EV Energy (EVEP -15.2%) plunges after Stifel downgrades shares to Hold from Buy with a $2 price target, chopped in half from $4, even as the firm looks for the capital markets to improve for traditional upstream MLPs.
Stifel says it continues to view EVEP as the best positioned to weather the crude oil downturn given the ~40% availability under its credit facility entering the fall re-determination.
However, the firm sees limited growth in the current commodity environment, as the company's focus remains on balance sheet management and, in turn, limited potential value creation for equityholders.
Energy MLPs had one of the strongest quarters ever in Q2, with the Alerian MLP Infrastructure Index surging 18.1% in a major recovery since the losses seen early in the year, and the index is now up 8% YTD.
DA Davidson’s Poe Fratt sees tempered MLP growth “on full display,” and remains positive on crude oil prices through 2017 despite recent weakness, believing that non-OPEC production finally is declining and lower capex has set the stage for better supply demand.
Fratt’s best current ideas include Enterprise Products Partners (NYSE:EPD), Genesis Energy (NYSE:GEL), Magellan Midstream Partners (NYSE:MMP), and Spectra Energy Partners (NYSE:SEP), all of which he rates Buy.
But Citi's Faisel Khan says investors should stay cautious given that the group faces tight liquidity and stretched balance sheets; he considers Legacy Reserves (NASDAQ:LGCY), Vanguard Natural Resources (NASDAQ:VNR) and EV Energy Partners (NASDAQ:EVEP) among the higher risk names, and that Atlas Resources Partners (NYSE:ARP) is "running out of options" and could be forced into bankruptcy.
EV Energy Partners (NASDAQ:EVEP) -3.8% AH on news it is suspending cash distributions while electing to repurchase up to $35M in outstanding senior notes.
EVEP says the repurchase of the notes at a substantial discount to par will create more long-term value for the company; it says repurchases of a total $147M of senior notes YTD 2016 and in Q4 2015 for $80M have reduced debt by $66.8M and cut annual interest expense by $9M.
Upstream MLPs likely will continue to face “an extremely challenging 2016" with low liquidity and high levels of debt, CIti analyst Faisel Khan says, expecting the group to exit Q1 with an average of ~80% drawn on their bank credit facilities.
Khan downgrades Atlas Resource Partners (ARP -5.9%) to Sell from Neutral with a $0.25 price target, slashed from $3, saying ARP seems to be “running out of options to address leverage and liquidity concerns” and likely will be forced to file for Chapter 11 “either after the next round of borrowing base redetermination or post a potential breach of its debt covenants early next year."
Cut to Neutral from Buy are EV Energy (EVEP -6.8%), which Faisel says has sufficient liquidity to survive the next round of borrowing base redetermination and has a strong sponsor that may come to its rescue but sees a potential breach of debt covenants next year, and Memorial Production Partners (MEMP -9%), which is drawn more than 70% on its credit facility and a potential borrowing base cut could "wipe out the entire liquidity."