Constellation Energy Partners LLC (CEP)

[frenchee]

Bottom feeding?
from Lehman:

INVESTMENT CONCLUSION
Shares of upstream MLPs have come under considerable pressure in recent months owing to concerns over capital markets access and the need to digest units issued in PIPE’s during 2007. Capital markets access has provided the capital needed to fund producing property acquisitions which are the impetus for distribution growth in the upstream MLP sector. CEP’s unit price has been significantly impacted by the change in market conditions.

We have increased our target yield to 8.75% from 6.25% to reflect a revaluation of risk premiums associated with upstream MLPs and a more conservative distribution growth rate. Units are currently trading at an implied yield of 11.3% based on its latest announced annual distribution of $2.25/unit which we estimate can be supported by a coverage ratio of 1.3x. Since capital access is critical to growth, positive unit price performance may be limited until conditions show signs of improving. In the meantime, we believe that the strong coverage ratio and attractive yield provide an incentive to be patient.

CEP issued approximately 10.8 million units in three separate PIPE transactions during 2007. Proceeds totaling about $375 million (~$34.70 average issue price) were used to finance acquisitions. A registration for about 2.3 million units was declared effective in December. A registration statement for the remaining 8.5 million units became effective in January. Combined, the PIPE units increased the public float to 73%, or 16.0 million units, from 47% or 5.2 million units prior.
At September 30, 2007, long-term debt was $147 million, representing 22% of book capitalization. The partnership’s credit facility is a $200-million secured revolving facility with a syndicate of commercial banks. The facility matures on October 31, 2010 and has a borrowing base of $180 million leaving $33 million available. CEP filed a $1-billion mixed securities shelf registration statement on January 30, 2008.
The shelf provides CEP with expanded acquisition financing alternatives, assuming the capital markets are receptive. We do not anticipate that CEP would need additional capital to fund its current activities.
Bottomfeeding.