Prospect of Dividend Cut Hurts Mesa Shares
Mesa Limited Partnership, the independent energy company headed by Texas financier T. Boone Pickens Jr., has seen its common share price fall sharply in the last month in a selloff by individual unit holders facing the prospect of a second dividend cut.
The company’s predicament contrasts strongly with its robustness in the mid-1980s, when Pickens’ much publicized corporate raids on Gulf Oil Corp., Unocal Corp. and Phillips Petroleum Co. netted Mesa hundreds of millions of dollars.
In the last couple of years, however, the bulk of Mesa’s revenue has come from its natural gas operations, and stagnant natural gas prices and high interest payments have restricted cash available for dividend payments. In March, the partnership cut its common dividend by 25%--to an annual rate of $1.50 a share from $2.
Mesa is scheduled to announce its next quarterly distribution on Dec. 15. Mesa’s treasurer, W. Mark Womble, said unit holders were informed at the time of the first cut that “a downward distribution adjustment was being contemplated for either the last quarter of this year or early 1990” if gas prices did not improve significantly.
Despite the possibility of a further dividend cut, Womble and analysts said the company’s underlying energy assets--including 2.25 trillion cubic feet of natural gas reserves--leave it well-positioned for a rebound once the current natural gas oversupply vanishes as expected.
The problem is that such a rebound might not happen for a year or so. “It’s just a question of getting from here to there,” said Everett G. Titus III, an industry analyst with the investment firm of Wheat First Butcher & Singer in Philadelphia.
Womble said Thursday that the company had still not decided on the size or timing of any dividend adjustment.
Mesa’s common shares traded as low as $7 a share before closing unchanged Thursday at $7.125 on the New York Stock Exchange. In the last year, the shares have traded as high as $13.875. Mesa’s preferred shares also closed unchanged Thursday at $8.25 a share.
Before Mesa cut its common dividend in March, it had held its $2-a-year level since the partnership was created in December, 1985, out of the former Mesa Petroleum Co. The dividend on the preferred shares remains $1.50 a share.
Womble said the company’s operating cash flow, which was about $68 million for the first nine months of 1989, has never met the dividend requirements, which he estimated at $222 million for the first nine months. Early this month, there were 79.1 million common shares and 87.5 million preferred shares in the hands of the partnership’s unit holders.
The shortfall is due mainly to soft gas prices. In 1985, Mesa’s average natural gas price was $2.68 per thousand cubic feet; for the year to date, it has averaged $1.62, Womble said.
The company also faces steep interest payments--$46.9 million in the third quarter--on debt from its $750-million acquisition of Tenneco Inc. gas properties last year. The company’s long-term debt stood at $1.44 billion at the end of the third quarter.
The shortfall from operating cash flow has been made up through cash reserves and marketable securities, which Womble said stood at $350 million, as well as through the sale of assets. So far this year, the company has sold about $100 million in assets, with another $30 million to close by the end of this year.
He said Mesa is still in the process of selling its interest in Bicoastal Corp., formerly Singer Co., to Leucadia National Corp. The sale would end Mesa’s involvement with Singer, which began with a $150-million loan to a partnership headed by investor Paul A. Bilzerian, who was convicted of securities and tax fraud this summer. Analysts estimate that Mesa’s interest in Bicoastal is worth about $70 million.
Analysts were unwilling to estimate how much lower Mesa’s shares may fall. Rosario S. Ilacqua, an analyst with Nikko Securities Co. in New York, said they are already selling at a price lower than the underlying value of the company’s assets.
Earlier this week, Mesa decided not to convert itself back into a corporation as a way to bolster the share price by attracting more institutional and corporate investors. As a limited partnership, Mesa is owned mainly by individual investors. Mesa indicated that it may yet decide to go the corporate route, however.
In any case, Womble said, Pickens is holding onto his 4 million common shares of Mesa. Pickens could not be reached.
