Why Access Midstream Partners LP Looks Like a Buy Right Now

Access Midstream Partners’ expanding presence in lesser-known yet rapidly growing shale plays should support several years of strong distribution growth.

Apr 23, 2014 at 1:28PM

For investors looking for a source of stable dividend income, master limited partnerships, or MLPs, remain one of the most attractive options. These tax-advantaged entities are required to pay out the lion's share of their revenues to their shareholders, allowing them to provide an average dividend yield twice that of 10-year U.S. Treasury bonds.

One MLP that may be worth a closer look is Access Midstream Partners (NYSE:ACMP), whose rapid expansion in lesser-known, high-growth U.S. oil and gas plays, such as Ohio's Utica shale and Colorado's Niobrara shale, should drive annual distribution growth in the high teens during the next few years. Let's take a closer look.


Photo Credit: Wikimedia Commons

One of the most stable business models around
ACMP's ownership of mainly natural gas pipelines offers one of the most stable business models in the entire MLP space. That's because these assets have no direct exposure to commodity prices thanks to long-term, fixed-fee contracts that lock in long-term revenues, regardless of the volume of natural gas customers actually end up transporting.

The partnership boasts leadership positions in several unconventional U.S. resource basins, including the Barnett, Eagle Ford, Haynesville, Marcellus, Niobrara, and Utica shales, as well as resource basins in the Mid-Continent region. Across all of the major basins in which it operates, Access' contracts are 100% fixed fee, and largely immune to volumetric risk.

In the Barnett, for instance, the partnership has long-term contracts to provide natural gas gathering and processing services to Chesapeake Energy (NYSE:CHK) and Total (NYSE:TOT). As part of the agreement, ACMP performs certain gas-gathering and related services for the two companies, which are subject to minimum-volume commitments. 

But regardless of whether or not Chesapeake and Total meet the minimum volume requirements, they're still required to pay ACMP a fixed fee. This greatly limits the partnership's direct exposure to commodity prices and volumetric risk because, even if its customers scale back on natural gas drilling due to low gas prices, ACMP still receives what it's owed based on the minimum volume requirements.

Volumetric and capital risk is further mitigated by MVC and long-term acreage dedications, as well as rate redetermination, cost of service, and fee tiers, while inflation risk is hedged by cost of service and fee escalators. This "toll booth" business model provides a great deal of cash flow stability and visibility that is rare in most other types of non-MLP businesses.

Strong distribution growth prospects
Since ACMP went public, it has delivered 49% annual growth in adjusted EBITDA, and 18% compound annual growth in per-unit distributions, all while improving its distribution coverage ratio. The partnership's coverage ratio for the full-year 2013 stood at 1.49x, up significantly from 1.15x in 2010.

Going forward, ACMP will focus much of its growth capital on expanding capacity within emerging liquids-rich plays, mainly the Utica and the Niobrara, that are poised for strong growth in activity levels and production in the years ahead. ACMP expects these two plays to account for a substantially larger portion of the firm's total throughput in the coming years. 

Led by investments in these two plays, the partnership expects to generate $1 billion-$1.1 billion in EBITDA this year, and $1.2 billion-$1.3 billion in 2015, up from $859 million in 2013, while actually requiring less growth capital and only slightly higher maintenance capital. This should allow the partnership to grow its distribution at an annual growth rate of at least 15% during the next few years.

To sustain its growth plans, ACMP has ample liquidity in the form of a $1.75 billion revolving-credit facility that matures in May 2018; the available borrowing capacity can be increased to $2.0 billion. The partnership's outstanding debt, which stood at $3.25 billion as of year-end 2013, also doesn't mature until 2021 and beyond, which gives it plenty of time before the bill comes due.

One risk factor to consider
While ACMP's exposure to less developed yet rapidly growing liquids-rich plays and its strong outlook for distribution growth make it an intriguing opportunity, investors should know that the partnership is highly dependent on one customer -- Chesapeake Energy. In the fourth quarter, Chesapeake contributed roughly 72% of ACMP's quarterly volumes, which leaves it uncomfortably exposed to any downturns in that company's business.

However, ACMP plans to substantially reduce its revenue exposure to Chesapeake to about 50% by 2015 through securing other customers across its key basins. If ACMP can meaningfully reduce its exposure to Chesapeake, while sustaining a debt-to-EBITDA ratio of below 4x, it should be smooth sailing. With growing fee-based revenues, double-digit distribution growth prospects supported by a healthy distribution coverage ratio, income-seeking investors would do well to take a closer look at ACMP.

Three stock picks to ride America's energy bonanza
ACMP's strong distribution growth outlook is supported by the record oil production that's revolutionizing the United States' energy position. Finding the right plays, while historic amounts of capital expenditures are flooding the industry, will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report, "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

Arjun Sreekumar owns shares of Chesapeake Energy. The Motley Fool recommends Total SA. (ADR). 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers