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Active investor for the past 10 years. Professional experience in the industry in the past. Now in sales and manage my own portfolio. Looking to build up an activist investor tribe that all rallys behind similar goals and looks to invest in small and mid-cap deep value companies. You can follow... More
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  • NASDAQ:EROC – Eagle Rock Energy Partners - A Quintessential "Death-Spiral" Company!

    Eagle Rock Logo NASDAQ:EROC Eagle Rock Energy Partners Security Analysis

    In this edition Fat Pitch will be reviewing Eagle Rock Energy Partners- NASDAQ:EROC . A Master Limited Partnership that has an unsustainable business practice, unless management changes their financial policies soon.

    Master Limited Partnership's (MLP's) in the energy sector have become increasingly popular with retail investors. Their main attraction is their perceived riskless investment that pays a yearly distribution of 6%. Now a truly riskless investment yielding 6% per annum is quite lucrative considering we are currently in a near zero interest rate environment. However, caveat emptor, many retail investors have no idea what they are getting themselves into!

    The sales team pushing this product hide behind the shroud of the minor, yet true, benefits of MLP's: the tax benefit of a limited partnership and the liquidity of a publicly traded equity. However, don't be sidetracked when they call and tout these insignificant benefits! Be sure to do your research and check out the financials. Lastly, when the sales-rep starts chit-chatting about how you will spend your easily earned earnings on a family vacation in the Bahamas, hang up the phone!

    Just to clarify, it is not that Fat Pitch thinks all MLP's are bad, it is just that most are! We see no point in explaining the background of the Eagle Rock Energy Partners - NASDAQ:EROC business since it is a horrible investment! Let us move on to the important part: the financials, focusing on a 3 year history of cash-flows statement.

    (click to enlarge)

    Right off the bat a keen investor will realize that the 2013 cash flows from operating activities (line B) is $300,000 less than depreciation (line A). In other words, the company is barely earning enough from their operations to replace what is consumed just to maintain the status quo of business operations. Also consider that Eagle Rock obtains positive cash flows from a depleting asset (oil & gas reserves) and their gas compressing and processing plants will need replacing every so often. Replacement costs have been reviewed and we agree that this yearly depreciation figure very accurate.

    Next, lets look at lines C and D: sections from the cash flow from financing activities. Notice how unsustainable this investment is!? Line C shows 2013 dividend distributions equal to 70% of its yearly cash flows from operations. You read that right! 70% went straight to investors via the dividend! And to think that this company cannot even earn enough to pay for its own replacement cost. Our calculations reflect Eagle Rock having a yearly shortfall of $118 million.

    So how to they stay in business!? Lets take a look at Line D. Thank goodness they have hard-nosed investment bankers to push new stock on the market to unsuspecting retail investors! And every time Eagle Rock Energy Partners - NASDAQ:EROC raises capital by selling equity, these investment bankers collect a pound of flesh, typically 5-7% of the total amount of capital raised, in 2013 that total amount of new equity sold to the market was $96 million. Investment bankers probably walked away with $6 million at the end of the transaction.

    Seems pretty reasonable to say that the only persons making any return on investment are the investment bankers! Please let F.P.I. kindly remind you that Eagle Rock Energy Partners - NASDAQ:EROC is not the only company playing the "raise capital just to pay dividends because our business can't economically support itself" game!

    Break 150x23 NASDAQ:EROC Eagle Rock Energy Partners Security Analysis


    Seal of Approval NASDAQ:EROC Eagle Rock Energy Partners Security Analysis

    SM Call Signs 300x172 NASDAQ:EROC Eagle Rock Energy Partners Security Analysis

    References Logo NASDAQ:EROC Eagle Rock Energy Partners Security Analysis


    Copyright © 2014 All Rights reserved. This material is for your information only and is not a solicitation, or an offer, to buy or sell securities mentioned in articles past, present or future. is a firm involved with equity research and valuations. The information contained herein has been obtained from sources that we believe are reliable but in no way is guaranteed by us. Furthermore, this report contains forward looking statements and projections that are based on certain assumptions and expectations that are generated by our proprietary research process. Accordingly, actual results may differ considerably from those reflected in this report due to such factors as those which are listed in the Company's SEC filings. Any non-factual information in the report is our opinion and is subject to change without notice.

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

    May 01 7:33 PM | Link | Comment!
  • Hallador Energy (NASDAQ:HNRG) - Forecasted Return 19.5% For Next 3 Years.

    Here are the 5 major reasons why HNRG is a superior energy company compared to its competitors.

    1) Strong U.S. demand for Illinois Basin coal - and Hallador's ability to mine it & sell it cheapest.
    2) Non-union labor force; advanced safety - health - & mine maintenance systems.
    3) A positive track record and experienced management team that includes 3 prolific venture capitalists.
    4) Strategic placement of coal mine system on major railway systems.
    5) Trading at a minor discount + major earnings growth for the next two years.

    Hallador Energy Company has ownership in three energy enterprises:

    100% ownership of Sunrise Coal
    50% ownership of Sunrise Energy
    45% ownership of Savoy Energy

    (12/2013) Yearly mining figures: 3.5 million tons of coal and 327,000 barrels of oil. We also want to note that all coal production has been pre-sold until 2016. We see this as a benefit for HNRG.

    In mid-2014 the new Bulldog mine will be approved for production. Yearly it will yield 3 million tons of coal - nearly doubling the coal output of HNRG.

    In mid/late 2015 the Russellville mine will be approved and begin mining operations; which again will increase production another 3 million tons/year.

    HNRG corporate offices are located in: Denver, Colorado - all mining operations are located near the Indiana and Illinois southern border .

    Hallador's 380 non-union coal mining employees coupled with the connectivity of mining operations and coal exporting near major railway infrastructure are two major competitive advantages HNRG has over not only Illinois Basin competitors, but most US coal miners in general.

    Stock Metrics

    In the Chart Above… We are looking at price and volume metrics. Our proprietary system indicates strong pricing support at the current trading level. We also want to note that as the dividend schedule repeats and liquidity increases HRNG will continue to elevate itself as an "invest-able" company in the public's opinion. Increasing Institutional Ownership by sale of insider holdings is currently how this is taking place. While most would consider this strategy "au contraire" in our opinion, it is brilliant. 2 year best case scenario: right off the bat one more occurrence of "insider to institution" sale takes place. Then the Bulldog mine becomes operational - end of 2014 we see the early beginnings of HNRG scaling in earnings. Through 2014 management continues its steady quarterly dividend and public opinion starts setting in that HNRG is worthy of being considered "light conversation" on Wall Street. 2015 comes upon HNRG and the financials start reflecting unexpected earnings gains due to the strategic planning and operational efficiency that management has set in place. Hallador continuing to make strides coupled with the energy industry turning full circle and becoming a sector of interest again for the public markets will continue to promote the demand for HNRG stock.

    Superior Operating Margins

    The industrial commodities markets are usually dominated by the low cost leader. Hallador happens to have the lowest cost coal and highest operation margins of any Illinois Basin coal producer. Most important as scale is reached with the Bulldog and Russellville mines opening, operating margins will likely improve.

    Compelling Valuation
    Our Discounted Future Cash Flow valuation model indicates a current opportunity to purchase Hallador Energy Shares at 86 cents on the dollar. We forecast intrinsic value to grow at around 17% per year - couple this with the discounted price and you get a forecasted real return of 19.76% per year. Fat Pitch stands by its 3 to 5 year investment horizon and considers its current holding of HNRG to be a first position that will increase with successful completion of projects and milestones.

    Disclosure: I am long HNRG.

    Apr 12 1:27 AM | Link | 3 Comments
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  • NASDAQ:EROC – Eagle Rock Energy Partners - A Quintessential "Death-Spiral" Company! $EROC
    May 1, 2014
  • Very few things are more important than a companies competitive advantage. Rule your Kingdom with a Moat!
    Apr 12, 2014
  • Hallador Energy (NASDAQ:HNRG) - Forecasted Return 19.5% For Next 3 Years. $HNRG
    Apr 12, 2014
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