Two master limited partnerships began trading publicly this month following initial public offerings. The crude royalties harvester with a modest yield proved much more popular than the coal miner with a decent one.
Foresight Energy Partners (NYSE: FELP) is a coal producer operating four underground mining complexes in the Illinois Basin. The partnership was formed in 2006 to develop and operate the Illinois mining assets of the Cline Group, a prominent mine developer. The $350 million IPO represented a 13.5 percent limited partner interest, putting the total market capitalization at $2.6 billion. The partnership has $1.3 billion of debt, giving it an enterprise value (EV) of $3.9 billion. The Cline Group owns 70 percent of the general partner, while private equity group Riverstone owns the other 30 percent.
Foresight Energy Partners is one of the largest owners of coal reserves in the US, and claims to be the lowest cost and highest margin domestic thermal coal producer. At 2014 production levels, the partnership's more than 3 billion tons of coal reserves are equivalent to 125 years of production. FELP produced 18 million tons of coal in 2013, and expects to produce 24.1 million tons in the 12 months ending June 30, 2015.
FELP's reserves and mines are located near multiple rail and river transportation access points, and it owns a 25 million ton per year barge loading river terminal on the Ohio River. It also has access to Gulf of Mexico terminal capacity of 12 million tons per year via contracts.
The IPO filings projected $412.9 million in EBITDA over next 12 months, giving the partnership an EV/EBITDA multiple of 8.5x. The partnership projects a minimum quarterly distribution of $0.3375, putting the annual yield at 6.75 percent based on the $20 targeted IPO price.
Foresight Energy Partners debuted on the New York Stock Exchange on June 18, and units traded down 4 percent followin! g the IPO. While some may question the wisdom of a new coal MLP given the general outlook for coal in the US, the coverage ratio is projected to be a conservative 1.3x for the next 12 months. The projected yield has risen to 6.9 percent based on Friday's close of $19.57.
Viper Energy Partners (NASDAQ: VNOM) also debuted on June 18, but saw much stronger demand. VNOM is a spinoff from one of the hottest independent oil and gas producers in the Permian Basin, Diamondback Energy (NASDAQ: FANG). Since its own IPO in October 2012, Diamondback Energy has rallied more than 400 percent, and its market capitalization has grown to $4.6 billion.
Viper Energy Partners owns mineral rights on 14,804 acres in the Permian Basin in West Texas, with an average 21 percent royalty interest on the oil and gas production. These mineral rights are leased to working interest owners who bear the costs of operation and development. Viper Energy Partners becomes the first US-listed partnership to rely on royalty payments, and it plans to grow distributions by acquiring additional mineral rights in the future.
Viper Energy Partners had scheduled the $100 million IPO at a price range midpoint of $20. The IPO represented 7 percent of the limited partner interest, with Diamondback Energy owning the other 93 percent, and the $20 share price would have valued the entire partnership at $1.5 billion. But demand proved extremely strong, and units priced at $26, then jumped to $34 during the first morning of trading.
The IPO filings projected $83.8 million in EBITDA over next 12 months, giving the partnership an EV/EBITDA multiple of 18.2x. The partnership expects to distribute $1.0994/unit over the next 12 months, putting the coverage ratio at 1.0x with an annual yield at 5.50 percent based on the $20 target price. However, with the unit price closing Friday at $33.99, the projected yield has dropped to 3.2 percent.
Given the commodity risk associated with Viper Energy Partners' business model and the ! now paltr! y 3.2 percent yield, this security could prove quite poisonous should commodity prices fall or interest rates rise.
(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)
No comments:
Post a Comment