On Monday, Atlas Pipeline Partners (NYSE: APL ) announced it was throwing down $600 million to acquire the privately held Cardinal Midstream. The deal is still subject to regulatory approval, but is expected to close by the end of this year. There is plenty of upside for investors with this acquisition, so let's take a closer look at the details.
Atlas picks up a handful of natural gas and natural gas liquids processing assets, including three cryogenic processing plants and the 66 miles of gathering pipeline that go with them. The partnership will also get Cardinal's gas treating business, which includes 17 different treating facilities in a slew of different hydrocarbon basins like the Eagle Ford, Granite Wash, Haynesville Shale, and Fayetteville Shale.
Perhaps most importantly, more than 80% of the gross margin derived from these Cardinal assets is from fixed-fee contracts. A fee-based business model allows midstream operators by and large to escape the volatility of commodity prices because they receive a fixed-fee for processing, rather than taking partial or complete ownership of the oil and gas they process.
The deal with have almost an immediate impact on Atlas Pipeline's books. The partnership is increasing its EBITDA guidance for next year by more than 20%, or about $60 million. Management expects that number to rise to $80 million by 2015.
Midstream partnerships are famous for their high payout ratios. Though Atlas doesn't have as high a yield as Energy Transfer Partners (NYSE: ETP ) 8.3% payout, its units are currently yielding 7.4%, for an annualized payout of $2.28 per unit, which is nothing to sneeze at. The Cardinal pickup should be immediately accretive to distributable cash flow by 3%-5% per unit next year, and 8%-10% per unit in 2014.
Foolish bottom line
This deal is indicative of the industry consolidation we are seeing a lot of right now. While we are unlikely to see another deal the size of the Kinder Morgan (NYSE: KMI ) buyout of El Paso, we will undoubtedly see many more mergers and acquisitions as midstream companies look to grow their footprint in key producing regions.
Want the skinny on one of the highest-yielding midstream companies? Energy Transfer Partners helps alleviate the gluts in supply with 23,500 miles of transformational pipelines. To see if ETP and its industry-leading yield will be a fit for you, click on this detailed premium report, which will supply you with a thorough analysis of this attractive midstream.