From the October 2012 issue of Research Magazine • Subscribe!

Warming Up

Energy firms and investors stand to benefit from any improvements in the domestic and global economy, equity analysts say.

Selman Akyol
Stifel Nicolaus
314-342-2158
akyols@stifel.com

Atlas Pipeline Partners (APL) announced 2Q12 results, reporting distributable cash flow of $32.8 million versus $29.9 million the prior year and $35.2 million in 2Q11. Recurring adjusted earnings before interest, taxes, depreciation and amortization (or EBITDA) totaled $49.0 million compared to $43.5 million the prior year and $51.1 million in 1Q12. 

As previously announced, the partnership left its quarterly distribution per unit (DPU) at $0.56, unchanged from 1Q but up from $0.47 the prior year.

Processed volumes continue to increase; in 2Q, they increased 8% from 1Q to 682 million cubic feet per day (MMcf/d). All plants are currently running at capacity, with the exception of its most recent edition at Velma. It is running at two-thirds capacity or 40 MMcf/d. Furthermore, volumes bypassing its Western Oklahoma plant total 115 MMcf/d. 

Capital expenditure for the year continues to be robust at $320 million to $350 million and not only includes the recently added Velma plant, the 200 MMcf plant in Western Oklahoma (3Q), but down payments on the 200 MMcf/day plant in West Texas due to come online in 1Q13. The incremental capacity should lead to distributable cash flow growth.

As of June 30, APL had a total of $709 million of long-term debt compared to the prior quarter of $609 million of debt. Debt to total capital was approximately 36%. The partnership is projected to invest approximately $320 million to $350 million in FY12 as it completes its previously announced capital projects and has incurred $175 million year to date. The partnership invested $81 million in growth projects during 2Q. 

APL should be able to continue to invest in its business without accessing the capital markets through 2012, as the partnership has total liquidity of $270 million, including cash on hand and capacity on its revolving credit facility.

 Paul Forward, CFA
Stifel Nicolaus
443-224-1379
pforward@stifel.com 

Natural Resource Partners’ (NRP) coal royalty revenues of $62.9 million were in line with our estimate of $63.1 million and above 1Q12 coal royalties of $60.0 million. Royalty revenues per ton averaged $5.25/ton in 2Q12 versus our estimate of $5.06/ton and 1Q12’s average of $4.95/ton. NRP benefited from strong performance in Southern Appalachia, driven by Cliffs Natural Resources’ Oak Grove longwall mine, which posted its strongest quarterly output since 2Q03.

Revenues other than coal royalties of $27.8 million were well ahead of our $22.8 million estimate. The main difference was $3.8 million in revenues from the sale of a right of way to the West Virginia Department of Highways for highway construction; cash from this sale will be received in 3Q12. Aggregates production in 2Q12 was 1.4 million tons vs. our estimate of 1.4 million tons, and aggregates royalty revenues of $1.7 million were approximately in line with our estimate of $1.8 million.

During 2Q12, NRP invested $26.7 million in acquisitions of oil and gas reserves located in Oklahoma and funded the final payment of $0.5 million associated with remaining obligations on a previously announced acquisition. 

NRP ended 2Q12 with $122.0 million cash on its balance sheet and $227 million available on its credit facility ($73 million outstanding). NRP will fund the final payment on its acquisition of coal reserves at the Hillsboro mine in the Illinois Basin for $40 million during 3Q12. The Hillsboro longwall, operated by the Cline Group, is expected to begin operation in August and should help increase NRP’s volumes in this region.

Amir Arif
Stifel Nicolaus
201-778-1975
arifa@stifel.com

Following [Penn Virginia’s Aug. 1 earnings] release, we have revised our 2012 CFPS/EPS (cash flow per share/earnings per share) estimates from $3.87/($1.00) to $3.89/($0.75). 

Six new Eagle Ford wells were completed during 2Q and are producing, with an average peak gross daily production rate of 884 barrels of oil equivalent per day (boe/d), trailing the average initial production rate of 1,001 boe/d for PVA’s initial 44 wells in the play. A third rig will be added to the play during 3Q. PVA has spud (started to drill) its initial test well in its Viola Lime prospect in Jefferson County, Okla., with results expected during 3Q. PVA holds 9,600 acres prospective to the play.

PVA reported 2Q12 CFPS/EPS of $0.98/($0.23), ahead of our estimates of $0.94/($0.33) and the Street at $0.90/($0.28), with the beat driven by higher liquids production, stronger oil prices, and a production taxes rebate. 2Q production averaged 19.6 million barrels oil equivalent/day (mboe/d), in line with our estimate of 19.6 mboe/d, but with a higher percent liquids cut (45% versus 43%). Operating costs (excluding production taxes) increased 4.5% quarter-over-quarter to $1.28/mcfe (thousand cubic feet equivalent), consistent with growing oil volumes.

Jason Gammel
Macquarie
+44-20-3037-4085 
jason.gammel@macquarie.com

Royal Dutch Shell’s (RDS-A, RDS-B) 2Q11 clean net income of US$6.4 billion was 1% light on consensus and 6% below our estimate. Upstream earnings of US$5.4 billion were essentially in line with our forecast (and 2% ahead of consensus). While 2Q11 production of 3,046 thousand barrel oil per day equivalent (kboepd) was down 2% year-over-year, realizations (both liquids and gas) were better than expected and clean net income of US$1.6 billion in the Integrated Gas division was up 111% year over year. Upstream net income per barrel of US$19.6/barrel oil equivalent (boe) in 2Q11 was marginally ahead of our estimates, an increase of approximately 33% on 1Q11. 

While this strong upstream result was aided by higher trading contributions, we take encouragement from signs that the major projects in Shell’s upstream portfolio are progressing to plan. In particular, we note LNG sales volumes of 4.81 metric tons, reflecting the successful ramp-up of Qatargas 4 during the quarter. 

Given our underlying macro assumptions and expectations for a tightening LNG market in Asia-Pacific, we believe similar margins are sustainable over the remainder of 2011 (and beyond). This strong upstream result is especially stark in contrast to BP’s near-term operational issues in the Gulf of Mexico.

Clean net income in Oil Products of US$551 million was materially below consensus of US$900 million and our estimate of US$960 million. Shell highlighted especially weak refining margins in Europe and Asia combined with lower volumes due to planned and unplanned maintenance. Group refinery intake of 2.8 million barrels per day (mmb/d) in 2Q11 was down 14% year over year, while refined volumes in Europe were down 20% year over year to 1.1 mmb/d. 

The weak result in oil products was partially offset by clean net income of US$530 million in chemicals, which was 24% higher than our estimate. Despite ongoing margin pressures in refining, management stressed that they now believe their U.S. chemicals business is well placed to continue delivering the strong results reported over the last three quarters.

Michael Gaugler
Brean Murray Carret & Co. 
212-702-6539 
Michael.Gaugler@bmur.com

Looking forward, our view is that [Southwest Gas (SWX)] can rectify its issues at [subsidiary] NPL in a timely manner, and that it will benefit from new rates in Nevada and lower interest expenses from a recent refinancing, all of which should allow the company to make our 2013 earnings projection. We’re maintaining our Buy rating and $49 target price, based on the shares attaining a P/E level of 17 times our 2013 EPS estimate of $2.87. Our risks to target include regulatory environment, weather impacts, inherent operational risks, and proposed climate change legislation.

SWX expects its General Rate Case filed in April of this year to be wrapped up in October, with new rates taking effect in November of this year. 

SWX is requesting $25.4 million in Southern Nevada and $1.5 million in Northern Nevada, with an ROE of 10.65% and a common equity ratio of 53.6%. It also seeks to continue the revenue decoupling mechanism currently in place.

Taking all of the aforementioned into account, we expect the shares to be range-bound ($41-$45) at least until the 3Q12 results are released in mid-November, at which time management can provide a solid update on NPL with several months under new leadership. At that point an opportunity exists to lower the risk profile, and focus solidly on 2013 for valuation purposes, which we’re doing now. We’re maintaining our Buy rating and $49 target price, based on the shares attaining a P/E level of 17 times our 2013 EPS estimate of $2.87.

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