I was referring to the distribution. The unhedged distribution would be $2.00 annually at current commodity prices at 1X coverage, down from $2.40 - not a disaster You are right the units are trading at $11 down from $20 - a disaster among many.
Regarding trading APL for lack of a premium. Selling APL to TRGP was brilliant. TRGP is an investment grade credit as a C Corp. APL has large capital needs.
ATLS received 0.1809 shares of TRGP for each unit of ATLS, $9.12 in cash per unit, and a new unit of Atlas Energy Group (AEG). At the time of the announcement, no one knows where AEG will trade. I will bet somewhere around $10 which is crazy cheap. If it does, you received a premium.
My average cost in ATLS is $8, when AEG starts trading when-issued, I plan to buy in size......
This drop down approach is not something the Cohen's invented. There have been several drop downs put together where the GP interest is used to acquire assets and subsequently dropped down to a LP.
Regarding cash flow sensitivity, if you took off all the hedges and just priced the commodities at spot, the ARP distribution would fall to $2.00 annually at 1X coverage in 2015. Down but not a disaster.
ATLS contributes some of its GP interest, which is very valuable, to a third party, perhaps private equity. The third party then buys producing assets in a new entity. This entity then drops down the assets to ARP thereby solving ARP's high cost of equity capital for acquisitions. ATLS wins depending on how it is structured as it sends ARP higher into the IDR splits. The third party earns a return on the acquired assets through the GP/IDR arrangement.
In my opinion, this was the "stay tuned" speech given by Cohen after 3Q conference call. Unfortunately, they can't get this done until the TRGP deal is consummated. In the mean time they can work on a deal. This is the timeline - routine monthly distribution announcements, we find out what the syndicate raise was in January, the TRGP deal closes in 1Q and then we get some creative drop down deal to solve ARP's growth problem. For ATLS, we will probably hear more about AGP in mid-2015. I wouldn't be surprised if they started up another AGP entity to re-enter the midstream space.
I think ATLS will partner with another company or perhaps private equity firm, give up some of the GP to the partner, buy E&P assets, and then start the process of dropping them down into ARP. This has happened elsewhere and given that ARP is locked out of the market in terms of issuing equity, they need to find a form of equity if they want to continue to grow and so the value of the GP increases as the IDRs kick into the high splits. The other form of indirect equity they have is the syndicate business that throws off fee income.
You are creating NewCo for about $7 per share with a $1.25 distribution. If I owned ARP, I would sell it and buy ATLS. You can create the GP of ARP at a yield approaching 20% through ATLS. A no brainer....
David - you bring up some good points. My guess is the IDR holiday from $0.65 - $0.70 that APL enjoys was a factor. My guess this could be 18 months of no upside for ATLS on APL. Also, the fund raising required to build out for PXD alone was daunting. If the junk market collapsed tomorrow, it was a big problem for APL. Selling to a near investment grade entity probably looked appealing and you still get a carry on APL through TRGP if you choose to hold the shares of the C-Corp.
I wouldn't be surprised if ATLS didn't get involved with a pipeline again!!
Oddly, I think ARP is the best positioned E&P MLP right now given the syndicate business even though it yields the most. I don't know why you would own ARP however. The best way to play ARP is going to be NewCo through the GP since we are right on the edge of the high splits. Arbitrage players must be having a great time with this 6-way play (TRGP, NGLS, APL, ATLS, ARP & NewCo).
Pushing the closing until January gives everyone 15 months to deal with the tax issue.
Should be interesting to see the distributions tonight at ARP & ATLS......
Here's what I think. We are getting about $22 per share in TRGP shares plus $9.12 in cash. We will also get new MLP shares in all the non-pipeline assets including; GP of ARP, 83% GP in AGP, GP & LP interests in ARCX and some oil and gas assets. Company stated that NewCo will distribute $1.25 on annual basis. So, the stub equity is being created in the market at about $7 per unit to yield about 18%. Way to cheap. If the new GP yields 8%, the total package is worth $46 plus we get a step up in basis in NewCo and TRGP shares offset by tax we have to pay.
Going forward, the syndicate raise is going to be key for ARP. Need at least $200 MM. Effectively a form of equity. We can't issue ARP equity at these prices. So what do they do. I can only speculate but there have been some deals with other firms where they drop down assets into the MLP. I wouldn't be surprised if ATLS gave up some of it's GP interest and partnered with another company, to acquire assets and drop them down into ARP. Again, another form of equity to ARP. Based on the last conference call where Cohen said stay tuned, something like this must be in consideration.
Interestingly, AGP committed to buy assets in the last Eagle-Ford Asset purchase by ARP. ATLS guaranteed the AGP commitment. The pressure is on to raise assets at AGP - interesting in the context that oil and gas has traded off since this deal was announced.
When you put all of this in a blender, and indeed it is a complicated mix, ATLS is very cheap at current levels. Any bounce in the commodity price could be the spark to make prices move.
APL increased it's distribution by $0.01 tonight. My guess is ATLS announces at distribution of $0.52-0.53 tomorrow night.
APL reported after the close. they bumped the distribution by $0.01 to $0.64 and had coverage of 1.2X for the quarter. ATLS and ARP always announce the day following APL.
Jim, you are exactly right. The business model of E&P MLPs do not work at these yield levels. The only way out is consolidation. For ARP, they have a very clear path, increase coverage to 1.1X and the stock will respond. The recent acquisition is $0.05 to $0.09 accretive. If they retain it, it will get them to a decent coverage ratio.
You bring up an excellent point regarding the cost of capital arbitrage potential. My guess is Kinder would have little interest in ARP but perhaps a lot of interest in APL. APL has pipes in 3 of the 4 best basins in the US - Permian, Scoop and Eagle-Ford and the Mississippi isn't too bad either.
This last acquisition for ARP is a home run for ATLS. Even with the 8 5/8's perpetual preferred's the deal is $0.05 - $0.09 per annum accretive to ARP. If it all were distributed, this would equate to $0.15-$0.20 to ATLS given it's LP ownership and IDR's. If you are sitting in the GP seat (which controls ARP), and you have to put up no capital to do accretive deals, the cost of capital of the combined entities (they were once combined) is actually quite reasonable. This is why one should always own the GP over the slave LP. I am adding to my ATLS position.
David, The one thing all these assets have in common is they are ideal for a MLP structure. Mature producing assets that throw off ample cash with a slower decline curve. Management is looking at this as a portfolio of properties balancing liquids and gas for diversification and also managing the portfolio decline curve to under 10% a year so as to manage the magnitude of maintenance capex needed to maintain the asset base. The syndicate capital raise of $200 MM or more is a real differentiator as no other MLP does this. It is effectively a form of equity used for acquisitions, all fee based, and therefore no commodity exposure.
Yes, the share action has been frustrating. However, I will have $2.40+ per unit returned to me this year and probably another $2.60 in 2015. One thing I've learned over many years is 80% of a move tends to happen in 20% of the time. ARP is suffering from the management mistake of over-promising and under-delivering. It will take some time to mend this flaw but they are moving in the right direction with the last few moves. I also think they will raise $200 MM or more in the private partnership syndicate business that will be a positive move relative to the $150 raised last year.
I have you been reading the Continental Resource pieces. They think the SCOOP basins could be as large as the Bakken!! Amazing stuff..
This brings liquids/oil production to 25% of total. Hopefully deal is accretive as Rangely which was a home run. I own 2 shares of ATLS for every one share of ARP. The IDR leverage resides with ATLS. ARP just needs to steadily build coverage to 1.1X while also slowly moving the distribution upward. At some point, the imbedded call option to natural gas price will be realized as well. Once these conditions are satisfied, ARP will move towards a 10% yield or lower.
Interestingly, in this press release, ARP made mention it had entered into an agreement with ATLS new MLP, Atlas Growth Partners (private MLP), to acquire undeveloped locations from ARP for $115 MM within 12 months. So ultimately, ARP will have $90 MM into this acquisition for the proven production. The big story in this deal is Atlas Growth Partners is for real and that is probably why ATLS was up over $1 today - an up market didn't hurt as well.
Stifel reiterated it's buy recommendation and raised it's price target from $36 to $40. Anything that is good for APL and ARP is even better for ATLS given the IDR leverage.
For ARP to meet the low end of 2014 distribution guidance of $2.40, the company would have to pay $0.2080 per month for the next 5 months. If they were to step it up gradually over the next 5 months, probably means the December distribution would be closer to $0.22 to meet the $2.40 full year target. This would put the company in an odd spot as $0.22 would be annualized at $2.64 for 2015.
ARP and it's officers are in the thick of fund-raising, especially post Labor Day. ARP is planning to raise over $200 MM this year for the syndicate program, up from $150 MM last year. Simultaneously, they are raising funds for Atlas Growth Partners (AGP). The last Form D filed August 7th shows they have raised $50 MM of the $500 MM target. AGP benefits ATLS as they hold 80% of the GP. (It will be interesting to see who obtained the other 20% of the GP - I suspect the Cohen's personally or perhaps they allocated to the fund raising activities as an added incentive).
ARP trades horribly - this is the price of weak distribution coverage. It's also the price of anticipated dilution related to acquisitions. Cohen took acquisitions off the table in last call. I suspect the company is on a mission to build coverage to 1.1X while also slowly raising the distribution. This should be a good quarter as they will book a lot of fees associated with the syndicate program. I look forward to the last 4 months of the trading year for ARP/ATLS......
Cohen was on CNBC yesterday and he stated that Atlas has no interest in consolidating it's GP/MLP structure anytime soon. This is very good news for ATLS as we are just at the beginning of the benefits related to ATLS GP IDRs in both APL and ARP as we are entering the high splits.
There are very few shorts against MLPs. The borrow rates are through the roof and there are few shares to borrow. You obviously don't know much about MLPs. It's not earnings that drive MLPs but rather distributable cash flow - DCF.
The better play is ATLS not ARP, although I own both. I own twice as much ATLS relative to ARP. I own ATLS for the growth and ARP for the yield. A takeover of ATLS would not be good at this stage of the company's development. ATLS is just entering the high IDR splits for ARP and APL. As we progress through the IDR splits, you get significant distribution growth in the GP ATLS. Once APL trades to a 5% yield, ARP to an 8% and ATLS to the low 3's, then we can start talking about takeovers as then we would truly receive a premium. We are going to see the distribution of ATLS go from over $2 this year to $5 over the next 4-5 years. This could be a $80-100 stock from here......
They have filed a series of schedule D's over last couple years. They have gone from $0 to $50 MM. It ames much longer to go from $0 to $50 MM than $50 to $500 MM based on my experience. You have to create the sense that the train is leaving the station......