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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: mutulu who wrote (98218)	3/22/2008 7:04:35 AM
From: Ed Ajootian	Read Replies (1) \| Respond to of 206204

mutulu, Constellation Energy Partners (CEP) -- Its really hard for me to answer that question, since that's not the way I think. It reminds me of when somebody asked me a question with a similar theme about Edge Petroleum. I've had more of an opportunity to look into CEP in recent weeks, and didn't like some things, so I'm turned off on the stock and have no plans to buy it and am in fact selling down my relatively small position fairly aggressively on rallies. Biggest negative is as follows. Their wells are declining in production somewhat faster than they (and the analysts covering them) thought, so in order to stay up with prior guidance regarding '08 production they decided to buy some more producing properties. All well & good, but my problem is that they chose to pay over $4/mcf for such properties, and guess who the seller is -- their "sponsor", Constellation Energy Group (CEG), which owns a big chunk of their stock (something like a third of the company I believe). Also, I'm now negative about the MLP/LLC space, given the current backdrop. When you look at the list of major financiers of these enterprises it brings up many of the same names that you are hearing about in connection with the financial crisis, names such as Lehman, Merrill, Citigroup, etc. These firms are likely being forced to sell down their positions in these MLP/LLC stocks in order to maintain some liquidity. In the course of doing this they are giving this sub-sector a black eye, one which the sub-sector is not likely to recover from for many a moon. The problem with the above, particularly as it relates to MLP/LLC's, is that this sort of entity, even more than a regular E&P, needs to have a ready access to capital in order to not only grow but even just to survive. The reason is that these firms retain virtually none of their cash flow, and instead rely on funds from either debt or equity issuances to move onward & upward. The debt markets for these enterprises, due to the national credit crisis, have gotten much tighter if not closed altogether, and the equity capital markets are effectively closed also (the last equity raise by an MLP/LLC occurred in 3Q of last year I believe). This is probably overstating the case, but to some degree these MLP/LLC's are basically just a type of legal Ponzi scheme. Pay healthy returns to your investors, keep raising more capital to maintain/increase your distributions. As long as your lenders and your equity investors stay with the program, everything is dandy, but as soon as this merry-go-round even just starts slowing down (never mind if it comes to a stop entirely), this business model basically breaks down. Clearly there is some price at which CEP would be "an unqualified buy", but due to my mindset on both the company and the sub-sector that it is part of, I just can't think along those lines.