On Monday, Atlas Pipeline Partners (UNKNOWN:APL.DL) announced it was throwing down $600 million to acquire the privately held Cardinal Midstream. The deal is still subject to regulatory approval, but is expected to close by the end of this year. There is plenty of upside for investors with this acquisition, so let's take a closer look at the details.
Atlas picks up a handful of natural gas and natural gas liquids processing assets, including three cryogenic processing plants and the 66 miles of gathering pipeline that go with them. The partnership will also get Cardinal's gas treating business, which includes 17 different treating facilities in a slew of different hydrocarbon basins like the Eagle Ford, Granite Wash, Haynesville Shale, and Fayetteville Shale.
Perhaps most importantly, more than 80% of the gross margin derived from these Cardinal assets is from fixed-fee contracts. A fee-based business model allows midstream operators by and large to escape the volatility of commodity prices because they receive a fixed-fee for processing, rather than taking partial or complete ownership of the oil and gas they process.
The deal with have almost an immediate impact on Atlas Pipeline's books. The partnership is increasing its EBITDA guidance for next year by more than 20%, or about $60 million. Management expects that number to rise to $80 million by 2015.
Midstream partnerships are famous for their high payout ratios. Though Atlas doesn't have as high a yield as Energy Transfer Partners (NYSE:ETP) 8.3% payout, its units are currently yielding 7.4%, for an annualized payout of $2.28 per unit, which is nothing to sneeze at. The Cardinal pickup should be immediately accretive to distributable cash flow by 3%-5% per unit next year, and 8%-10% per unit in 2014.
Foolish bottom line
This deal is indicative of the industry consolidation we are seeing a lot of right now. While we are unlikely to see another deal the size of the Kinder Morgan (NYSE:KMI) buyout of El Paso, we will undoubtedly see many more mergers and acquisitions as midstream companies look to grow their footprint in key producing regions.
Fool contributor Aimee Duffy has no positions in the stocks mentioned above. The Motley Fool owns shares of Kinder Morgan. Motley Fool newsletter services recommend Kinder Morgan. 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.