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July 03, 2013 – Comments (25) | RELATED TICKERS: BBEPQ , LINEQ

Well it looks like there might be some spill over from this whole short attack on LINN.  Seems like they are throwing the baby out with the bath water.  Here's your chance to buy in at lower prices.  I made the case for BBEP here:

And so far to date that has played out the way I predicted.  I have been happily collecting my distributions every quarter since they reinstated and I don't see any reason why this should stop.  Another good article written here by TMF is:*

The one way to cut a short attack off at the knees is to buy those discounted shares and hold.

25 Comments – Post Your Own

#1) On July 04, 2013 at 4:20 AM, Valyooo (33.64) wrote:

What are your thoughts on LINE?  I own some and am worried about obligations....don't fully understand what the issue is

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#2) On July 04, 2013 at 6:57 AM, somrh (88.61) wrote:

With respect to LINE, if you haven't already read John Hempton's blog posts on it, at least read this. The thing that he claimed did a number on his short thesis was the merger which he claimed would improve their asset quality.


One observation and/or question (perhaps I'm mistaken here... I haven't really ventured off into MLPs) is that PV-10 figure. I think the idea behind is fine (obviously there's a lot of assumptions built into it so a lot ways to be wrong but that's the case with pretty much any valuation technique... I digress.)

If I'm understanding it correctly, PV-10 projects future revenues (based on proven oil reserves and current oil prices), subtracts off production expenses, etc to arrive at cash flows. They then discount this with a 10% discount rate to arrive at a value. 

What I'm not clear on is whether or not interest is subtracted. As far as I can tell, it is not subtracted. 

That's OK (in fact, I prefer it.) That means that the PV-10 figure is not an equity valuation but an enterprise valuation.

Doing a google search on "PV-10 enterprise value" shows up with a number of articles that seem to be using it that way. 

Why does this matter? As I pointed out here (and as Prof Damodaran did in more detail here) the following equation is relevant:

Equity = Enterprise Value - Debt + Non-Operating Assets

So per the 10-k (and the second article), BBEP's PV-10 (which I'm assuming is an estimate for EV) is $1.99B. The only two figures they claim to subtract are future development and production costs (iow, interest is not subtracted.. see page F-40 of the 10-k). Therefore to arrive at the equity portion of this we would need to factor in the debt and non-operating assets.

Per the most recent quarter, long-term debt came in at $840M. So that would need to be subtracted of from EV:

Equity = $1.99B - $840M + Non-Operating Assets

Assuming no non-operating assets (looks like cash is close to $0... you can tell me if they have some other assets), that would put equity at about $1.2B, which is less than the current market price. That would indicate that it's ovepriced by around 25% since the current market cap is around $1.5B.

And you still have to factor in that the PV-10 is not an exact science but depends on a variety of assumptions which may or may not pan out as desired.

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#3) On July 04, 2013 at 7:36 AM, somrh (88.61) wrote:

As a side note, regarding LINE, according to their 10-k, their PV-10 is around $6.073B (again, no indication they subtracted any interest so this should be an EV figure, not an equity figure).

Line has more than that in long-term debt!

The equity on LINE (unless there are a lot of non-operating assets of note) is like an ATM call option to the tune of $5.4B.

Perhaps, MLP's are BUY, BUY, BUY. These two don't fit the bill.

BBEP looks moderately overpriced.

LINE looks like trash, even after the 40% drop it's already taken. 

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#4) On July 04, 2013 at 1:00 PM, Valyooo (33.64) wrote:

Why does equity matter if the dividend steams are fine?

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#5) On July 04, 2013 at 3:53 PM, somrh (88.61) wrote:


How is the dividend stream fine if the underlying business (which supports that stream) isn't fine?

BBEP's dividend streams looks OK on the above analysis though it looks as though you may end up paying a premium for it. LINE's dividend stream is concerning to put it mildly.

The value of the equity is no different than the present value of the dividend stream so that estimate is relevant. Granted, these are all estimates (my estimates are using their PV-10 figures). 

And they may simply end up stiffing bondholders with the kind of dividends they have been paying out. But even with that, I would be surprised if the future stream of dividend payments were greater than the current market price.

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#6) On July 04, 2013 at 4:49 PM, awallejr (56.09) wrote:

I am no fan of PV-10 analysis.  I linked the TMF article for those who are. I listened to ATPG and how their PV-10 was over 6 Billion and can only get under $700 million now. 

Many stocks sell for way less than book value.  Think FB could fetch much money on a liquidation?  Some real estate, servers and other equipment. You are gambling on growing monetizing which may or may not work well.

What I look at is what does a company do. Will it still be in business years from now.  The quality of their management team. Dividends/distributions and are they covered for future growth.  And a few other metrics.

Had you bought BBEP in December of 2009 per my suggestion you paid $10.43 and have received distributions of $5.61.  Discounting any growth on reinvesting those distributions you now have a $15.47 stock with an adjusted cost of $4.82. In 3 years more, assuming they just continue paying current distributions, you will have an incalculable percentage rate of return since you will have received more than you paid.

Another thing about BBEP is their deal with Whiting.  They did it with cheap credit instead of diluting shareholders and it will be quickly accretive.  Another excellent TMF article is here:*

Right now you are now getting a 12% return, much of it nontaxable since it is a MLP.  Throw your money into Tbills if you hate volatility.

I do say the pipeline ones are the safer play, such as PVR which I suggested when it was 21 and now is 27.  Don't sell, it will the 30s eventually.

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#7) On July 04, 2013 at 4:50 PM, oldfashionedway (33.95) wrote:


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#8) On July 04, 2013 at 5:00 PM, awallejr (56.09) wrote:

And Val as for LINE I did suggest it back in 2009-10 but I sold out because it was too much of a nat gas play and I preferred oil and liquids.  Given a choice between them and BBEP I prefer BBEP.

I haven't really followed it after I sold out, though I did hear whispers about accounting issues before.  As I said elsewhere it is either a dangerous play or an opportunistic one.

But one thing I did notice about your stock holdings you mentioned in another thread, they tend to be too "Cramerish"  meaning the things he would tout.  Take it from a guy who listened to Cramer years ago only to get burned.  He is a churner, end of story.

He told people to buy Line what on June 21 and then tells people to sell on July 3 after it already was tanking?

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#9) On July 04, 2013 at 5:11 PM, awallejr (56.09) wrote:

As for VNR, they are all getting pulled down.  That is the nature of momentum.  So you have to take advantage of it.  If your goal is to grow and grow an income stream, dividends/distributions are more important than capital gains.  As long as you think that dividend is safe and you get a buying opportunity go for it.

You can still buy stocks to trade, options to play but as I have said over the years create a core income stream especially if you are young.

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#10) On July 04, 2013 at 5:53 PM, somrh (88.61) wrote:

FWIW, VNR has a PV-10 of just under $1.6B. And with $1B in debt...

They also give some clarification on how it's measured (see page 54 here):

Standardized Measure is the present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the SEC (using the 12-month average price as defined below) without giving effect to non-property related expenses such as selling, general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion, amortization and accretion and discounted using an annual discount rate of 10%. 

So it's basically like projecting gross profit over the life of the reserves and discounting those to the present. SG&A isn't even included. Interest, as I suspected, is also not included.

The SG&A factor is interesting because, for VNR, it represents almost 10% of gross profit (which means the PV-10 calculation should be adjusted by approximately 10%?).

Do they have any other assets not reflected in that calculation?

And I'm off. Happy fireworks day!

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#11) On July 05, 2013 at 2:15 AM, somrh (88.61) wrote:

Coming back to BBEP, here's a good article.

1) He correctly compares PV10 to enterprise value, not equity. 

2) He suggests that one could argue that a lower discount rate might be appropriate. 

I'm actually sympathetic to this. I think the discount rate should probably change as treasury rates change but also related to the stability/risk of the cash flows of the underlying assets (I have a model for this that's still in development... I should probably post it at some point.)

In any event, that would increase the estimated value of the firm.

3) The article also points out there my be some unproved reserves that they my already own that wouldn't be factored into the PV10. But here you would run into estimation problems.

I don't know much about the process of actually determining reserves but I'm guessing there's a lot of modeling and assumptions involved. Coming up with more reserves beyond that may be more suspect.

Either way, I'd be more comfortable paying only for the proved reserves and get any extrs for free. 

But I suppose one could argue that it's somewhere around fair valued. *shrug*

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#12) On July 05, 2013 at 2:32 AM, awallejr (56.09) wrote:

I do find it interesting that the link in #11 mentions the cessation of distributions years ago.  The REAL reason was as I suggested in my first link.  It was a clever way of screwing Quicksilver.  And it worked.  They are now gone.

However, the bottom line is if this is a legitimate company that can continue to grow.  Either you believe in management or you don't. Personally I believe in them and have profited substantially as a result. Listen to me or not but at current prices buy the sucker.  You are buying a company.  A company with assets.  A company that grows. A company that has grown its distributions for years now.


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#13) On July 05, 2013 at 11:59 AM, constructive (99.97) wrote:

I agree with somrh. Comparing PV10 to enterprise value isn't perfect, but it's a lot better than alternative. If you blindly buy yield, don't be surprised if you get dividend cuts, weak growth and dilution.

PSE was the MLP I thought was signficantly underpriced. My suspicions seem to be confirmed by PXD buying them. I guess NTI, MCEP, SXL, HCLP, TNH and UAN might be cheap as well.

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#14) On July 05, 2013 at 12:15 PM, constructive (99.97) wrote:

"Had you bought BBEP in December of 2009 per my suggestion you paid $10.43 and have received distributions of $5.61.  Discounting any growth on reinvesting those distributions you now have a $15.47 stock with an adjusted cost of $4.82. In 3 years more, assuming they just continue paying current distributions, you will have an incalculable percentage rate of return since you will have received more than you paid."

It's certainly possible to calculate a rate of return. You just have to use the correct formula.

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#15) On July 05, 2013 at 2:46 PM, awallejr (56.09) wrote:

I don't think anyone is arguing that you should buy yield blindly here.  But on the other hand I say don't buy PV-10 blindly.  I again point to ATPG as an example.

I have presented many reasons in support of this stock.  Today I sold December 15 $15 puts for $2 on BBEP.  I could have gotten a higher price but I was working and used a limit order.  

As for rate of return calculations I suppose it depends on how you view dividends.  If I bought a stock for $15 and I have received $16 in dividends and will continue to receive dividends in the foreseeable future personally I view that as free money. 


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#16) On July 06, 2013 at 6:49 PM, awallejr (56.09) wrote:

Also want to point out that BBEP CEO bought almost half a million dollars worth of the stock in the open market on 7/03, average price of $14.92.

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#17) On July 06, 2013 at 9:28 PM, HarryCaraysGhost (75.54) wrote:

Well you convinced me, made BBEP an outperform on Caps. Should be interesting to see how this plays out.

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#18) On July 07, 2013 at 2:37 AM, awallejr (56.09) wrote:

Oh Harry you won't lose on CAPs over time unless the S&P skyrockets.  But I have been right about XRX this year, PVR, BX, eventually ACAS (did say take profits) and I will be right here too over time.  BBEP is a solid company.  Buy it in real life.  I have. 

I do have a few more picks but I can't play them until after September. Reason why is I will have IXPL puts expiring then (10 contracts at 15 and 10 contracts at 17.50 so $32,500 committed) which would free up margin.

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#19) On July 07, 2013 at 2:47 AM, awallejr (56.09) wrote:

Puts meaning ones I sold to open. 

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#20) On July 09, 2013 at 5:39 PM, awallejr (56.09) wrote:

If anyone did listen to my Dec 15 puts suggestion, you might want to take profits since a 75% gain in a few days is something you don't want to lose.  I do think they will eventually expire worthless come December but there can always be volatility between now and then where you can jump in and out.

And if you bought the common just sit on it and collect the distributions.

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#21) On July 19, 2013 at 5:33 PM, awallejr (56.09) wrote:

Guess Forbes reads my blogs but they were a little late on this trade I suggested above:*

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#22) On August 01, 2013 at 2:44 PM, awallejr (56.09) wrote:

If you listened to my Dec 15 put play you might want to "buy to close" that position at least 1/2 to lock in a substantial profit.  You received $2 and can close the position for .40-.50. 

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#23) On August 26, 2013 at 12:36 AM, awallejr (56.09) wrote:

March 17.50 2014 puts looking good to sell.

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#24) On December 18, 2013 at 9:36 PM, awallejr (56.09) wrote:

Well BBEP December $15 puts expired worthless.

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#25) On December 18, 2013 at 9:37 PM, awallejr (56.09) wrote:

Well absent any major collapse in next 2 days.

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