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MeridianGuy

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  • Breitburn Energy Partners Is Looking For A Loan [View article]
    I am a big fan of Value investing based on book value, but at these fire sale prices many of the land assets are probably overvalued vs "spot" prices. When Oil is low, the potential income on a given property is lower, so its value is lower too.

    Personally I think the devaluation is temporary, but rest assured, I doubt they would get full value for the assets they have listed.

    FYI, I am long BBEP
    Jan 14, 2015. 06:11 PM | 2 Likes Like |Link to Comment
  • Breitburn Energy Partners Is Looking For A Loan [View article]
    PERSONAL OUTLOOK

    This is the 3rd MLP I am slowly going "all-in" on. The first was LINE in late 2008 (13-17), the 2nd was BWP in Feb 2014 (12-16), and now I have a 6.11 basis on BBEP. In all cases I caught the falling knife a little too early and was forced to nervously DCA through the bottom. It was gut wrenching, but paid off in the last two go rounds. (NOTE: "All-In" for me is 15-20% of my total portfolio. I am currently at about 5% with BBEP)

    This time around my investment thesis is the same: Multi-Billion dollar businesses are large for a reason and generally don't disappear overnight unless there is extreme corruption OR gross mismanagement of the business to the point of negligence.

    In this case, as in my previous two MLP investments, I see neither. I do acknowledge the very real "headwinds" of low Oil prices and looming credit renewals, however, both of these are part of the MLP business and as mentioned before, unless you believe management is incompetent, these will be addressed as they are simply part of the business.

    There is a reason why MLP's hedge and I ASSUME there is a reason they choose the hedge durations that they do. Oil is a commodity and commodities trade in cycles. I am not an MLP CFO, but I am betting real $$$ that the two are connected. Sure there is a risk of cycles being longer/shorter than anticipated, and that will affect profitability, but that should not affect an entity's existence. Would General Mills go out of business if grain prices were higher than expected for an indefinite period? No. Likewise, assuming this management team is worth anything, BBEP's existence should not be threatened either.

    Next question is the Credit Renewal. As mentioned, their business is extremely profitable, and in recent quarters, even much more than expected. Given their hedges, there is little doubt that if they had to fully cut the distro and kill all non-maintenance CapEx, they very quickly could pay down debt. So to me its not a question of IF they can manage their debt, it is how they will manage it, and will it affect the distro.

    OUTLOOK SUMMARY

    Personally I am confident the distro will be reduced or killed, however, this equity is not priced based on potential distros. The market is questioning its viability to continue operations at all. Given the fact that management has faced a similar situation in 2008 in an even tougher lending environment, I don't see why they won't come out of this round just as well. I am betting that this company will survive and that oil will recover above $60 a barrel by year end.

    My biggest questions/assumptions are:

    1) Is this management team the same that successfully managed the 2008 Oil Price/Lending crisis? I am assuming it is.

    2) Does the creditor have the option of revoking the Facility completely, or are they only entitled to adjust it? I am assuming they only have the right to adjust it and that adjustment is capped. If they can revoke it completely, that would be dangerous and very bad for BBEP, but again I believe in the management team and that their assets are very valuable.

    Here is an article that talks about the Macro forces on Oil. The author says a price rebound is inevitable as lower prices WILL eventually increase demand and lower supply.

    http://bit.ly/17IEOXB
    Jan 14, 2015. 04:24 PM | 6 Likes Like |Link to Comment
  • American Capital Agency: Impact Of Last Week's Fed Statement On Its MBS Portfolio [View article]
    Welcome to Oz ksalisb!! No one on these AGNC threads seem to care about the "core" business or cash flow. It drives me crazy.

    My understanding is that you are right, if market rates for MBS are increasing due to Fed fears, but LIBOR/FF is not increasing, then their opportunity for increased spread is real. HOWEVER, given that their core model is to borrow at short term rates while investing at long term rates, AND the fact that management was selling lower rate assets this quarter, I think management feels the market is right and they don't want to take the risk of losing money on those assets if LIBOR starts rising. Because if Bernanke's forecast holds true, then LIBOR/FF rates will start to rise.

    The most interesting part of the last transcript I read was the fact that they were moving into more Medium term borrowing agreements. I think this was a tell that they were worried about ST interest rates continuing to rise. My "hope" is that this foresight led to more aggressive hedging to the point the impact of recent MBS price declines was minimized.

    Either way though, this rate volatility highlights the risks in these leveraged companies. All it takes is one aggressive idiot making the wrong derivative hedge and losses could be amplified. Scary.
    Jun 24, 2013. 03:20 PM | 1 Like Like |Link to Comment
  • American Capital Agency Corp.'s Updated Dividend Sustainability Analysis (Through Q1 2013) [View article]
    Scott, can you confirm the following:

    1) Your Table 1 appears to be adding Unrealized Gains/Losses to the Net Income to calculate "Estimated Taxable Income". I think I am getting confused because this 8k

    http://bit.ly/12e3Ztw

    shows ($1.57) per share "comprehensive loss" including ($2.21) of Mark to Market losses. Obviously this is not the same Unrealized Gain/Loss in section B. So does this $2.21 figure appear anywhere on your table? I am trying to figure out what the company is actually required to pay dividends on. The 8k has 1.18 of "real income", $2.21 of paper losses, and .50 cents in taxable income. How did they get there?

    2) They have .86 cents per share of UTI.

    3) They owe $3.41 in dividends of undistributed income...
    Q3 - 1.36 +
    Q4 - 1.93 +
    Q1 - .50 = $3.79 * 90% = $3.41

    4) The UTI bucket is currently short $3.41 - .86 = $2.55 in required future dividends.

    5) IF their "real" cash flow engine ($1.18/sh last quarter) suddenly became break even, they would be forced to sell assets to come up with the dividend payment or else be declassified as a mREIT.

    In short I am still confused why I am the only person looking at it this way. Quarterly Cash Dividends must be paid with REAL CASH. Real Cash is obtained from one of the following places:

    1) Undistributed Income (cash on balance sheet)
    2) Uninvested Capital (cash on balance sheet)
    3) New Capital Raises (cash on balance sheet)
    4) Asset Sales
    5) New REAL Spread Income

    1,2, 3, 4 are nice back stops, but #5 is the most important number in my opinion. At the end of the day, Paper Earnings mean nothing (GAAP or Non-GAAP).

    My fear is that if rates rise and spreads tighten, their "real cash" flow drops (Spread Income). For every $ that real cash flow drops, their $3.41 dividend liability must be paid for some other way. 1st option is to dip into UTI, after that is gone the you start looking at #2, #3, #4. In a rising rate environment their asset values drop and they will be forced to sell at a loss or raise more capital which will only dilute existing shares further, forcing a lower dividend.

    Am I crazy for seeing this from a cash perspective? At the end of the day, shouldn't all investments be valued from a cash flow basis?
    May 10, 2013. 05:07 PM | 1 Like Like |Link to Comment
  • American Capital Agency Corp.'s Updated Dividend Sustainability Analysis (Through Q1 2013) [View article]
    Bruce, my instincts are the same as yours and I am tempted to move out of the mREITs and into MLPs. The thing keeping me invested though is that this mREIT market was created by the fed to support the MBS market after everyone bailed. MBS's were being sold for pennies on the dollar and the Fed knew they couldn't support the market alone through Fed purchases and Fannie/Freddie. As such, I think these mREITs are providing a valuable function in the financial community and will be around a long time. And the model of borrowing at x and investing at (x+y) is a solid one.

    The only time interest rate/asset values SHOULD come into play is if they are forced to sell at a loss. And IF AGNC was limiting quarterly payouts to the previous years earnings, they would always have enough to cover the dividend and never be forced to sell MBS's at a loss. However, given that they are OVERPAYING their dividend liability by a large margin, i don't see how they are not going to be forced to sell MBS and/or raise capital (which dilutes the stock and lowers dividends).
    May 10, 2013. 04:28 PM | 1 Like Like |Link to Comment
  • American Capital Agency Corp.'s Updated Dividend Sustainability Analysis (Through Q1 2013) [View article]
    Let's hope he gets paid by the comments!! My screen keeps freezing everytime I open one of these articles!
    May 10, 2013. 03:50 PM | 2 Likes Like |Link to Comment
  • AGNC: Sustainability Analysis For The Layman (KISS) [View instapost]
    Agreed. As a W.A.G. I'd project a similar 1.18 in spread/roll income and then another 50 cent gain as a reversal of this quarters losses on the recent interest rate increase.
    May 10, 2013. 03:43 PM | Likes Like |Link to Comment
  • American Capital Agency Corp.'s Detailed Dividend Sustainability Analysis [View article]
    Thanks, I look forward to it!

    Bryce clarified some of my concerns about dividend liability. His thought was that "Comprehensive" Income does not drive dividend liability, only "Taxable Income" does. So in the recent quarter, that would be .50 cents per share, requiring only .45 cents of distributions in Q1 2014.

    http://bit.ly/12e3Ztw

    I am still long, but as mentioned, I am focusing on their "cash from operations" which is 1.18 in my book (.78 cents spread, 40 cents roll income). To me this represents their true "Payout Power" (combined with UTI).

    http://bit.ly/12e3Ztw
    May 8, 2013. 02:25 PM | 2 Likes Like |Link to Comment
  • AGNC: Sustainability Analysis For The Layman (KISS) [View instapost]
    Thanks for the tip! I will check that out. The link I posted above is one of their 8k's. I haven't found the 10k, but this summary from the 8k seems pretty good...

    FIRST QUARTER 2013 FINANCIAL HIGHLIGHTS

    • $(1.57) comprehensive loss per common share, comprised of:

    ◦ $0.64 net income per common share

    ◦ $(2.21) other comprehensive income (loss) ("OCI") per common share

    ▪ Includes net unrealized losses on investments marked-to-market through OCI

    • $0.78 net spread income per common share

    ◦ Comprised of interest income, net of cost of funds (including interest rate swaps) and operating expenses

    ◦$ 1.18 per common share, including $0.40 per common share of estimated net carry income (also known as "dollar roll income") associated with purchases of agency mortgage backed securities ("MBS") on a forward-settlement basis through the "to-be-announced" ("TBA") dollar roll market

    ◦Includes $0.09 per common share of estimated "catch-up" premium amortization benefit due to change in projected constant prepayment rate ("CPR") estimates

    •$0.50 estimated taxable income per common share

    ◦Estimated taxable income was negatively impacted by net realized losses of approximately $(0.55) per common share recognized for tax during the quarter due to monthly settlements of TBA dollar roll positions during a period of price declines

    ◦Total estimated net taxable income (loss) attributable to TBA dollar roll positions was $(0.15) per common share, net of estimated TBA net carry income

    •$1.25 dividend per common share declared on March 7, 2013
    May 8, 2013. 01:55 PM | Likes Like |Link to Comment
  • AGNC: Sustainability Analysis For The Layman (KISS) [View instapost]
    Ok, thanks. That was another concern/misunderstanding. I wanted to verify exactly what drives their Dividend Payment requirements... ie - Does it include M2M adjustments or not. My impression from other articles was that it did.

    So would you agree the recent quarter's "important" number for LT investors is .78 cents a share (Net Spread Income) * 90% = .702 * 4 = $2.80 Dividend / $30 = 9.3% yield?

    http://bit.ly/12e3Ztw
    May 8, 2013. 11:49 AM | Likes Like |Link to Comment
  • AGNC: Sustainability Analysis For The Layman (KISS) [View instapost]
    Ok, we are both out of our element, but my guess is they probably make hedging decisions based on probabilities and internal rate projections. And more than likely they don't want to spend money unnecessarily protecting against MAJOR moves that aren't likely to happen. In the options world, you may buy a put spread vs. a put in order to limit your hedge cost. Not sure if there are swap products like that. Where the swap writer has capped losses. Again, sounds like we are just guessing and hoping they are hedging appropriately.
    May 8, 2013. 11:21 AM | Likes Like |Link to Comment
  • AGNC: Sustainability Analysis For The Layman (KISS) [View instapost]
    So it sounds like you are saying AGNC is not making enough in their core business to cover the dividend. This was my fear, but I don't see anyone talking about this in their Sustainability discussions. Is there a line item I should be looking at to see this number? My fear all along was that they are financing the dividend through capital raises, which is not much different than a Ponzi scheme. I hate using that word because I believe in their "core" model. In fact, the thing that has kept me invested is the idea that even if their "core" model currently only supports a $1 dividend, and that business is cut in half (.50 cents), you are still looking at a 6.5% yield with NO equity valuation reduction ($2/$30). Everyone (ie Cramer) says a 15% is an unsustainable dividend, so why does the price have to come down as the dividend comes down. Isn't a 6-8% dividend reasonable? It seems to be for MLP's so why not for REITs?
    May 8, 2013. 11:00 AM | Likes Like |Link to Comment
  • AGNC: Sustainability Analysis For The Layman (KISS) [View instapost]
    By "paper" income, i was referring to Mark to Market valuations. Ex:

    1. Raise 1B capital.
    2. Borrow 10B @ 2.5%.
    3. Invest 10B @ 4%.
    4. Collect 400m in investment interest.
    5. Pay 250m in borrowing costs.
    6. Add/Subtract 10-30m in hedging/transaction costs/profits.
    7. "Real" income = ~120m.

    If rates dropped 1% over this period, the 10B in investments might rise to 10.5B. This would be a "paper" profit of 500m. Or if they fell it could be a 500m "paper" loss.

    My point is that reported NetInc includes this "paper" mark to market amount. Meaning their "earnings" are -380m to 620m.

    I believe their "required" payouts are based on this -380/620 amount and not the "core" 120m of business profits. Is that true?

    Either way, I'd like to see what their "core" business is producing.

    I am an owner of a few rental properties. Some of which have gone underwater, however, my income still exceeds my borrowing costs and so I don't really care about my "book value". If my plans are to hold the assets and continue to collect income, then why do I care about book value?

    To me, the same should be true for AGNC. Of course my borrowing costs are fixed, whereas AGNC's is constantly changing, but my point is who cares about the fluctuation in BV?

    Also, in a increasing rate environment, aren't prepayments a good thing? In this case most assets are valued under face value so a prepayment (at face value) means the borrower is paying over market rates. I guess this assumes all assets are purchased at face. If they paid $107 on a $100 note, I can see how a prepayment could be bad.
    May 6, 2013. 12:17 PM | Likes Like |Link to Comment
  • AGNC: Sustainability Analysis For The Layman (KISS) [View instapost]
    I am probably over simplifying my definition of Cash Flow. As a "layman" I am thinking of it as net spread (after hedging/overhead). Their basic business model seems to be borrow ST and re-invest LT. When I say "Cash Flow" am referring to the returns on that model.

    In general, they should ALWAYS have positive cash flow so long as their avg ST borrowing rate is below their avg LT investment return. I am saying we should be focusing on how much this "core" business is producing on an annual basis.

    Scott's spreadsheet tracks "UTI - Undistributed Taxable Income". I assume this is what you are referring to as "Retained Earnings" and it is definitely a possible source for paying dividends. However, my thoughts are that the more you "overpay" in dividends owed this quarter, the less this bucket has in it for next years dividend.

    Personally, I would like to see UTI always have enough to cover the next year's dividend. I understand this would mean capital is going unused most of the year, but it would make me feel better because once the money is earned, it must be later distributed.

    To me it is no different than personal income taxes. It would be like us paying 2012 taxes during each 2013 paycheck, instead of withholding money each check for our 2013 liability. On an ongoing basis it is kind of the same (each paycheck has GI minus taxes), however, you will always have future unfunded tax liability if you are not withholding taxes related to that period's earnings. The IRS does not let you do that, and as an investor, I'd like to see AGNC withhold 90% of this quarter's earnings to guarantee next year's quarterly dividend.

    By not withholding their future dividend liability, they are dependent other forms of funding... additional profits, capital raises, or asset sales. If rates rise, profits fall, capital gets more expensive, and asset sales become realized losses.

    Do that make sense?
    May 6, 2013. 12:01 PM | Likes Like |Link to Comment
  • AGNC: Sustainability Analysis For The Layman (KISS) [View instapost]
    Hey Bryce, I looked at Scott's numbers and it looks like he was adding in "Tax Book Differences". Those were the numbers I was using. But as mentioned, either way they are still overpaying and my concern is whether they can claim those overpayments against future dividend liability. For example, can they choose not to distribute anymore dividends this year because they have already overpaid by 1.4B over the past 4 years?

    http://bit.ly/13m95UY
    May 6, 2013. 10:43 AM | Likes Like |Link to Comment
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