By Ivan Y.
Atlas Resource Partners (NYSE:ARP) has been one of the harder hit oil and gas producers these past several weeks. It has fallen from about $18.50 in the beginning of October to about $10.60 today. It was also noticeably excluded in the complicated deal announced in October between Atlas Energy (NYSE:ATLS), Atlas Pipeline (NYSE:APL), Targa Resources (NYSE:TRGP), and Targa Resources Partners (NYSE:NGLS).
Last week, in an 8-K filing, ARP revised its distribution guidance for 2015. Despite significantly lower oil prices, ARP only cut its distribution next year by 4 cents. These are the differences between ARP's previous guidance from November and the revised guidance from last week.
- 2015 cash distribution: $2.40 (previous), $2.36 (revised)
- Oil price assumption: $83.35 (previous), $78.15 (revised)
- Nat gas price assumption: $3.83 (previous), $3.74 (revised)
(Please note that the price assumptions are inclusive of hedges)
In my opinion, ARP's 50%-plus fall to its low around $9 was unjustified. This is mainly due to two reasons. First, the majority of ARP's production is natural gas (not crude oil). For 2015, nat gas is estimated to be about 75% of total production. Natural gas has not been hit as hard as crude oil has these past several weeks. In addition, even if the natural gas price follows the oil price farther down, it won't have a huge impact on ARP because about 72% of ARP's expected natural gas production in 2015 is hedged at $4.20. Prices have been locked in at even higher prices in 2016 at $4.31, and even higher in 2017 at $4.37.
The second reason ARP's stock price was unfairly punished is because most of ARP's crude oil production for 2015 is hedged. About 68% of expected crude oil production has been locked in at a price of $90.65. In the revised guidance, ARP's oil price assumption is $78.15 per barrel (which includes the barrels that will be sold at $90.65). Some simple arithmetic will show that ARP will meet or exceed the $78.15 price as long as the remaining 32% of oil production can be sold at exactly $51.59 or higher. WTI oil closed on Friday near $57.
Even if it takes more than a year for oil to recover, ARP is still in a good position due to hedges that are in place from 2016 to 2018.
- 2015: 1.743 million barrels at $90.65 (~68%)
- 2016: 1.209 million barrels at $87.36
- 2017: 672k barrels at $85.67
- 2018: 540k barrels at $84.57
ARP is in a strong position heading into 2015. Most of expected oil production has been locked in at much higher prices and natural gas prices are still holding up. With an expected distribution of $2.36 for next year, the current yield is over 20%. That is a pretty solid bargain. There are actually a lot of bargains in the oil & gas sector right now, so ARP is only one of many that can be considered.
Instead of a direct investment in ARP, I believe a better way to gain exposure to ARP is through ATLS (which holds a large number of shares in ARP). Investing in the ATLS "stub" is the arbitrage strategy advocated by Seeking Alpha contributor Dan Rosenblum and Leon Cooperman of Omega Advisors. Based on Monday's closing prices, the market is only giving the ATLS "stub" a value of $2.50 per share.
Disclosure: The author is long ATLS.
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.