• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

CLICK FOR FULL REPORT: Just How Understated are E&P MLPs' Maintenance CapEx Figures?

Companies in this Analysis:

Atlas Resource Partners (ARP)

BreitBurn Energy Partners (BBEP)

EV Energy Partners (EVEP)

Legacy Reserves (LGCY)

LINN Energy (LINE, LNCO)

QR Energy (QRE)

Vanguard Natural Resources (VNR)

Summary Points

  • In our view, understated maintenance CapEx (and overstated DCF) is endemic among the upstream MLPs.
  • VNR strikes us as especially aggressive, because they only replaced 17% of produced reserves with the drill bit in 2013, but did not include any capital spent on acquired PDs in maintenance CapEx.  We calculate that VNR’s maintenance CapEx should have been ~5x higher than what it was in 2013, which would've reduced VNR’s reported DCF to below $0.
  • Understated maintenance CapEx is not a free lunch.  While it boosts the distribution in the near-term, it’s a long-term headwind, as the MLP needs to raise additional debt and equity merely to sustain that distribution.
  • This is one important non-GAAP accounting issue with respect to the E&P MLPs, but not the only one.  Other issues that we often see include aggressive hedge accounting (like adding back the cost basis of commodity derivatives to DCF); adding back unit-based compensation to DCF; adding back non-cash interest expense to DCF; adding back acquisition-related G&A to DCF; and more.
  • We remain negative on the upstream MLPs.  Aggressive non-GAAP accounting, particularly with respect to maintenance CapEx, is a serious concern.  Valuations are difficult to justify on any metric other than reported DCF.

Kevin Kaiser

Managing Director