April 12, 2010 - 8:15pm EST by
2010 2011
Price: 7.50 EPS ($0.41) $1.00
Shares Out. (in M): 22 P/E NMF 7.5X
Market Cap (in $M): 165 P/FCF NMF NMF
Net Debt (in $M): -31 EBIT 0 0

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     NGP Capital Resources is a BDC which specializes in energy related investments. The company went public in November of 2004 at $16.00 a share. It is an offshoot of NGP Energy Capital Management, a large and successful investment vehicle set up in 1988 by Kenneth Hersh and David Albin, alumni of the Richard Rainwater and Sid Bass organizations, respectively. They are well regarded. NGP Capital was previously written up by abrams705 on 12/30/05 at $13.11 and angus309 on 7/30/06 at $14.50. Their write ups are worth reviewing.

     From the end of 2004 through 2007, NGPC maintained and slightly increased its net asset value per share. In 2004 NAV per share was $14.03, in 2005 it was $14.02, in 2006 it was $13.96, and in 2007 it was $14.14. The company did this by making reasonably conservative loans and managing these intensively. In 2008, however, the company stumbled and made some bad investments. These investment problems were not the more benign type of mark-to-market problems that hurt many BDC's,  they were bad loans. As a result NAV per share declined to $12.15 in 2008 and further to $11.10 by the end of 2009. Unlike the mark-to-market loan losses at other BDC's, there will be little if any recovery of these losses. On the other hand, the company has not shied away from taking its losses, and I feel confident that the company has presented its financial condition in an honest and forthright manner.

     At present the portfolio consists of 16 investments. The largest of these is a $50 million position in a specialty coal producer, Alden Resources. The investment has not been without problems,and NGPC has taken over management of the company. At year end, $19.5 million of the position was on non-accrual. However, Alden's results have improved and the investment is expected to be brought current in the next quarter. NGPC's next largest investment is a $25 million secured loan to Tammany Oil & Gas which is fully performing. The third largest posion is an $18 million secured loan to another oil and gas producer, Black Pool Energy, which is likewise fully performing.

     During 2009, NGPC wrote off a $14 million investment in a oil and gas service company, Nighthawk Transport. The plug was pulled on Nighthawk by its banks in the midst of the credit crisis. NGPC had a minority position in the company's subordinated debt. The lead subordinated lender was D.B. Zwirn which itself imploded. Its loan book was purchased by D.E. Shaw, and they did not want to pursue a workout. NGPC believes that Nighthawk could have survived, but that they did not have the resources to insure that result. They plan not to make that mistake again. At year end 2009, NGPC had unrealized losses of $50 million of which $33 million is attributable to a loss on a loan to Formidable, LLC. an oil and gas operator. NGPC is frankly admits that they misjudged the capabilities of Formidable's management. Last, a $12 million writedown was taken on an investment in an oil and gas producer, TierraMar Energy. While there may be some recovery in the future, any recovery will only be in the fullness of time and the position has been written down to reflect net-present-value. NGPC will avoid $50 million positions in the future and insure a more diversified book of smaller positions.

     On 12/31/2009, NGPC had net assets of $317 million, total liabilities of $77 million, and stockholders equity of $240 million. With its stock at $7.62, the company has an equity market capitalization of $165 million against stockholder's equity of $240 million. NGPC appears to be trading at a 69% of NAV. With the average BDC trading at 93% of NAV, the 31% discount represents an attractive valuation. However, at year end, $108 million of NGPC's $317 million of assets was cash. Adjusting for cash, the company's balance sheet is $200 million of marked-down assets, $9 million of other assets (accounts and interest receivable, prepaids, and deferred tax assets [$3 million]), net cash of $31 million and zero liabilities. If the $31 million of net cash is netted against the equity capitalization, an investor gets $209 million of assets for $134 million or a 36% discount to NAV. Only Kohlberg Capital and American Capital trade at greater discounts to NAV in the BDC arena , and they both have problems to work through. 

At the present time, NGPC is paying dividends at a $0.68 annual rate. This provides an investor with an 8.9% annual yield. The Bloomberg Dividend Summary estimates that the dividend rate will be reduced to $0.60 per annum, which would be a 7.8% yield on today's price - still decent. I believe that as the company makes new investments, the discount will narrow and, combined with a decent current yield, will provide today's investor with a fine rate of return surpassing 25% over the next 12 months.




New investments.

The passage of time.

The risk is that the company makes more bad loans.


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