Constellation Energy Partners: A Speculator's Delight for MLP Fans

| About: Sanchez Midstream (SNMP)
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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):


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 year, an indication they're trying to make the best of their business while running on very tight budgets. Successful capital expenditures in the next few months will be key in making 2010 a very good year along with debt reductions so CEP can refinance with a larger loan that would allow for more capital expenditures.

3 years ago, their units reached 50. For the last 18 months, units have been languishing under 5. This year, the units have been sliding (after reaching 5 in January) to just above 3. But where there is chaos, there is opportunity. If management can keep costs under control and the new capital expenditures (gas wells in the Cherokee Basin) are successful, 2011 could bring improved financials and maybe distributions.

An interesting item is if they earn a profit in 2010, CEP could issue K-1 forms for partners to pay taxes on their share of net income. The best information should come from CEP, but chances are they have greater priorities running their business to keep it profitable rather than supplying information. CEP does not provide much guidance. Taxes for MLPS are very complicated, but new investors should be aware of the possibility that partners may have to pay taxes on net income even without distributions.

The MLP sector has been one of the best performing industry groups in the last year but CEP has been left behind (for obvious reasons). Speculators who are willing to accept a lot of risk in the pursuit of high profits, will be interested in CEP. Those who want to sleep at night, will give it a pass. My guess is CEP will pull through and could provide big gains in 2-3 years. It's interesting at this time, profitable MLPs, which are doing well, have seen their index drop over 10% in May. But that is story for another time.

Disclosure: No position