Monday, February 02, 2015

Finding Opportunity in Crude Oil's Bust - Part 3

Natural Resource Partners LP (NRP-$9.39) is principally engaged in the business of owning and managing mineral reserve properties.  NRP primarily owns coal, aggregate and oil and gas reserves across the United States that generate royalty income for the partnership. The partnership does not actively engage in the mining of any of its minerals or natural resources, but rather leases its properties to various operators in exchange for royalty payments.
  • NRP owns and controls 2.3 billion tons of coal reserves across three US coal basins, interests in approximately 1500 oil and gas wells, interest in soda ash operations, and over 11 million mineral acres. While in 2012 roughly 95% of NRP's EBITDA was derived from coal-related businesses, the proportion is expected to fall below 55% in 2015, with the remainder derived from oil and gas, aggregates and industrial minerals.
  • Recent debt-financed acquisitions have strained the balance sheet – the Debt/ EBITDA, as adjusted is expected to be in 4x -- 4.5x in 2015, up from 3.0x as of the end of 2012. 

Nordic American Offshore Ltd. (NAO - $11.87) owns and operates platform supply vessels (PSV), principally in North Sea.

NAO as a company is not directly exposed to the price of oil to a significant extent. The company does not own oil fields or sell oil. It is a Platform Supply Vessel (PSV) company servicing offshore oil installations, including oil rigs as necessary parts of their operations. In its main market, the North Sea, existing production accounts for about 80% or so of the work handled by its vessels. Existing production in the North Sea, according to management, is by and large unaffected by movements in the oil price.
  • ZERO debt and cash break-even level of about $12,000 per day per ship, which is considered low.
  • Of the current six vessel fleet - three are on long term charters with an average duration of two years before options. The income from these three vessels alone can cover all the costs of the six vessel fleet, thereby safeguarding the company's financial position.

QEP Midstream Partners, LP (QEPM- $15.50) has primary assets consisting of ownership interests in four gathering systems and two FERC-regulated pipelines through which it provides natural gas and crude oil gathering and transportation services. Assets are located in, or are within close proximity to, the Green River Basin located in Wyoming and Colorado, the Uinta Basin located in eastern Utah, and the portion of the Williston Basin located in North Dakota.
  • Over 2.6 Bcf/d and 54 MBbls/d throughput capacity
  • Access to three prolific oil and natural gas basins in the Rockies
  • ~ $500 million credit facility, undrawn on Sept. 30th

Seadrill Partners LLC (SDLP-$13.75) offers a speculative play on drilling services. A drop-down from Seadrill, this MLP owns a modern, high specification fleet of contracted vessels with a revenue backlog of $5.7 billion. The contracts have relatively high day rates and an average length of nearly four years, with the earliest finishing in 2015.

As a result of its growing asset base and cash generation, Seadrill Partners is expected to continue increasing distributions to its unitholders. The future balance between fleet expansion, leverage, and quarterly distributions will be important factors for an assessment of Seadrill Partners' financial policy. We note that proposed maintenance covenants would allow debt to EBITDA of up to 5x. [LT exceeds $2.8B, maturities 2019 - 2021]

Downside is the relative lack of diversification across the business, compared with Seadrill Ltd. and other large operators. Geographically, the vessels under current contracts are in three main regions. Operationally, there are four ultra-deepwater floaters, two drillships, and three tender barges: Ergo, more than a few days off day-rate for one or more vessels could have a meaningful effect on performance. 
  • LT contracts with Exxon-Mobil, Chevron, Total SA & BP
  • Seadrill “drop-downs”: Under agreements with its majority owner Seadrill Ltd., SDLP is likely to continue to acquire rigs and fractional interests in rigs that already have contracts for more than five years.
  • No exposure to day rates of UDW rigs until 2017, only semi-tender rig West Vencedor available before then
  • Coverage ratio exceeded 1.03x in 3Q:14
  • Ratio of earnings –to- fixed charges exceeds 4.5x
  • Cold-stacking issues should realign supply-demand issues by 2017

USA Compression Partners, LP (USAC - $17.35) is a pure-play Compression MLP.
Compression is a necessary and critical infrastructure for producing & transporting hydrocarbons - Compression is required to transport natural gas throughout the pipeline system.

Fundamentals remain strong: For the year ended December 31, 2014, USAC’s average fleet utilization was 94.0 percent.
  • Although 85% of USAC’s business (by HP) is natural gas-based, gas price agnostic - activity driven by production volumes and the need to move the gas
  • Gas production increasing primarily in shale plays, which require more compression and flexible compression
  • Midstream build-out still in “early innings” in many shale plays; compression grows alongside gathering and processing (“G&P”) expansions
  • Crude oil economics support unconventional production techniques made possible with compression
  • Long-lived Asset base: Compression units typically last for 40+ years, when properly maintained & 60% of the capital cost of a unit never wears out (average age of fleet is about 4 years old)
  • Liquidity: $1.1 billion in revolver credit and an extension of the maturity to 2020 (~600M available).
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. ~ British Prime Minister Winston Churchill (1874 – 1965)

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