Sunday, February 01, 2015

Finding Opportunity in Crude Oil's Bust - Part 1

Though the Energy Information Administration (EIA) expects global oil inventories to continue to build in 2015, the downward pressure on oil prices could ease mid-year. The EIA projects that Brent prices will reach a 2015 monthly average low of $49/bbl in January and February, and then increase through the remainder of the year to average $67/bbl (during the fourth quarter).

As sliding crude prices pressure profit outlooks, those investors looking to “bottom fish” should principally focus on companies that are being proactive in this difficult environment  in facing declining free cash flows (such as balancing cost cutting and capex without sacrificing long-term reserve replacement needs and production schedules).

In addition, ideal buy candidates should have locked-in hedges (cash flow preservation) and manageable debt leverage (including net-on-balance liquidity – untapped revolving credit lines – and no balloon-debt maturities due before 2017 -2018).  
Attractive dividend yields are not necessarily anathema, too – assuming distribution coverage ratios are realistic.

Opportunity often comes disguised in the form of misfortune, or temporary defeat. ~ Motivational speaker Napoleon Hill (1883 – 1970)

With valuations at multi-year lows, the 10Q Detective has added the following stocks to a diversified portfolio of energy holdings – upstream to downstream:

CSI Compressco (CCLP-$14.52) provides vertically integrated compression-based production enhancement services, including both conventional wellhead compression services and unconventional GasJack-casing compression services; and, in certain markets, well monitoring and sand separation services. Total fleet horsepower is 1,072,304 as of September 30, 2014.
  • Production enhancement services improve production rates and recoverable reserves of natural gas and oil wells
  • Distribution coverage ratio was 1.21x (1H:201)

Capital Product Partners L.P. (CPLP-$8.02) is an international, diversified shipping company and leader in the seaborne transportation of a wide range of cargoes, including crude oil, refined oil products, such as gasoline, diesel, fuel oil, jet fuel and edible oils, as well as dry cargo and containerized goods. 
  • CPLP maintains a strong balance sheet and capital structure with net debt/capitalization of 26.7% (as of September 30, 2014) 

Eagle Rock Energy Partners, L.P. (EROC-$2.30) is a SPECULATIVE, growth-oriented upstream Master Limited Partnership (MLP) with assets located primarily in Oklahoma, South Alabama, Texas, Mississippi and Arkansas.
Eagle Rock's E&P assets are highly concentrated in the Mid-Continent and are small on a reserve and production basis relative to E&P MLP peers:
  • Proved Reserves 346.3 Bcfe  /% Proved & Developed/ 67.3% % Oil 48.8%
  • 13-year reserve life
  • 3Q 2014 production of 75.1 MMcfe/d (82% operated by the Partnership)
  • Strong Balance Sheet: ~$285 million of liquidity (~$190 million of RGP units as of 9/30/14 and ~$94.3 million revolver availability)
  • Net leverage ratio of 2.3x as of September 30, 2014
  • Owns 4.9M shares of Regency Energy Partners LP (NYSE:RGP) - $25.11 (as of 1/29/15)

Transitioning to a pure-play E&P MLP, Eagle Rock will also be exposed to the structural risks inherent in the MLP business model characterized by an `acquire and exploit' growth strategy and uncertainty regarding the availability, pricing, and quality of acquisition targets as well as execution and integration risks while growing cash distributions paid out to unit holders.

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