MLP S-1 filed with valuation higher than expected July 26, 2007 Goldman Sachs
News
Pioneer filed its S-1 for the company’s Spraberry Master Limited Partnership on July 26. The company expects proceeds of about $250 million from a 44% interest in the MLP to be sold to investors. With a market capitalization of about $560 million, the $34 million in initial planned distribution represents a 6.0% yield. The MLP will have 150 Bcfe of almost entirely proved developed reserves at Spraberry, and the expected valuation represents about $3.74 per Mcfe.
Analysis
The reserve valuation is greater than our expectation for a $2.34 per Mcfe and greater than the $1.20 per Mcfe we assume for proved developed reserves in our base case net asset value for Pioneer as a corporation. We have highlighted that the Spraberry field is one of the most attractive for value creation as an MLP, even assuming higher yields and lower commodity prices. Our 12-month discounted cash flow based target price for Pioneer of $55 per share includes $10 per share of MLP-related upside, led by Spraberry. Key risks include commodity price and interest rate volatility, drilling results, cost pressures and regulatory pronouncements. We expect Pioneer to provide important information on the tax implications to the parent from the sale of assets to the MLP, and we believe the company could introduce a tax structure that may surprise the Street to the upside.
Implications
We believe this filing is positive by further bringing attention to the gap in how MLP investors are valuing long-lived (especially liquids) reserves versus what is being valued in E&P corporations. We continue to highlight Berry Petroleum (Buy rated), Forest Oil (Conviction Buy rated) and Pioneer (Neutral rated) as the companies that have the most upside from expected upstream MLP developments. Please see our July 15 note, Spraberry MLP S-1, likely this month, could provide near-term boost, for more details. |
