Please ensure Javascript is enabled for purposes of website accessibility

Atlas Pipeline Partners' Big Eagle Ford Buy

By Matthew DiLallo - Apr 23, 2013 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A deeper look at the key points of interest in the company's most recent acquisition.

Midstream gathering and processing company Atlas Pipeline Partners (NYSE: APL) recently announced a major acquisition related to the Eagle Ford Shale. The company is paying a billion dollars in cash in a deal to acquire privately held TEAK Midstream. With a deal this large its important to take a deeper look to see what it means to Atlas' investors.

With a market capitalization of $2.3 billion, the TEAK Midstream deal is a big one for Atlas. The company is using a $400 million secondary offering to fund the equity portion of the deal while it has committed bank financing to fund the rest of the cash required to close the transaction. Current investors are being diluted; however, overall the deal looks like a very good one for investors thanks to three very important components.

One of the major benefits of this deal is that it gets Atlas a foothold in the Eagle Ford Shale. The Eagle Ford has seen amazing production growth over the past few years thanks to its liquids-rich characteristics and proximity to the energy markets along the Gulf of Mexico. Because of this, Atlas had been looking for an entry point into the Eagle Ford, which it has now found in TEAK. However, as important as access to the Eagle Ford's growth is to the company, its only part of the reason why this is a very solid acquisition.

The most important aspect of this deal, in my opinion, is that 80% of TEAK's current gross margin is from fixed-fee contracts. This is highly secured revenue which is important to provide stability to the company's distribution. Once the transaction closes and the Atlas' near-term growth projects come online, 50% of Atlas' cash flow will be fixed-fee.

There is a real effort on the part of midstream companies to increase fee-based revenue. As I mentioned, this stabilizes cash flow and leads to a much more secure distribution which is something that's important to investors. Top midstream operator Enterprise Products Partners (EPD 0.60%), for example, boasts of fee-based margins of more than 80% this year. Enterprise has invested billions to steadily increase that number which just two years ago was just slightly over 70%. With more than 30 consecutive distribution increases, this has been money well spent. Atlas, on the other hand, has a long way to go to get its fee-based margins that high, but its heading in the right direction. 

That leads me to the third and final positive of the acquired Eagle Ford assets. These fixed-fee assets come with an embedded upside of organic growth opportunities. For example, the Silver Oak cryogenic processing plant which is in the process of being expanded could more than triple in size over the coming years. As Atlas expands this asset, it will be add even more fixed-fee revenue. There's further organic expansion opportunities, as well as the opportunity for bolt-on acquisitions as Atlas builds out its Eagle Ford presence in the coming years. 

This transaction is a continuation of Atlas' rapid expansion of the past couple of years; it's the second-largest recent deal, as the company also purchased Cardinal Midstream late last year for $600 million. Acquisitions, however, are just part of the story here as Atlas has been spending on a variety of organic growth projects to drive returns.

For example, earlier this year the company announced a percent of proceeds contract with SandRidge Energy (NYSE: SD) in the Mississippi Lime formation. The deal was a winner for both companies, as SandRidge was looking to capture natural gas liquids volumes to enhance the economics its core Mississippi Lime acreage. It enabled the company to get a greater share of the processing value while paying lower fees. Meanwhile, Atlas was able to extend its contract with SandRidge while also receiving more acreage dedicated to expanding its fee-based gathering assets.

All of this growth has Atlas expecting 2014 EBITDA of $450 million-$500 million with annual distributions of between $2.75 and $2.85 per unit. That would indicate solid growth from the current EBITDA rate $340 million and annualized distribution rate of $2.32 per unit. That growth assumes that the company won't make any new acquisitions or pursue further organic growth opportunities at its legacy operations, meaning that there is the potential for additional upside.

Overall, Atlas' big Eagle Ford buy is a very positive development for the company. It adds geographic diversity, increases its fee-based revenue, and is loaded with organic growth opportunities. There's a lot to like with this deal and Atlas investors should be very pleased with this new addition. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
EPD
$26.76 (0.60%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.