Atlas Investors Shrugged

The crude credit crunch, which looks set to remain part of life in the oil patch for quite some time, has led to all sorts of interesting corporate developments:

• Brutal borrowing base redeterminations.
• Fire sales like the one involving Chesapeake Energy (NYSE:CHK).
• Friendly mega-mergers and hostile takeover attempts.
• Master limited partnership shake-ups, both internally (in the case of Magellan Midstream Partners (NYSE:MMP)) and by opportunistic outsiders.

The move by Atlas America (NASDAQ:ATLS) and Atlas Energy Resources (NYSE:ATN) to merge on Monday falls into the latter category. In this case, Atlas America owns both common units of, and a general partner interest in Atlas Energy, a limited liability corporation (LLC) that drills for natural gas in the Marcellus shale.

Atlas America's got an interest in Atlas Pipeline Holdings (NYSE:AHD) and, by extension, Atlas Pipeline Partners (NYSE:APL) as well, but midstream development is less of a focus now. On the merger conference call, management stated its "single all-encompassing purpose" of exploiting the Marcellus shale play, and reassured callers that cash flow wouldn't be diverted to Atlas Pipeline.

If this were a takeover, Atlas Energy unitholders would surely be bitterly disappointed here. The shares look quite cheap, and there's no premium being paid in the transaction, fittingly characterized by management as a "wholeness exercise." The thing is, Atlas America already owns nearly half of the limited partner units, and current Atlas Energy holders are going from controlling 52% of the operation today to 49.7% of the combined entity.

This isn't a meaningful transfer of ownership. That's why the shares didn't move very much yesterday. There are some salutary effects, though.

Atlas Energy will both dodge a cash flow diversion to the general partner and gain access to Atlas America's excess cash, easing its credit metrics. The taxable corporate structure, without a distribution payout requirement, will funnel more funds to horizontal drilling for Atlas' own account (rather than being shared with outside investors in Atlas' tax-advantaged partnerships). Management also pointed to better traction with both institutional investors, some of whom can't invest in an LLC, and bondholders, who would rest easier with cash flow being retained rather than paid out to unitholders.

Ultimately, yield-oriented individual investors may be more disappointed than the analysts on yesterday's call. Distributions are getting canned, which may very well fuel higher total returns down the road. In the meantime, though, that juicy current income will be lost.