Sanchez Production Partners LP (SPP)

[dan_s]

I took my first hard look at SPP this morning. It is a new MLP that made its first distribution to Common Unit Holders in November, 2015. It has only made three quarterly cash distributions to common unit holders. They have increased distributions to common unit holders to $0.4121/quarter and management indicates they "expect" to keep increasing them. See management's forecast below.

Keep in mind that distributions to Preferred Unit Holders come first.

This MLP is a combination of an upstream and a midstream MLP. With the announced acquisition on July 5 of additional midstream assets from Sanchez Energy (SN), the majority of future revenues will be from the midstream assets.

Their upstream assets are primarily working interests in mature properties operated by SN. SPP has escalating working interest percentages in the properties that should offset the normal decline rates of the wells. They also have most of the future production hedged at good prices, so upstream revenues should be stable. Their Mid-Continent upstream assets are for sale, but the sale should not have much of an impact.

This MLPs structure is rather complex and since it is so small (market cap only $33 million) few analysts cover it. First Call does not have any EPS of CFPS forecast for it, so I don't have anything to compare my forecast model to and very little history to go by.

Mezzanine equity
Class B preferred units, 19,444,445 and zero units issued and outstanding as of March 31, 2016
and December 31, 2015, respectively
Partners' capital
Class A preferred units, zero and 11,694,364 units issued and outstanding as of March 31, 2016
and December 31, 2015, respectively. Class A pfd units converted to common units (1 for 10) at 3-31-2016.
Common units, 4,157,826 and 3,240,812 units issued and outstanding as of March 31, 2016 and
December 31, 2015, respectively

As of March 31, 2016, SPP had no Class A Preferred Units outstanding, 19,444,445 Class B Preferred Units outstanding, and 4,157,826 common units outstanding.

DISTRIBUTIONS TO UNITHOLDERS
From the second quarter of 2009 through the second quarter of 2015, we did not pay distributions on our common units. Starting in
the third quarter of 2015, the board of directors of our general partner declared distributions of Class A Preferred Units on August 10, 2015
and November 10, 2015 to holders as of August 14, 2015 and November 16, 2015, respectively. A total of 549,756 paid-in-kind units were
distributed for the year ended December 31, 2015. On November 30, 2015, we paid a cash distribution with respect to the quarter ended
September 30, 2015 in the amount of $0.400 per common unit. On February 9, 2016, we announced that the board of directors of our
general partner approved a cash distribution of $0.406 per common unit for the fourth quarter of 2015. The Partnership also declared a
fourth quarter 2015 paid-in-kind distribution of 2.5% on its Class A preferred units and a fourth quarter prorated cash distribution of
$0.3815 on its Class B preferred units. The distributions were paid on February 29, 2016 to unitholders of record on February 19,
2016. On May 10, 2016, we announced that the board of directors of our general partner approved a cash distribution of $0.4121 per
common unit and $0.450 per Class B preferred unit for the first quarter of 2016. The distributions are payable on May 31, 2016 to
unitholders of record on May 20, 2016. All Class A preferred Units were converted to common shares on a one to one basis at March 31,
2016; as such, no paid-in-kind distributions were made on Class A Preferred Units for the first quarter of 2016.

2016 FORECAST (provided by SPP on May 16, 2016)
Based on hedges in place and forward prices as of Dec. 31, 2015, the Partnership's "base case forecast" estimates that 2016 Adjusted EBITDA will range from $54 million to $60 million, providing Distributable Cash Flow ("DCF") of $13.5 million to $19.5 million in 2016. Based on these forecast results, and a common unit count that includes the conversion of the Class A preferred units to common units effective March 31, 2016, the Partnership projects the common unit distribution coverage will range from 1.9x to 2.8x, or 2.3x at the midpoint of the Partnership's 2016 DCF forecast.

The Partnership's base case forecast excludes contribution of the Mid-Continent assets, which have been targeted for divestiture. No incremental asset acquisitions or divestitures are included in the Partnership's base case forecast. The base case forecast also assumes no additional units are repurchased in the open market under the Partnership's $10 million unit repurchase program.


The future of SPP is highly dependent on Sanchez Energy continuing to develop their Eagle Ford upstream assets, primarily the Catarina Field. Read our recent profile on Sanchez Energy. Then I recommend you slowly go through SPP's recent presentation, which you can download from their website. I also recommend that you go to the latest 10-Q and read carefully the rights of the Class B Preferred Unit Holders..

Because this MLP is small and highly dependent on Sanchez Energy it has a HIGH LEVEL OF RISK.

I have posted my forecast model for SPP to the EPG website under the MLP tab, but I warn you that it is pure SWAG at this point.