even before giving consideration to any interest expense.

    Yet, ARP continues to acquire gas and oil properties. There is an entrepreneurial logic here which escapes me. If the business is money losing, why keep buying more?

    Is it because:

    1) SGA expenses are largely fixed and as total gas and oil business goes, they will eventually decline as share of revenues and the business will become profitable?

    2) SGA expenses associated with gas an oil production are in fact a much smaller portion of total SGA expenses than the apparent 56%?

    3) Gas and oil are currently underpriced and one expects prices to increase in the future? But in this case would it not make more sense to just buy reserves and hold off exploiting them until prices have risen?

    4) Although depletion is said to be calculated per unit of production, it somehow overstates the rate of consumption of reserves?

    5) Some other reason I have not understood?

    Stocks: ARP
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  • Yarak
    , contributor
    Comments (284) | Send Message
     
    Interesting questions - I found they mirror my own. Many MLPs have done well over the past few years (and before, actually), but I've started to become concerned there's too much room for error in the many estimates provided. Estimates of reserves, estimates of decline rate, allocation of capital expenses to production, and in some cases allocation of hedge costs across periods. So one just has to "trust" this combination of estimates and believe that the distribution is sustainable - since I bet most people price them on yield - I know I do.

     

    One has a tendency to trust "professional" estimates and things printed on investment materials. And they may well pan out. But for me it's just becoming more and more intellectually difficulty to justify.

     

    It's a pity, I'd like to find more understanding and confidence, since I firmly believe that nat gas prices are going up and would like to bet on that happening.
    12 Apr 2014, 06:42 AM Reply Like
  • memshu
    , contributor
    Comments (587) | Send Message
     
    Author’s reply » upstream mlps are prolly not a good way to bet on rising NG prices - they are almost entirely hedged for 2014 and mostly hedged for 2015. some are even mostly hedged through 2017! if they hedge through puts (like LINE used to be), they will be able to realize the upside; but if through costless collars - well, then, no. purer bets on NG can be had via futures contracts or ETFs.

     

    regarding estimates... other industries are similar in this regard. insurance and banking don't really have earnings in the ordinary sense - only estimates.

     

    my problem here is not that i dont trust the estimates - i am not a trusting kinda guy anyhow - but that i don't understand why it makes sense to go out and buy a lot more of a business which appears to be loss making. i have suggested some reasons above. other considerations are possible:

     

    for instance, perhaps production costs are front loaded - you first have to drill the hole (lots of work) then only operate the tap; that would explain why ARP's production is unprofitable now but worth setting up all the same - all these costs will drop away in the future and we'll be left with pure (cash) flow;

     

    also, perhaps the way reserves in the ground are accounted for reflects today's technology while these companies see better extraction technology coming down the pike within a few years which will make a lot more of the oil extractable. in which case it makes sense to pile reserves on now.

     

    i just don't know.
    12 Apr 2014, 07:53 AM Reply Like
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