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I am a fundamentally oriented value investor who complements this with technical analysis to help optimize price points selected for buying and selling. I like companies with * significant price to free cash flow * high return on invested capital and return on equity * book-adjusted earnings or... More
• ##### Quick Calculations On ATLS Barnett Shale Acquisition 1 comment
Mar 17, 2012 4:23 PM | about stocks: ATLS

Assume \$1.9 Billion USD of capital expenditures is required to extract (actually produce) 1 Tcf of proved reserves. I am taking this data point based on Peyto in Canada, which publishes a number of \$1.8B of capex per Tcf. Peyto is one of the most efficient producers in North America. If someone has a better number please give that.

Assume variable extraction costs for 1 Tcf of \$400M. I lack a good reference number for this and I would appreciate some data points from others.

Together that gives \$2.3B of total costs required to extract 1 Tcf of gas. Figure \$2.3 of all-in costs - variable plus capex - for each MCF of gas.

Assume selling price of gas is \$3 long term. That gives \$3B of revenue versus \$2.3B of costs, or \$700M net cash out. Now take a 20 year net present value of \$700M with a 10% discount rate. That gives NPV-10 of \$297M, versus our effective payment for the resource of \$690M.

I'll save you some calculating: I worked out that the payment of \$690M assumes a long term gas price of \$3.92 to just break even.

Now here is where it gets a little shaky for me: notice I did not add the price we paid of \$690M 1 Tcf equivalent to the total all-in cost. The reason for this is that the acquisition includes 198 producing wells. So my assumption is that we have already paid for some of the capex in the form of those wells. Figure \$2M per well or about \$396M of capex in place. The rest would be a payment for reserves. The trick is how much more capex do they need to spend to fully exploit the resource, and that's not clear.

It does not strike me as any kind of sure thing. It looks like the market is valuing the deal based on just the increased distributions.

Bottom line is that if we were buying pure reserves we would want them at a substantial discount to \$297M assuming a \$3 long term spot price for dry natural gas. It is not clear how much useful capex we got (these wells could be marginal). At \$690M, it's not an obvious steal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: ATLS
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• bartgrenier
, contributor

Your analysis is directionally correct. A couple points you may have missed is the fact ARP lays off much of the Cap Ex risk through it's syndication business and it gets a carry on other people's capital. Lastly, MLP's trade a one thing and one thing only, their current yield (annualized for the latest quarterly distribution) and the prospect for the distribution to increase. A Nat Gas E&P with good prospects for distribution increases will trade to a 6% yield vs 8% for average prospects.

ATLS, the GP in this case, will trade to a 4% yield or better as it is effectively a hedge fund with 2 and 50% carry through it's IDR interests once the IDR's are in the money. Furthermore, the GP has no capital needs and it basically pays out 100% of distributable cash flow.

I am very long ATLS and I wouldn't be surprised to see the units trade to \$75 once the annualized distribution reaches a \$3 level late 2013 or early 2014.
17 Mar 2012, 07:04 PM Reply Like