The GP MLP sector is so fascinating. The S&P 500 is now trading at about 14 X earnings and about 11X cash flow. ATLS trades just north of a 3% yield while the MLP pipelines trade to a 6-7% yield and the MLP E&P names trade to a 8-10% yield. Since the GP MLP pays out 100% of cash flow, ATLS is trading at just about 33X (1/0.03). APL is trading at about 12X cash-flow adjusted for payout ratio of 1.2X and ARP is trading at about 8 X forward looking cash flow.
On a forward looking basis, ATLS is trading at about 20X a 2013 distribution of $1.85. However, if you annualize the last distribution of 2013 of say about $0.55, the multiple falls to about 17X for ATLS.
One might ask, why do the GP MLP structures trade at such a premium to the market? My answer is the structure is just a better mouse trap than anything else. First, the distributions come back to you as a return of capital until your cost basis is returned, effectively changing ordinary income into capital gains at preferential rates. Second, as the GP, once the underlying MLPs are established, you are putting zero capital at risk as the GP - the returns on capital are undefined as you can't divide by zero - the ultimate capitalist structure. Third, the IDR carry on the MLP provides a leveraged participation in the growth of the MLP distributions. Once the IDR is fully in the money, the carry is 50%, better than nearly all hedge funds. Fourth, most GPs, including ATLS, own units in the underlying MLP further providing participation. Lastly, the GP, once the full structure is developed carries an extraordinary takeover premium. The underlying MLPs are constantly weighing the cost of buying out the GP - the IDR structure just raises the cost of capital to the MLP. Outside the underlying MLPs, outside investors can get control of not only the GP, but effectively the operations of the underlying MLPs as well. The ATLS/APL/ARP structure has an aggregate equity market cap of $4.75 B. You can buy ATLS for $2.0 B and get control of $4.75 B of assets. If you include APL/ARP debt, you can control roughly $6 B of enterprise value with tremendous growth prospects.
This leads me to my last point, when will the Cohen's try to extract the maximum takeover premium? Between now and 2016, I can see the distributions reaching $4.00 annually. However, in 2016, the growth rate of distributions are likely to slow meaningfully given the laws of big numbers, thus weighing on the market multiple. If ATLS can hold it's 3-4% yield, effectively a 25-33X multiple, one can get a $100 - $132 unit price for ATLS. In my opinion, if the Cohen's could extract a price of $125 in the 2015 - 2016 timeframe, even they would have to think of letting this go.
In the interim, all ATLS holders, enjoy the ride and the tax-free distributions!! I wonder if the Cohen's read this board!!
Thanks for the comparative analysis on the comps, Bosox.
My gut tells me a buyout of 180 in 5 years. Why? Full recovery of nat.gas and NGLS prices and de-bottlenecking of supplies thru out North America, monster growth in Wolfcamp play and consistent growth in Mississippi, Atlas ability to lever up balance sheet to sustain growth, and recognition by a finance player i.e. private, equity, big brokerage, insurance or other, that the Atlas partnership business is VERY valuable and worth paying up for.
Just my two cents. Enjoy the ride!!
Well that would all be nice. However, I'm perfectly happy with continuing increases in distributions over the next couple of years. Your scenario requires that everything goes right - which rarely happens. What would help greatly is an increase in NG above $4.50 and a modest increase in NGL pricing.
Its a long way from .30 to $1 in quarterly distributions. I'll be thrilled to receive them, but I'm more focussed on passing through the 49% IDR's this year. We have yet to see the expansion come on-line and have to see if they can grow the drilling program at ARP (I think everyone knows NG prices are in the dumpster and that has to make it harder to get folks to invest in drilling).
If we can see $1.50+ in distributions this year, $2.25+ in 2014 and $3 range in 2015 I'll be a happy camper. $4 in 2016 - I won't complain but I also wouldn't bet money it. I don't see NG pricing improving much over the next couple of years and I'm a little concerned with the situation at SD.