New Source Energy Downgraded At Wunderlich On Litigation, Liquidity Problems

• New Source Energy Partners LP NSLP has seen a decline of 97.68 percent in its share price, year to date.
• Wunderlich’s James L. Dobson has downgraded the rating on the company from Hold to Sell, while lowering the price target from $1.00 to $0.00.
• The downgrade is based on expectations of the borrowing base redetermination proving to be worse than expected, increased liquidity concerns and the ongoing litigation with New Dominion.

New Source Energy announced on September 28 that “that a likely larger-than-expected reduction in the borrowing base would cause a loan covenant deficiency, which would prevent the partnership from paying the previously declared preferred distribution,” according to the Wunderlich report.

Analyst James Dobson believes that while this could help in a quicker settlement of the ongoing litigation with New Dominion, the company’s contract exploration and production partner, there did not appear to be “a clear path for liquidity and associated value.”

Dobson reported that the partnership had borrowings worth about $50 million on its $57 million revolver and that the company expects a potential reduction in its borrowing base to lead to a cash shortfall, which would prevent New Source Energy from paying the cumulative preferred distribution on Series A preferred units in October, as per the loan covenants.

Based on the company’s announcement, Dobson expects the redetermination to lead to a reduction of about $23-$25 million in the borrowing base, which would leave the company overdrawn by $16-$18 million.

“NSLP is seeking to increase liquidity, but options are limited. Management is pursuing a settlement of the litigation, which is likely the best path to improved (albeit limited) liquidity,” the report stated.

The distributable cash flow per unit and EBITDA estimates for 2015/2016 have been reduced to reflect “lower OFS expectations, as well as lower production estimates.”