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Strategies & Market Trends : Value Investing

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To: Grommit who wrote (56544)	1/3/2016 5:42:18 PM
From: Spekulatius	Read Replies (1) of 78774

Grommit - you friend has compounded his error not just by investing in E&P's, but in E&P LP's which are a poor business model. While the depreciation in a pipeline of a typical midstream is just an accounting entry, because the pipeline had a long operation life (I assume it is so,but in some cases that is not true), the depreciation of an oil well is an very real expense, as any oil or gas well will run dry. This means that most of the cash flow really would need to be diverted to replacing the depleting reserves. This is a very different situation than with a midstream pipeline, where the asset swap would through of cash for decades with only a small fraction of the cash flow needed for maintenance Capex. The energy LP could maintain a mirage of sustainability as long as they could issue stock to yield hungry investors above NAV (purchasing them from E&P's in most cases) a one that avenue is gone, they are going into runoff and the remaining cash flows at lose nervy prices right now are only a fraction of what these partnerships were implying even a short time ago.

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