Access to Higher Income is Right Around the Corner

Access Midstream Partners' yield has nowhere to go but up

Jan 22, 2014 at 10:55AM

How would you like to pocket at least 4% annually over the next 20 years, regardless of where the stock market goes? In order for this company to let you access such a safe yield, it had to build and acquire 6,800 miles of pipelines and other midstream assets in high growth shale plays.

Access Midstream Partners (NYSE:ACMP) has done a tremendous job investing in each of the major shale plays in the United States. With assets in the Marcellus, Utica, Eagle Ford, and Niobrara that all have a fixed-fee cost structure, Access Midstream Partners can provide growth and stability through a wide range of operations.

Financials
Through high growth shale plays, Access Midstream Partners has been able to raise its quarterly payout by 15% annually since 2010. Now it stands at 53.5 cents a unit, resulting in a current yield of 3.9%. While this may seem small compared to other midstream MLP's, that's because it is. However, with a distribution coverage ratio of 1.51, this distribution has nowhere to go but up.

Access Midstream Partners' capital expenditures will drop from $1.65 billion in 2013 to $850 million in 2015. While capex decreases, projects are still coming online to drive up 2015 earnings before interest, depreciation and amortization, or EBITDA, to $1.25 billion from ~$825 million in 2013. At the same time, maintenance capital is guided to stay flat throughout that time period at $110 million.

Larger EBITDA, combined with stable maintenance costs and less expenditures means only one thing: distributable cash flow growth. More DCF turns into a larger distribution, driving up the yield and thus your return.

Quality future assets
The Utica shale is an emerging play with promising well results coming from various E&P plays, Including the CONSOL Energy/ Hess joint venture. In order to get out in front of the future drilling bonanza prompted by +50% liquids production mix, Access Midstream Partners has teamed up with EV Energy Partners (NASDAQ:EVEP) and M3 Midstream.

To drive earnings higher, the trio will build four gas processing plants. Each plant will have the ability to process 200 MM cubic feet per day of natural gas, which is a much needed service. The group is also going to build out 135,000 barrels per day of fractionation capacity (for natural gas liquids), to be supplemented by an additional 870,000 barrels of NGL storage.

This is a fairly capital intensive project, which is why these three midstream companies decided to share the costs. Access Midstream owns 49% of the project while EV Energy Partners owns 21%, and M3 Midstream owns the rest. By splitting the costs, midstream companies can reduce risk and invest more in other parts of the country.

This isn't the first partnership Access Midstream Partners and EV Energy Partners have created. Both own stakes (66% Access, 9% EV Energy) in Cardinal Gas Services that services liquid production in the Utica. With 135 million cf/d of gathering capacity and 163 miles of pipelines, both are already sizable players in the emerging Utica story.

Quality current assets
The Mid-Continent includes plays like the Mississippi Lime, Granite Wash, and the Wolfcamp and Delaware plays in the Permian Basin. Access Midstream owns 2,800 miles of pipelines with 180 gas gathering systems feeding 584 MMcf/d of gas into its system from the region. An annual fee redetermination allows Access to bring in more cash each year for its existing assets as surging output increases pipeline demand.

Foolish conclusion
With a stable, fee-based revenue structure and assets in high growth shale plays, Access Midstream is able to maintain a high coverage ratio while putting cash back to work to further grow cash flow. Over the next few years, expect major distribution increases from Access Midstream as revenue surges while expenditures plummet.  

For a historical perspective, the distribution has been raised 12 times in the past 12 quarters, so this earnings season, the thing to watch for is the growth of the payout. From Q2 to Q3 2013 there was a sharper-than-normal increase in Access' distribution, which could point toward a higher level of distribution growth in the future.

As Access Midstream Partners raises its distribution expect the unit price to increase, compounding your return on top of the payouts. For those looking for a stable income play that also has solid growth potential, look no further than Access Midstream Partners.

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Callum Turcan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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