Spraberry MLP S-1, likely this month, could provide near-term boost - Goldman Sachs - July 16, 2007
What's changed
We expect Pioneer (Neutral rated) to file its S-1 this month towards an initial public offering of units in a Master Limited Partnership for assets in the Spraberry field in the Permian Basin. We expect a second filing for a separate Raton Basin MLP towards yearend. Separately, we are revising our EPS estimates for Pioneer for 2007 and 2008 downward and are now below First Call consensus for 2Q 2007, to be reported on August 7.
Implications
While we believe Pioneer shares already assume some value for MLP upside, we believe the filing could be a positive catalyst both for Pioneer and for other small- and mid-cap E&Ps that have MLP-related upside. We believe the Spraberry field is one of the preeminent assets for an MLP, because of relatively low maintenance costs and multi-year drilling inventory.
Valuation
While we do not believe current MLP yields will be sustainable in the longer term, the percent of assets for which Pioneer and others receive cash proceeds does represent value creation, which we believe should be reflected in stock prices. Off of a $45 base, we see $6-$8 per share of upside for the Spraberry field and $3-$5 of upside for the Raton. This yields a $55 12-month DCF-based target price, representing 12% upside from current levels.
Key risks
Commodity price volatility, drilling results, cost pressures and the sustainability of capital flows and yields for MLPs are key risks.
Impact on related securities
We see Buy-rated Berry Petroleum and Buy-rated Forest Oil have attractive MLP-able assets that are not fully valued by the Street at present. |
