Natural gas prices are low, MLP yields are high. Throw in a spin-off and you get Atlas Resource partners.
Background:
Atlas Energy (ATLS) is a MLP with two subsidiaries, Atlas Pipeline (APL) and the newly spun off Atlas Resource Partners. The old Atlas Energy MLP was sold to Chevron in November of 2011 for 3.2B in cash. The company is engaged in US natural gas and oil plays.
ARP was spun off March 15, 2012. ATLS retained 20.96M common units, 2% general partner interest and all incentive rights. They have over 8,600 wells operating currently and ARP recently bought 277 bcfe of proven reserves from Carrizo (CRZO) for $190M. They expect 2013 pro-forma distributions to be $2.25-2.40 representing a yield around 8% at today's share prices.
Properties:
Currently ARP has 8,500 drilled wells in Appalachia that produce ~30Mmcf/d, 150 wells in Indiana, 450 wells in Tennessee, and hopes of drilling over 200 wells in Colorado. The recent Carrizo acquisition gives them access to an additional 198 wells and 277 Bcfe of reserves. Carrizo sold these properties to pay off revolving debt and to fund expenditures in their Eagle Ford play. It also sounds like they wanted to focus more on liquids. As many E&P companies are.
While I can only speculate, it seems that they did get a good deal. At $4,219 per Mcfed ($23,204 per BOE/d) and 0.69/Mcfe proven reserves this reflects favorably compared to other public companies and previous transactions. As a comparison one can buy Gale Force Petroleum at outright at 11M and get 275 BOE/d, with plans of getting 350 soon. While obviously not a perfect comparison for multiple reasons it works out to $40,000/BOE/d.
Management:
Jonathan Cohen is the Chairman of the Board and Edward Cohen is their CEO. The father and son team has been in the oil industry for awhile and did quite well with old Atlas. From the time of the IPO to the acquisition shares grew over 800%. I loved Edward's quote from CNBC just a few weeks ago "the people who are busily selling, we are busily buying. When the blood is running in the street that's a good time to be buying." I'm not sure there's blood in the streets due to low natural gas prices, but he is in Texas, so who knows.
COO is Matthew Jones. He too has been with Atlas for since the IPO, CFO since 2005.
Valuation:
I'm new to MLP land and thus I revert back to understanding the business, it's prospects, it's management and it's downside. Right now with natural gas in the dumps and oil sky high it seems every company is doing what is expected: dumping natural gas and spending heavily on liquid rich fields.
The lack of capital spending on natural gas will eventually catch up and Mr. Smith's invisible force will be upon us. When? I have no idea and pretty much any forecast besides "never" will probably be too soon. With the proposed EPA restrictions on more polluting coal plants, companies like Huntsman and Dow bringing production back to the US due to low natural gas prices, and other economic influences prices should recover.
Well capitalized and more importantly, well managed, natural gas companies should emerge with relative earning power if natural gas prices recover.
From their Form-10 they believe they will generate AEBITDA of $61.5M for the 12 months ending 12/2012, AEBITDA needs to be 52.9M to pay the minimum distribution. They have maintenance capex of 9.2M and interest expense of 900K, therefore FCF will be around 51M in 2012.
This was before the Carrizo acquisition and thus FCF will be higher. I'll consider distributions a reasonable proxy for FCF. With the expected distribution in 2013 2.25-2.40 we're given a FCF yield of 8.0%-8.6%.
The future predictability of their cash flows is obviously dependent on two variables, the price of the commodity and the amount of said commodity they can produce. They have hedged well, as shown in their presentation and noted in their filings. They indicate they have upside potential if prices climb. How much is up for debate, they estimate they have 90% of natural gas production hedged next year.
Conclusion:
I believe that ARP is a well managed company. Unfortunately I don't believe it is worth an investment right now. No number of models lead me to 20% returns annually. The bottom line is that this is a company selling at roughly 12X distribution, a rough estimate of FCF. While great if I wanted long term steady income, I will pass for now. I will continue to investigate small natural gas plays hoping to find the diamond in the rough. This spin-off has not created an opportunity in this case.
Wednesday, March 28, 2012
Monday, March 12, 2012
Paulson Capital Corp (PLCC)
PLCC is a boutique broker dealer and boutique investment firm headquartered in Portland, OR. Founded several decades ago by Chester Paulson they specialize in small and nano-cap IPOs and charge commissions for brokerage trading. Mr. Paulson and his family own a majority of shares, Chester himself owns 2.11M shares (~36% of shares outstanding).
Recent Events:
The company is a net-net and would likely make Dr. Graham himself an investor as they are selling at 48% of stated net-net value. Reading through transcripts this is nothing new and they have sold below liquidation value for many years.
It was announced just a few weeks ago that the brokerage side of the company was sold to JHS Capital Advisors. Details on the sale are currently scarce and the sale price is unknown, thus offering potential market inefficiency. A few notes should be made as this is not Mr. Market acting completely irrationally prior to the announcement.
First, $5.5M of the $16.1M of total assets exist as receivables from clearing organizations. While regarded as "very liquid" and a "good place to put cash" (Q2 2008 conference call) it is likely that all of this will be going to JHS. Of course if that is true, accounts payable ($366K) will be going too.
Second, their trading and investment securities on the balance sheet consist of companies that are not very liquid (for the most part) and for the most part awful companies(from a value perspective). Of all the 13G's looked through, the largest position was in S&W Seed. As of 3/9/2012 PLCC held 420,000 shares worth about $2.486M. It is safe to say that a discount should be applied to these assets as it will be difficult to recognize them at easily trackedprices. An additional $3.9M of investments are made in 5 privately held companies. How accurately audited these are is anyone's guess.
This point shows why it is important to read the filings deeply because while most financial sites would consider this a net-net, I do not. Their investments are illiquid and hard to value, definitely not cash or cash equivalents. In my eyes the only liquid position is S&W Seed, making real net-net value around
Third, while insiders own a significant stake in the company it doesn't necessarily mean they are completely aligned with outside shareholders. Chester and his wife took home around $360K last year, their son-in-law and CEO took home $261K. This is a family operation and Chester's son, Charles, heads proprietary trading and advises the firm on market dynamics and trends. His understanding of market dynamics and trends resulted in losses in investment income and/or trading for 3 out of the past 4 years. Perhaps the firm should take a contrarian stance.
While I don't consider the pay egregious, they probably have more invested outside of the company than with the company. I have no clue if this is true or not though.
What would JHS buy them at?
This is a tough one but I believe we can come to a comfortable range of valuations that JHS went through.
We know the firm as a whole is losing money and it's pretty easy to see why. Commissions and salaries totaled $14.8M in 2011 compared to total revenue of $15.4M, $14.6M was related to commissions (the unit being sold). The company expects there to be a huge drop in employees with the remaining Paulson Co. Going through the list of people at the firm it seems likely that Chester Paulson (184K salary), Murray Smith (salary unknown), Jacqueline Paulson ($184K salary), Trent Davis ($261K salary), and Lorraine Maxfield ($116K salary) will be staying behind. JHS likely assumes that they can take all of their salaries out and will then try to get rid of duplicative overhead.
For the sake of simplicity I will take the $14.8M in commission and back out their salaries, which come to $867K. With some rounding ($67K lopped off as a margin of safety) salaries and commissions for the unit being sold will total $14M. This is relative to $14.6M of commissions generated (with around $1B in AUM that's one healthy management fee, perhaps I'll start a hedge fund in Oregon). This very simple exercise says that JHS will probably see $600K of profit just through elimination of the family salaries.
I believe this to be conservative though as I'm sure there will be several people axed in this process on both ends. JHS likely will see numerous redundancies and for a unit that generates 14M in revenue every 100K plus benefits will quickly add up. Also, JHS charges fees for their RBC platform that range from 0.5%-3%. When all is said and done we can safely say: pretty much the same as Paulson.
How much will they are willing to pay is a grey area though. Pick your chosen multiple off my conservative estimate. Do they expect to see better profits? Do they expect growth? Will there be an equal exchange for assets existing? I have no idea.
Gut level says they pay 6-10X of their expected first year profits. Therefore my ruler says 3.96-6.6M plus some small asset purchases at book price. Exactly what those are though is unknown to me. How receivables from RBC are treated is another big question mark. It isn't clear to me that these represent apples to apples receivables depending on collateral requirements.
So for a quick valuation, that I believe is conservative, we can do a sum of the parts. Their trading firm and investment side is pretty bad, I will value the business at zero and say it is only worth cash and "short term investments" which as discussed above are small caps and numerous warrants. So here goes my inputs...
Cash as is at 292K
Investment securities: 20% discount to 10K value despite the run up in equities (just to be conservative) = 6.1M
It is unclear to me what other assets will be considered part of the brokerage firm so I will value the remainder of the assets at zero (again to be conservative).
Liabilities are difficult to assign so to be conservative I will assume all liabilities stay with Paulson Co. -1.748M
I will assume JHS fought a hard battle and wants to buy the brokerage firm at 7X conservative earnings or $4.6M.
Conservative value = 292K+6.1M+4.6M-1.748M = $9.2M.
I'm sure there will be plenty of bonuses after the acquisition, so lets call it $9.0M. This compares to a market cap as of 3/9/2012 of 5.77M, 63% margin of safety based off of my conservative value. If we back out 3.9M (say the private company investments are worthless) PLCC is priced roughly fairly(9.0-3.9=5.1M).
I don't think PLCC should trade at book value. To put it bluntly, they are poor allocators of capital and there is no reason to believe that they could liquidate tomorrow and actually get book values. No position. All figures not linked from public filings.
4/17/2012: Well a very small transfer of business profits, and now the transaction is done I'm looking forward to reading the next SEC report that gives audited financials. For a total of $1.6M in cash from JHS, they'll have $1.9M in cash (at most, I'm sure there will be some congratulatory bonuses for selling a business with $14M in revenue for $1.6M...).
So going to my quick valuation we have cash of $1.9M, and equities worth around $6.1M (old data I know) and liabilities of $1.748M. I'm not sure whether or not to add back the receivables, but I think I will this time to get a high estimate. So 1.9+6.1+5.5-1.748 =11.75 (6.25M w/o receivables FWIW). Some of these liabilities will probably drop, since compensation expenses were included in the merger. Regardless it's pretty damn hard to come up with a fair value, especially a fair value that shareholders will see. Paulson is now a business with $1.3M in revenue paying salaries of at least $867K. Throw in another $200K for other general and administrative expenses and we're basically at breakeven.
Recent Events:
The company is a net-net and would likely make Dr. Graham himself an investor as they are selling at 48% of stated net-net value. Reading through transcripts this is nothing new and they have sold below liquidation value for many years.
It was announced just a few weeks ago that the brokerage side of the company was sold to JHS Capital Advisors. Details on the sale are currently scarce and the sale price is unknown, thus offering potential market inefficiency. A few notes should be made as this is not Mr. Market acting completely irrationally prior to the announcement.
First, $5.5M of the $16.1M of total assets exist as receivables from clearing organizations. While regarded as "very liquid" and a "good place to put cash" (Q2 2008 conference call) it is likely that all of this will be going to JHS. Of course if that is true, accounts payable ($366K) will be going too.
Second, their trading and investment securities on the balance sheet consist of companies that are not very liquid (for the most part) and for the most part awful companies(from a value perspective). Of all the 13G's looked through, the largest position was in S&W Seed. As of 3/9/2012 PLCC held 420,000 shares worth about $2.486M. It is safe to say that a discount should be applied to these assets as it will be difficult to recognize them at easily trackedprices. An additional $3.9M of investments are made in 5 privately held companies. How accurately audited these are is anyone's guess.
This point shows why it is important to read the filings deeply because while most financial sites would consider this a net-net, I do not. Their investments are illiquid and hard to value, definitely not cash or cash equivalents. In my eyes the only liquid position is S&W Seed, making real net-net value around
Third, while insiders own a significant stake in the company it doesn't necessarily mean they are completely aligned with outside shareholders. Chester and his wife took home around $360K last year, their son-in-law and CEO took home $261K. This is a family operation and Chester's son, Charles, heads proprietary trading and advises the firm on market dynamics and trends. His understanding of market dynamics and trends resulted in losses in investment income and/or trading for 3 out of the past 4 years. Perhaps the firm should take a contrarian stance.
While I don't consider the pay egregious, they probably have more invested outside of the company than with the company. I have no clue if this is true or not though.
What would JHS buy them at?
This is a tough one but I believe we can come to a comfortable range of valuations that JHS went through.
We know the firm as a whole is losing money and it's pretty easy to see why. Commissions and salaries totaled $14.8M in 2011 compared to total revenue of $15.4M, $14.6M was related to commissions (the unit being sold). The company expects there to be a huge drop in employees with the remaining Paulson Co. Going through the list of people at the firm it seems likely that Chester Paulson (184K salary), Murray Smith (salary unknown), Jacqueline Paulson ($184K salary), Trent Davis ($261K salary), and Lorraine Maxfield ($116K salary) will be staying behind. JHS likely assumes that they can take all of their salaries out and will then try to get rid of duplicative overhead.
For the sake of simplicity I will take the $14.8M in commission and back out their salaries, which come to $867K. With some rounding ($67K lopped off as a margin of safety) salaries and commissions for the unit being sold will total $14M. This is relative to $14.6M of commissions generated (with around $1B in AUM that's one healthy management fee, perhaps I'll start a hedge fund in Oregon). This very simple exercise says that JHS will probably see $600K of profit just through elimination of the family salaries.
I believe this to be conservative though as I'm sure there will be several people axed in this process on both ends. JHS likely will see numerous redundancies and for a unit that generates 14M in revenue every 100K plus benefits will quickly add up. Also, JHS charges fees for their RBC platform that range from 0.5%-3%. When all is said and done we can safely say: pretty much the same as Paulson.
How much will they are willing to pay is a grey area though. Pick your chosen multiple off my conservative estimate. Do they expect to see better profits? Do they expect growth? Will there be an equal exchange for assets existing? I have no idea.
Gut level says they pay 6-10X of their expected first year profits. Therefore my ruler says 3.96-6.6M plus some small asset purchases at book price. Exactly what those are though is unknown to me. How receivables from RBC are treated is another big question mark. It isn't clear to me that these represent apples to apples receivables depending on collateral requirements.
So for a quick valuation, that I believe is conservative, we can do a sum of the parts. Their trading firm and investment side is pretty bad, I will value the business at zero and say it is only worth cash and "short term investments" which as discussed above are small caps and numerous warrants. So here goes my inputs...
Cash as is at 292K
Investment securities: 20% discount to 10K value despite the run up in equities (just to be conservative) = 6.1M
It is unclear to me what other assets will be considered part of the brokerage firm so I will value the remainder of the assets at zero (again to be conservative).
Liabilities are difficult to assign so to be conservative I will assume all liabilities stay with Paulson Co. -1.748M
I will assume JHS fought a hard battle and wants to buy the brokerage firm at 7X conservative earnings or $4.6M.
Conservative value = 292K+6.1M+4.6M-1.748M = $9.2M.
I'm sure there will be plenty of bonuses after the acquisition, so lets call it $9.0M. This compares to a market cap as of 3/9/2012 of 5.77M, 63% margin of safety based off of my conservative value. If we back out 3.9M (say the private company investments are worthless) PLCC is priced roughly fairly(9.0-3.9=5.1M).
I don't think PLCC should trade at book value. To put it bluntly, they are poor allocators of capital and there is no reason to believe that they could liquidate tomorrow and actually get book values. No position. All figures not linked from public filings.
4/17/2012: Well a very small transfer of business profits, and now the transaction is done I'm looking forward to reading the next SEC report that gives audited financials. For a total of $1.6M in cash from JHS, they'll have $1.9M in cash (at most, I'm sure there will be some congratulatory bonuses for selling a business with $14M in revenue for $1.6M...).
So going to my quick valuation we have cash of $1.9M, and equities worth around $6.1M (old data I know) and liabilities of $1.748M. I'm not sure whether or not to add back the receivables, but I think I will this time to get a high estimate. So 1.9+6.1+5.5-1.748 =11.75 (6.25M w/o receivables FWIW). Some of these liabilities will probably drop, since compensation expenses were included in the merger. Regardless it's pretty damn hard to come up with a fair value, especially a fair value that shareholders will see. Paulson is now a business with $1.3M in revenue paying salaries of at least $867K. Throw in another $200K for other general and administrative expenses and we're basically at breakeven.
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