3 More MLPs Hit By Wall Street; Citi Analysts See Challenging Spring

Citi’s Faisel Khan said that upstream MLPs are likely to continue to face “an extremely challenging 2016 with low liquidity and high levels of debt.” He expects upstream MLPs to exit 1Q with an average of around 80 percent drawn on their bank credit facilities. A majority of the upstream MLPs have suspended both preferred and common distributions in order to preserve liquidity.

The crude oil price estimates have been reduced by an average of about 17 percent to $40 per barrel for 2016, $45 per barrel for 2017 and $47 per barrel for 2018. The natural gas price assumptions have been reduced by an average of around 16 percent to $2.12 per MMBtu for 2016, to $2.80 per MMBtu for 2017 and $2.85 per MMBtu for 2018.

Atlas Resource Partners: Chapter 11 Looming

Analyst Faisel Khan downgraded the rating for Atlas Resource Partners, L.P. ARP from Neutral to Sell, while reducing the price target from $3.00 to $0.25.

The partnership seems to be “running out of options to address leverage and liquidity concerns” and is likely to be forced to file for chapter 11 “either after the next round of borrowing base redetermination or post a potential breach of its debt covenants early next year,” Khan commented.

The partnership has drawn about 85 percent on its credit facility and a reduced borrowing base could be higher than 15 percent. The analyst wrote, “We would caution investors that the equity value could get completely wiped out if the partnership goes through a long and expensive chapter 11 restructuring process.”

EV Energy Partners

Khan downgraded the rating for EV Energy Partners, L.P. EVEP from Buy to Neutral, while reducing the price target from $4.50 to $2.00. He said that the partnership appears better positioned than peers to survive the challenging commodity price environment.

EV Energy Partners has sufficient liquidity to survive the next round of borrowing base redetermination and has a strong sponsor that may rescue the MLP. Khan added, however, that after incorporating the reduced commodity price assumptions, “we do not feel comfortable recommending the partnership due to the high leverage and a potential breach of debt covenants next year.”

The analyst added that a suspension of its distribution was likely.

Memorial Production Partners

Citi downgraded the rating for Memorial Production Partners LP MEMP from Buy to Neutral, while reducing the price target from $4.50 to $2.50. Khan believes that the next round of borrowing base redetermination would limit the partnership’s ability to execute on its strategy.

The partnership is drawn more than 70 percent on its credit facility, and a potential borrowing base cut could “wipe out the entire liquidity,” the analyst commented.

Although the partnership has taken steps to address liquidity by reducing its distribution and trimming its capital budget for 2016, and plans to sell non-core assets in the Permian and Rockies, “we do not feel comfortable recommending upstream MLPs before the next round of borrowing base redetermination,” Khan explained. He added that there was no clear path to manageable leverage and Memorial Production Partners would be “at the mercy of banks and commodity markets in the near to medium term.”