American Midstream Partners (NYSE:AMID) is a small fry in the mid-stream space, but it's growing quickly. That could put it on the radar screen of the bigger fish that need larger acquisitions to grow. Now that the partnership is starting to increase its dividend, it might be time to get aboard.

In December, American Midstream announced and finalized the acquisition of Blackwater Midstream Holding from its sponsor, ArcLight Capital. The $60 million sticker price was tiny when you compare it to other players in the midstream space. For example, Kinder Morgan Energy Partners (NYSE:KMP) -- worth $35 billion in market capitalization -- recently paid close to $1 billion to buy its way into the Jones Act shipping space.

That was a nice way for American Midstream to end 2013 with a bang, but the tiny LP just announced that it is already set to buy more midstream assets; this time for around $100 million. That acquisition happened directly with Penn Virginia Corporation (NYSE:PVA). Penn Virginia CEO Baird Whitehead explained that, "The divestiture of our natural gas midstream assets is the first step in a series of potential divestitures which will reduce our indebtedness, improve our liquidity and fund further investment in our oily Eagle Ford Shale play."

In other words, Penn Virginia is using the funds from this sale to expand its production business. That means more production and explains why it signed a 25 year contract to keep using the assets that American Midstream bought. That's a win/win for both companies.

Acquisitions like these will also help American Midstream keep moving down the distribution growth path. The partnership's first increase came in October, and these two purchases, which are both expected to be immediately accretive, suggest that more such increases are on the way.

However, besides its own acquisition driven growth, there's another reason to like American Midstream. The Jones Act investment by Kinder Morgan Energy Partners was actually two purchases—American Petroleum Tankers and State Class Tankers from affiliates of The Blackstone Group and Cerberus Capital Management. Although together they cost a billion dollars, neither was that large alone. As American Midstream continues to grow its asset base, it will eventually get to be big enough to attract the attention of larger players.

Down the road?
That may not happen right away, since American Midstream is relatively small with an enterprise value hovering around $340 million. But a buyout would add icing on investors' cake. And it isn't only a giant like Kinder Morgan Energy Partners that could make this happen. For example, $1.4 billion market cap Crestwood Midstream Partners (NYSE:CMLP) is coming out of a transformational period and could easily absorb American Midstream.

Crestwood is really just the new name for Inergy which merged with the company in 2013 after a series of acquisitions and divestitures that turned it from a propane company into a natural gas and oil midstream player. It was a complicated and difficult period, but the announcement of a dividend hike in January suggests that Crestwood is finally ready to get back on the growth path.

Although internal projects are one way of achieving that, picking up a smaller player like American Midstream would be quicker. Of course, you shouldn't discount the desirability of Crestwood, either. It's large enough to entice a big player like Kinder Morgan Energy Partners. So, as this changing company starts charting its new course it could be worth a look, too.

Heads or tails, you win
American Midstream appears to have plenty of room to grow, particularly since it can buy up assets that wouldn't interest larger players. That should lead to continued growth and more distribution hikes. That's a win for investors. And, as it gains scale, it could turn into an acquisition target itself. That, too, would be a win for investors. The LP isn't without risks, but for more aggressive investors, it could still be a nice addition to your portfolio.

Reuben Brewer has a position in Kinder Morgan Energy Partners and American Midstream Partners. 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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