Stock forum

Post edited 9:51 pm – March 22, 2010 by sdev

Zehua,

CEP is a partnership. In a partnership structure, income of the corporation flows through to the owners and is taxed once. The fact that the partnership is not paying the income the partnership declares to the partners doesn't change the fact that you owe the IRS your share of the profits. 

With regards to your valuation…Jae's spreadsheets are great I'm sure (haven't purchased but just might have to just to cut down on the amount of time I waste by not using it), but you can't just plug in complicated companies like this one and depend on that value. Their hedge accounting causes wild swings in their reported earnings. To get an idea of a free cash flow input, you have to look at their proprietary "adjusted ebitda" numbers, and adjust them accordingly. 

Overall, I would classify this as a event driven/special situations investment with the events being:

* Resumption of div

* Resumption of capex

* Most importantly, recovery in nat gas prices

You get 4 years for prices to recover, but it's like owning an option thats decaying over that time (unless someone wants their assets and buys them out).

Post edited 10:22 pm – March 21, 2010 by zehua

zehua said:

sdev said:

Zehua,

I am not an OSV spreadsheet owner but I would advise the following. Be careful in just using the spreadsheet alone. CEP's financials are somewhat complicated as their hedges are marked to market each quarter and that causes large swings in gaap earnings. In addition, the PPE is a topic of debate as it is directly correlated to the value of natural gas. Intrinsic value at $29 seems a little high but it probably is substantially higher than the current market value.

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In the most recent 10-K, Risk factors section, I found the following, which sounds pretty odd to me. I have never heard that commom stock holders need to pay their share of the company's income tax.

Unitholders may be required to pay taxes on income from us even if they do not receive any cash distributions from us.

Unitholders are required to pay federal income taxes and, in some cases, state and local income taxes, on their share of our taxable income, whether or not they receive cash distributions from us. Generally, should we generate taxable income for a particular tax year and not pay any cash distributions, our unitholders will be required to pay the actual tax liability that results from their share of such taxable income even though they received no cash distributions from us.

On May 15, 2009, we paid a cash distribution of $0.13 on each common unit (or Class B) and Class A unit. If we generate taxable income for the 2009 tax year, our unitholders who received that cash distribution and any unitholders who purchase or purchased common units after the record date for such distribution may not receive cash distributions from us during 2009 sufficient to pay the actual tax liability that results from their share of such 2009 taxable income. Additionally, based on our 2010 business plan and forecast, we do not currently anticipate resuming a cash distribution in 2010 and we anticipate making limited maintenance capital expenditures. If we generate taxable income for the 2010 tax year, our unitholders may not receive cash distributions from us during 2010 in an amount sufficient to pay the actual tax liability that results from their share of such 2010 taxable income.

Jae Jun, would you mind taking a look at this company please? It doesn't sound like a company. I haven't heard of any company whose shareholders need to pay the company's income tax.

The insiders have sizable purchases recently, including their CFO.

I am wondering if this is not a company, can we analyze it as a stock? The reproduction cost is $29 per share. DCF is $46. Of course the DCF valuation is too high because it seems like they don't pay income tax, but ask their shareholders to pay tax for them, but even with a tax rate of 50%, the DCF valuation would be $22.

sdev said:

Zehua,

I am not an OSV spreadsheet owner but I would advise the following. Be careful in just using the spreadsheet alone. CEP's financials are somewhat complicated as their hedges are marked to market each quarter and that causes large swings in gaap earnings. In addition, the PPE is a topic of debate as it is directly correlated to the value of natural gas. Intrinsic value at $29 seems a little high but it probably is substantially higher than the current market value.

Thank you sdev. I though the PPE is mostly the value of the pipelines? I didn't realize it is the value of the gas itself. They have huge depreciations every quarter, and that makes the FCF pretty good even though the EPS is negative. I am still confused about the EPV for this company, as it seems to be a bit too low from the spreadsheet.

Hi Jae,

    I have some difficulty getting the current EPV valuation for this company. First of all, in your spreadsheet, the PPE is about 670M instead of 5M. Correcting that raises the reproduction cost to $29, which is consistent with the DCF valuation. However, The EPV is a negative $36. In your spreadsheet you wrote a note that the default D&A to be added back is 20%. Why is that instead of 100%? I am reading through the book 'value investing' again to try to have an idea. However, Even if I set D&A to 100%, it is still a minus $5. I believe there must be something else that is going on wrong. The EPV couldn't be some far away from DCF. Could you please help me with that?

Thanks!

Zehua