Putting An Estimated Yield On The Distribution Restart Of Eagle Rock Energy Partners

Summary

• Eagle Rock Energy Partners has completed the sale of its midstream business, leaving the company as a pure play upstream MLP.
• Management must now prove it can manage an MLP to generate growing cash flow and distributions to investors.
• A DCF estimate puts the restarted distribution rate at a 5% to 6% yield, well below the typical 9% paid by established upstream MLPs.

I last wrote on Seeking Alpha about Eagle Rock Energy Partners LP (EROC) in October 2013. At that time I warned that the company was overloaded in debt the $0.88 annual distribution per unit would soon be cut due to rapidly declining distributable cash flow. The next distribution was cut to $0.15, down from $0.22, and the lower rate was paid for just two quarters before distributions stopped after the February payment. When the article published, EROC was at about $7.25 per unit yielding 12%. Currently the unit is trading for $4.34.

EROC data by YCharts

In late December 2013, Eagle Rock Energy Partners and Regency Energy Partners LP (RGP) announced that Eagle Rock would "contribute" its midstream assets and business to Regency in exchange for a combination cash, assumption of EROC debt, and RGP units totaling about $1.3 billion. The goal was to leave Eagle Rock as a pure-play upstream MLP with a very low debt load. The EROC distribution was suspended after the February payment until the "contribution" was consummated and Eagle Rock was able to focus on its upstream business. The deal with Regency closed on June 30.

Putting an Estimate on DCF

With its second quarter earnings, Eagle Rock reported adjusted EBITDA for the remaining upstream business, with the midstream portion of revenues and earnings classified as discontinued operations. From various parts of the earnings release, I was able to pull together enough numbers to put a rough estimate on the third quarter DCF. Here goes:

• Q2 adjusted EBITDA from continuing operations: $24.9 million
• Positive impact on G&A expenses after contribution: +$3.5 million -- Reported Q2 G&A of $12.0 million and forward guidance of $8.2 to $8.7 million.
• Minus quarterly maintenance capex guidance of: $13.5 million
• Interest per quarter on $250 million of remaining debt at 8.5%: $5.3

Analyst’s Disclosure:The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.