Q1 2013 Earnings Call

May 17, 2013 9:30 am ET

Executives

Stephen R. Brunner - Chief Executive Officer, President and Chief Operating Officer

Charles C. Ward - Chief Financial Officer and Treasurer

Analysts

Michael D. Peterson - MLV & Co LLC, Research Division

Frank J. Abella - Investment Partners Group, Inc.

Presentation

Operator

Good morning, and welcome to Constellation Energy Partners' First Quarter 2013 Earnings Call. [Operator Instructions] The conference is being recorded. I will now turn the call over to Stephen R. Brunner, President and Chief Executive Officer of Constellation Energy Partners.

Stephen R. Brunner

Hello, everyone. This is Steve Brunner. Chuck Ward and I would like to thank you for taking the time to join us this morning as we review our first quarter 2013 results.

Before we get started, I'd like to remind our listeners that this morning's presentation is being webcast

I am a long time holder of GeoMet (GMET.PK) yet first wrote about the stock on April 2, 2013. That article highlighted the challenging predicament GMET was in but that if the company could address its bank debt issues via a successful asset sale, could be a very interesting and deeply undervalued opportunity. Readers can go back to the article to get a sense of the various dynamics impacting GMET but the overall focus was GMET's sale of its Black Warrior Basin (BWB) assets. I anticipated GMET would sell those assets for about $55MM, using comparables from the Constellation Energy Partners (CEP) sale. However, the actual sale came in at $63.2MM, a very robust valuation and very material in alleviating GMET's solvency issues. GMET will receive $63.2MM in proceeds of which at least $52MM will be used to pay down debt, including the elimination of the $21MM borrowing base

GeoMet (GMET.PK) is an interesting event-driven opportunity for individual investors but before even considering it, I thought it was prudent to highlight some big risks with the company ahead of any discussion as opposed to the typical disclosures after the analysis. One can invest in GMET via its common equity or its preferred shares (GMETP) but keep in mind that GMET's market capitalization is currently just ~$12MM (assuming full dilution of GMETP) and trades at $0.14. This is a real company and has been mentioned of late on Seeking Alpha given the high level of M&A activity in the natural gas space. Keep in mind that a large portion of the stock is controlled by two energy focused firms - Yorktown and Sherwood Energy - and as a result this is the type of company whose stock is highly illiquid at current levels. I have been a long time holder

Natural Gas prices (UNG) have risen substantially in the past year, from a low of below $2 to over $4 now, and there is now chatter about prices potentially hitting $5 this year. In this environment, it is interesting to track companies selling natural gas assets, as they could achieve higher than expected valuations in the strongest natural gas pricing environment in more than a year.

One company selling assets is Sonde Resources (SOQ). Sonde is selling its producing properties in Canada, which are 2/3 natural gas. Management mentioned previously that they would expect at least $70 million for the 2p reserves, plus some additional potential value for undeveloped Drumheller and Michichi oil locations. This compares to a current market cap of $90 million. The company also has substantial undeveloped holdings in the Duvernay, where EOG (EOG) and Encana (ECA), among others, are active. And it has a North

Q4 2012 Earnings Call

March 05, 2013 9:30 am ET

Executives

Stephen R. Brunner - Chief Executive Officer, President and Chief Operating Officer

Charles C. Ward - Chief Financial Officer and Treasurer

Analysts

Michael D. Peterson - MLV & Co LLC, Research Division

Gregg T. Abella - Investment Partners Group, Inc.

Brian Sauer

Presentation

Operator

Good morning, and welcome to Constellation Energy Partners Fourth Quarter and Full Year 2012 Earnings Call. [Operator Instructions] This conference is being recorded. [Operator Instructions] I will now turn the call over to Stephen R. Brunner, President and Chief Executive Officer of Constellation Energy Partners.

Stephen R. Brunner

Good morning, and thanks for joining us as we review our fourth quarter and full year 2012 results. This is Steve Brunner speaking, and Chuck Ward is with me this morning.

We have a lot of ground to cover this morning, but

Q3 2012 Earnings Conference Call

November 9, 2012 9:30 am ET

Executives

Stephen Brunner - President & CEO

Charles Ward - CFO & Treasurer

Analysts

Presentation

Operator

Good morning and welcome to Constellation Energy Partners Third Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. The conference is being recorded. I will now like to turn the call over to Stephen R. Brunner, President and Chief Executive Officer of Constellation Energy Partners.

Stephen Brunner

Good morning. Thanks for joining us for our third quarter 2012 earnings review. Our presentation this morning is being webcast and the slides are available in our website constellationenergypartners.com.

On Slide 2 of this mornings presentation is a reminder that our slides and discussion include forward-looking statements which are subject to certain risks and uncertainties. These risks and uncertainties are described more fully in our documents

This article uses terms and concepts explained in A Ranking Protocol for the MLP Space. If you are an energy industry expert please forgive any of my gross oversimplifications intended to give a big picture view without getting completely down in the weeds.

No Attention Span Summary: The Upstream Master Limited Partnerships ("MLPs") ranked in order from highest/best score to lowest score on the 3 Year Forward Yield After Tax / Valuation Coverage Ratio ("3YR FYAT / VCR") metric are as follows: Memorial Production Partners, LP (MEMP); QR Energy, LP (QRE); LRR Energy, LP (LRE); Eagle Rock Energy Partners, LP (EROC); Atlas Resource Partners, LP (ARP); Mid-Con Energy Partners, LP (MCEP); BreitBurn Energy Partners LP (BBEP); Pioneer Southwest Energy Partners, LP (PSE); LinnCo, LLC (LNCO); Linn Energy, LLC (LINE); Legacy Reserves, LP (LGCY); Vanguard Natural Resources, LLC (VNR); EV Energy Partners, LP (EVEP); Constellation Energy Partners, LLC (CEP).

Aberdeen Asset Management PLC is an investment advisory and hedge fund firm managing over $55 bn in equities. I discussed the Top 7 Buys of Aberdeen in a previous article. In addition to buys, it is also interesting to have a look at top companies where Aberdeen is booking profit and selling its holdings. The following is a list of its top seven sells from the last quarter according to its latest 13F filing with SEC.

Stock	Symbol	Shares Held - 09/30/2011	Shares Held - 12/31/2011	Change in shares
Philip Morris International Inc.	PM	17196736	13333475	-3863261
Metlife Inc.	MET	1397285	147274	-1250011
Hess Corporation	HES	1542779	1008442	-534337
Paccar Inc.	PCAR	724559	59137	-665422
Apache Corp.	APA	824934	579293	-245641
Emerson Electric Co.	EMR	1384328	992230	-392098
State Street Corp.	STT	1987624	1587331	-400293

I believe Paccar is a good short candidate among above stocks. However, I

LRR Energy, L.P. (LRE) is a new dividend offering in the energy sector. The anticipated annual dividend yield is 10%. The company is an exploration and production (E&P) master limited partnership (MLP). The company began trading on November 11th. The initial public offering was $19 a share on the New York Stock Exchange. 9.41 million shares were sold to the public. This article will focus upon the merits of buying LRR Energy shares for the dividend income.

Click to enlarge:

Dividend Expectations

The company's minimum quarterly distribution is 47.5 cents per quarter. This equates to a minimum annual payout of $1.90. Based upon the stock's current price of $19, the $1.90 is a solid 10% annual yield.

LRR Energy Background

LRR Energy acquires, develops, and operates oil and natural gas properties in the Permian Basin region in west Texas and southeast New Mexico; the Mid Continent region in

Analysts like to follow the buying trends of company insiders such as members of the board and upper management because these people know more about their companies than anyone else. If they personally buy company stock, it is a significant vote of confidence in their company.

We ran a screen on small-cap stocks with market caps between $50-$100 million for those seeing significant net insider purchases over the last six months.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

Do you think these insiders are calling it right on their companies? Use this list as a starting point for your own analysis.

List sorted by net insider purchases as a percent of share float.

1. Zogenix, Inc. (ZGNX): Engages in the development

The last few months have been very difficult for stock markets. MLPs had been high flyers for more than 2 years, but they were also hit with selling. The Alerian MLP Index (AMZ) had its greatest rally in its 16 year history, rising from a recession low of 152 in Nov 2008 to 390 on April 28, 2011. The index dropped to 316 on Monday & soared to 342 yesterday (an extraordinary swing, especially for a low beta index). Even after today's rebound, the chart below is depressing:

[Click all images to enlarge]

Alerian MLP Index --- 1 year

The recent decline may continue for weeks, even months. But for those with long term horizons, markets will come back as they did after the fall of 2008. MLPs should be treated as long term investments. They invest in long term assets designed to last for not years, but decades. Below

The Alerian MLP Index has had one of the most spectacular runs ever, for any index. At the bear market bottom on Nov 21, 2008, the index fell to 152 (only a 52% gain above its starting value of 100 on December 31, 1995). The comparable index including reinvested income had fallen to 370 from its former highs in 2007. By April 28, 2011, the MLP index exploded to 390 (up 156% from the lows) and the comparable index including reinvested income was 1,123 (on the next day). MLPs are yield securities and the yield for the index plunged to 5.86% when the index peaked, close to the record low of 5.37% in 2007.

Here are three prominent MLPs with very different performances. Enterprise Products (EPD) and Kinder Morgan (KMP) are the two largest MLPs, and those investments have done well. While their unit prices have slightly lagged the index,

Enterprise Products Partners (EPD) and Constellation Energy Partners (CEP) are master limited partnerships (MLPs) with very different stories.

EPD, the largest MLP, reported record aggregate natural gas liquid (NGL), crude oil, refined products and petrochemical pipeline volumes along with record natural gas pipeline volume for 2010. Net income was $1.4 billion, operating margin of $3.3 billion and distributable cash flow (usued to pay distributions) of $2.3 billion were also records.

EPD invested $3.1 billion to develop midstream energy infrastructure to serve customers in areas such as the Haynesville/Bossier Shale and the Eagle Ford Shale and increasing demand for NGLs. Three major projects began operations during 2010: a 5.3 million barrel refined products storage facility serving a large refining customer in Port Arthur, Texas; the Trinity River Basin natural gas pipeline serving producers in the Barnett Shale area of North Texas; and a 4th NGL fractionator at the complex in Mont

MLPs have had two outstanding years coming off the lows in November 2008. Below is a brief history of the Alerian MLP Index and yields:

Dec 31, 2006___282___6.4%
Jul 13, 2007____342___5.4% Previous record high
Dec 31, 2007___301___6.4%
Nov 20, 2008___154__15.1% Low during the financial crisis
Dec 31, 2008___176__12.1%
Dec 31, 2009___285___7.4%
Nov 09, 2010___365___6.1% New record high
Dec 17, 2010___350___6.4%

At the time of the previous record high, the yield for the index was a record low 5.4% while the yield on the 10 year Treasury bond was 5¼%. The premium spread of the MLP yield over the Treasury rate was just a few basis points, essentially zero. After reaching its peak in 2007 with a record low yield, the low beta index dropped 60 in a few weeks - a rude shock to MLP investors.

2010 has been a very good

In a post in late November last year, Testing the performance of price-to-book value, I set up a hypothetical equally-weighted portfolio of the cheapest price-to-book stocks with a positive P/E ratio discovered using the Google Screener, which I called the “Greenbackd Contrarian Value Portfolio”.

The hypothetical portfolio is based on Josef Lakonishok, Andrei Shleifer, and Robert Vishny’s (“LSV”) Two-Dimensional Classification from their landmark Contrarian Investment, Extrapolation and Risk paper.

The portfolio has been operating for a little over 3 quarters, so I thought I’d check in and see how it’s going.

Here is the Tickerspy portfolio tracker for the Greenbackd Contrarian

The Alerian MLP Index had its greatest year in history in 2009, gaining an amazing 62% (off a depressed low). It started this year strong but sputtered in February, went up in April, was hit with selling in May and has been surging since then for a YTD gain of 14% (what would be a great year ordinarily). Most noteworthy is the advance of 60 points (22%) in the last 2 months (however, it slipped back 8 in the last 2 days) while popular averages made little progress. The yield has been reduced to only 6.7%, low compared with historical standards. MLPs are getting more attention helped by new MLP ETNs and mutual funds which have been buying MLPs, especially in Q2.

Below is the table for the Alerian MLP Index (AMZ) and its comparable index with reinvested income (AMZX) for key dates:

_____________AMZ___AMZX
Jul 13, 2007 342.14 750.14---record

Constellation Energy Partners (CEP) earned a profit in Q1. Below is a very condensed income statement for Q1 (in thousands of dollars except per unit data and units are not in dollars):

_____________________2010_____2009

Total Revenues 64,518 52,193
Depreciation, depletion
and amortization 27,248 14,434
Total operating expenses 42,592 30,476

Net income (loss) 18,058 18,933
Adjusted EBITDA 14,940 17,434

EPS - Basic $ 0.75 $ 0.85
EPS - Units Outstanding 24,002 22,386

Depreciation is included because of its importance in cash flow. Their unit production was 3,860 MMcfe, 11% below last year. Company borrowings were $185 million, leaving $20 million available. Capital spending in 2010 will be $10-12 million, allowing them to complete about 25 wells (spent mainly in Q2 and Q3). CEP also reaffirmed that they expect distributions will remain suspended through Q4.

In summary, they're getting by but not setting the world on fire. Most cost items were lower this

Most MLPs have had an outstanding rebound in the last year, but a few are still far below former highs after suspending distributions took their prices into single digits. A few with current prices are:

Atlas Pipeline Partners (APL)_______14.52
BreitBurn Energy Partners (BBEP)___15.04
Constellation Energy Partners (CEP)__3.45

These companies survived the worst part of the recession and should do better as the economy improves. BreitBurn declared a Q2 distribution based on an annualized rate of $1.50 (and just went ex-distribution). However their last distribution, paid in Q1 2009, was based on an annual rate of $2.08. At least they are working their way back. Atlas Pipeline just reported Q1 results and said distributable cash flow per weighted average common limited partner unit was approximately 36¢, or $1.44 annualized (implying they have their eye on declaring a distribution). The partnership had $1.2 billion in borrowings and the debt seems

Stock Screen Strategy and Backtest Series:

• NCAV and NNWC Screen Strategy
• CROIC and ROIC Screen Strategy
• Negative Enterprise Value Screen Strategy
• Free Cash Flow Cows

Why Free Cash Flow Matters

Most business schools teach that it is earnings that drives free cash flow. On paper, this theory may look nice and proper, but in the real world, cash is king and cash is what you need to drive earnings.

When it comes to true profitability, forget earnings and EBITDA. FCF is by far the best number to refer to.

• Free cash flow is the cash that a company is able to generate after paying off all of the bills, maintaining existing asset bases and pursuing future growth.
• FCF is what enhances shareholder value and how dividends can be consistently paid.

With that said, it is clear that a company able to increase and generate FCF will appreciate in value

CONSTELLATION ENERGY PARTNERS (CEP)

Thesis: Constellation Energy Partners is an oil and gas limited liability company that owns natural gas assets. The company is presently hampered by debt taken on during the energy boom in the past few years and has thus refocused on using operating cash flows to reduce long term debt. The market cap of the partnership is currently valued in the public market at roughly 27% of the PV-10 NAV (Net Asset Value)[1] using NYMEX strip prices (12/31/09). Investing in the partnership offers a margin of safety in relation to their asset base and catalysts for share appreciation over the next two years include the resumption of maintenance and growth cap-ex as well as dividend reinstatement.

Company Overview: Constellation Energy Partners was organized by Constellation Energy Group and offered to the public in 2006. The purpose is to acquire energy assets with a