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)
- 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.