Hedge fund manager Leon Cooperman recently went on CNBC to discuss his fund's energy holdings. What is interesting is that he said that he took advantage of the current market environment to add to his position in Atlas Energy LP (ATLS). It's a somewhat surprising selection as it's a name few energy investors know, however, it's a stock that he sees being real interesting because of the value that's being hidden by a pending transaction.
A complex value
Cooperman's interest in adding to his position in Atlas stems from a deal the company announced with Targa Resources Corp (TRGP -0.30%). Cooperman noted this by saying about Atlas, "We have been adding to it, if you check filings, I think, we are up to about 12% of the company and really the deal [with Targa] is out there. It's kind of interesting [...]." The rather complex deal is one that Cooperman thinks will unlock a lot of value in the assets Atlas Energy owns and he wants to participate to an even greater degree in that future.
To understand that future we need to understand the deal and what it means for investors in Atlas. Under the terms of the deal Targa Resources is acquiring the company in order to take control of Atlas Energy's midstream general partner and its limited partner interests in Atlas Pipeline Partners (NYSE: APL), which it is buying for $1.9 billion in cash and shares. As part of the deal Atlas Energy will spin out its non-midstream holdings, which includes its interests in upstream MLP Atlas Resources Partners L.P. (NYSE: ARP), to shareholders. That entity, Atlas Energy Group, is expected to pay a minimum dividend of $1.25 per share each year.
What Cooperman pointed out on CNBC is that when you do the math the value is really compelling. For example, the cash and stock shareholders would get from Targa Resources alone suggests that investors are only putting a value of about a dollar per share on the non-midstream spin off of Atlas Energy Group, according to Cooperman's math. That's quite compelling when we consider that the company plans to pay out $1.25 per year in distributions to investors. As the slide below notes, which adjusts the value from Cooperman's math to reflect the current value of Targa Resources as opposed to his value for the company, we see that the market still isn't ascribing much value to Atlas Energy Group.
Source: Atlas Energy LP Investor Presentation
Because of this disconnect Cooperman says that, "something is wrong somewhere and when things like that exist in the stock market stock prices go up or the dividend is vaporized." However, in his mind even if the dividend from that entity is reduced the value of Atlas as a whole, when including the value of Targa, is quite compelling given the disconnect in the marketplace.
Hidden value
Atlas Energy also sees a substantial value disconnect between the market's implied value of the assets it's placing into Atlas Energy Group and the value it sees. For example, the market value alone for its ownership stake in Atlas Resource Partners, along with the implied value of its natural gas production in the Arkoma region suggest a current value of $4.80 alone. However, as this next slide notes those assets are only part of the value of Atlas Energy Group with the whole business being worth between $13 and $20 per unit before factoring any growth potential.
Source: Atlas Energy LP Investor Presentation
Both Atlas and Cooperman would agree that the market isn't giving it much, if any credit, for the assets that will be housed in the new Atlas Energy Group. Further, the market isn't giving the company any credit for future growth despite the fact that the company sees a number of potential opportunities ahead of it. For example, Atlas' fundraising business, which raises money from private investors to drill oil and gas wells, could easily raise a billion dollars' worth of fundraising capital. That capital could potentially generate an additional $0.35 per unit in cash flow, plus incentive distribution rights. Such a deal could boost the company's $1.25 annual distribution by as much as 30%. That's just one of the many growth opportunities that investors, other than Cooperman, are missing.
Investor takeaway
Leon Cooperman sees an incredible value play in Atlas Energy. Not only will current owners soon receive shares of Targa Resources plus cash, but they'll also receive newly minted units of Atlas Energy Group, which is substantially undervalued by the market. This value disconnect is why Cooperman is taking advantage of the oil sell off to add to his Atlas Energy position before the market realizes the real value that is sitting there for the taking.
