For investors looking for a source of stable dividend income, master limited partnerships, or MLPs, remain one of the most attractive options. These tax-advantaged entities are required to pay out the lion's share of their revenues to their shareholders, allowing them to provide an average dividend yield twice that of 10-year U.S. Treasury bonds.
One MLP that may be worth a closer look is Access Midstream Partners (NYSE: ACMP), whose rapid expansion in lesser-known, high-growth U.S. oil and gas plays, such as Ohio's Utica shale and Colorado's Niobrara shale, should drive annual distribution growth in the high teens during the next few years. Let's take a closer look.
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One of the most stable business models around
ACMP's ownership of mainly natural gas pipelines offers one of the most stable business models in the entire MLP space. That's because these assets have no direct exposure to commodity prices thanks to long-term, fixed-fee contracts that lock in long-term revenues, regardless of the volume of natural gas customers actually end up transporting.
The partnership boasts leadership positions in several unconventional U.S. resource basins, including the Barnett, Eagle Ford, Haynesville, Marcellus, Niobrara, and Utica shales, as well as resource basins in the Mid-Continent region. Across all of the major basins in which it operates, Access' contracts are 100% fixed fee, and largely immune to volumetric risk.
In the Barnett, for instance, the partnership has long-term contracts to provide natural gas gathering and processing services to Chesapeake Energy (CHKA.Q) and Total (TTE -1.28%). As part of the agreement, ACMP performs certain gas-gathering and related services for the two companies, which are subject to minimum-volume commitments.
But regardless of whether or not Chesapeake and Total meet the minimum volume requirements, they're still required to pay ACMP a fixed fee. This greatly limits the partnership's direct exposure to commodity prices and volumetric risk because, even if its customers scale back on natural gas drilling due to low gas prices, ACMP still receives what it's owed based on the minimum volume requirements.
Volumetric and capital risk is further mitigated by MVC and long-term acreage dedications, as well as rate redetermination, cost of service, and fee tiers, while inflation risk is hedged by cost of service and fee escalators. This "toll booth" business model provides a great deal of cash flow stability and visibility that is rare in most other types of non-MLP businesses.
Strong distribution growth prospects
Since ACMP went public, it has delivered 49% annual growth in adjusted EBITDA, and 18% compound annual growth in per-unit distributions, all while improving its distribution coverage ratio. The partnership's coverage ratio for the full-year 2013 stood at 1.49x, up significantly from 1.15x in 2010.
Going forward, ACMP will focus much of its growth capital on expanding capacity within emerging liquids-rich plays, mainly the Utica and the Niobrara, that are poised for strong growth in activity levels and production in the years ahead. ACMP expects these two plays to account for a substantially larger portion of the firm's total throughput in the coming years.
Led by investments in these two plays, the partnership expects to generate $1 billion-$1.1 billion in EBITDA this year, and $1.2 billion-$1.3 billion in 2015, up from $859 million in 2013, while actually requiring less growth capital and only slightly higher maintenance capital. This should allow the partnership to grow its distribution at an annual growth rate of at least 15% during the next few years.
To sustain its growth plans, ACMP has ample liquidity in the form of a $1.75 billion revolving-credit facility that matures in May 2018; the available borrowing capacity can be increased to $2.0 billion. The partnership's outstanding debt, which stood at $3.25 billion as of year-end 2013, also doesn't mature until 2021 and beyond, which gives it plenty of time before the bill comes due.
One risk factor to consider
While ACMP's exposure to less developed yet rapidly growing liquids-rich plays and its strong outlook for distribution growth make it an intriguing opportunity, investors should know that the partnership is highly dependent on one customer -- Chesapeake Energy. In the fourth quarter, Chesapeake contributed roughly 72% of ACMP's quarterly volumes, which leaves it uncomfortably exposed to any downturns in that company's business.
However, ACMP plans to substantially reduce its revenue exposure to Chesapeake to about 50% by 2015 through securing other customers across its key basins. If ACMP can meaningfully reduce its exposure to Chesapeake, while sustaining a debt-to-EBITDA ratio of below 4x, it should be smooth sailing. With growing fee-based revenues, double-digit distribution growth prospects supported by a healthy distribution coverage ratio, income-seeking investors would do well to take a closer look at ACMP.
