What makes Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) a rocky base?

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Dallas, Texas 09/10/2013 (Financialstrend) – Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) is quite an interesting company. This is because of its growing midstream business and also its upstream oil & gas operations. In combination, these 2 operations produce quite a high distribution for its investors. The one question that lingers is about how risk-free that more than 13% yield is.

The distribution average ratio calculation

One of the first things that should be looked at while considering the safety factor of any MLP distribution is its distribution coverage ratio. In this particular case, EROC is placed well below the 1.0 times marker which is the critical level. A disastrous 1st quarter that was followed by an almost on par 2nd quarter did not help in any way. This exactly why EROC’s coverage-ratio is now 0.65 times which is worrisome to say the least.

This ratio is not really sustainable, but the company sees some light at the end of the tunnel. Firstly, it expects an increase in the production of oil and gas as it has a leading position in the SCOOP. In addition, it very recently completed its Wheeler unit which will begin producing a cash-flow very soon.

Midstream assets

Apart from this, the company has also started seeing some benefit from its acquisition of BP’s midstream-assets. These assets will be the key to the long-term growth of the company. One more area that should be watched is EROC’s liquidity picture. It is pushing-up very close to the 4.75 times leverage-ratio as its total-debt to adjusted EBITDA ratios was around 4.5 times that of what it was in the last quarter.

This is what is resulting in the company having to cut around $100M in capital-spending in 2013. This will bring the future cash-flows down further. Investors who are considering investing in the company’s might want to take all these factors into consideration.

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