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American Midstream Partners Proves Bigger Isn't Always Better

American Midstream Partners (NYSE: AMID  ) is buying assets from DCP Midstream, which is owned 50/50 by Phillips 66 (NYSE: PSX  ) and Spectra Energy (NYSE: SE  ) . Once again, it is using its small size to pick up assets that are little more than a sideline business for the bigger players.

Small can be beautiful
American Midstream Partners is a tiny player in the midstream space, sporting a market cap of just $300 million. Moreover, it isn't affiliated with any large energy company; it is run by private equity firm Arc Light Capital. While this means American Midstream Partners won't benefit from a big-name energy-focused parent continually selling it (dropping down) new assets, it puts American Midstream in a unique industry position.

And the recently announced purchase from DCP Midstream is a perfect example. American Midstream Partners will pay $115 million for "onshore natural gas processing and offshore natural gas gathering and transportation and oil gathering assets" that "complements American Midstream's High Point system located in Southeast Louisiana, and improves AMID's ability to compete for increased shallow-water and deep-water production from new drilling in the prolific oil and gas eastern region of the Gulf of Mexico."

(Source: Public domain, via Wikimedia Commons)

To fund this acquisition, American Midstream Partners is selling $200 million worth of units in a private placement. The best part of this deal, however, is that it should boost results right away. According to CEO Steve Bergstrom, "management intends to recommend to the board of directors an increase to the quarterly distribution of three to five percent for the fourth quarter 2014 distribution" because of this deal.

Why did Phillips 66 and Spectra Sell to American?
However, there's an interesting twist to this deal. DCP Midstream, owned by two energy giants, could have sold these assets to any one of three other controlled limited partnerships. The most logical choice would have been DCP Midstream Partners (NYSE: DPM  ) , but both Phillips 66 and Spectra Energy have associated partnerships that could have bought the assets, too.

So, why are the pipelines and refinery that American Midstream Partners just bought so undesirable that DCP Midstream Partners didn't step up to the plate? They aren't, it's just that they aren't big enough to matter to a larger company. DCP Midstream Partners has a market cap of nearly $6 billion. Adding assets worth $115 million would likely have been more distraction than it was worth. Phillips 66's associated partnership is equally as large, and Spectra Energy's controlled MLP is about $15 billion in size. Clearly, none of them wanted to be involved in this small-fry deal.

In fact, the sale is so small that DCP Midstream didn't even put out a news release. It was American Midstream Partners that released the details of the deal. But this all goes to highlight the value of being small and independent. American Midstream can buy the insignificant assets that larger players want to shed so they can focus on more important properties.

Wheeler and dealer
That makes American Midstream Partners, in conjunction with ArcLight, something of an industry wheeler and dealer. And so far, that's been a good position to be in. The partnership came public in mid 2011, with ArcLight coming on board as general partner in April of 2013. Since that point, American Midstream Partners has increased its distribution twice, with the DCP deal hinting that a third increase could be on the way.

AMID Chart

AMID data by YCharts.

The combination of ArcLight and distribution growth has proven to be an important catalyst for American Midstream Partners. Its units have run up notably since early 2013. That said, they still yield around 6.3%, and the partnership's small size suggests that it has plenty of room to grow via small, bolt-on acquisitions like the DCP Midstream deal, with independent ArcLight providing a potential source of drop down transactions that only sweeten the deal.

At the end of the day, as an investor you are getting paid reasonably well to ride on American Midstream Partners' coattails as it continues to use its tiny size to its advantage.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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Related Tickers

9/3/2015 3:59 PM
AMID $12.95 Down -0.26 -1.97%
American Midstream… CAPS Rating: *
DPM $27.87 Up +0.31 +1.12%
DCP Midstream Part… CAPS Rating: *****
SE $28.24 Up +0.19 +0.68%
Spectra Energy CAPS Rating: *****