Now that the 3Q is behind us which was admittedly mildly disappointing we can start to look forward to the 2014/15 bounty ahead of us. The 3Q was marred by largely things out of management's control, namely a processing plant fire in the Utica and a glut of gas coming off the Marcellus at ARP. Drilling in our other basins looks very positive where new pay zones were uncovered in the Marble Falls and the Coal Bed gas play basically covers our S,G&A. APL had issues in S. Texas but our pipes are in front of some of the most prolific plays in the country, especially with our partner PXD.
Management lowered guidance for both ARP and APL for 2014. I think the 3Q has taught management the need to guide Wall Street to a number they can actually beat, like the 2Q. I believe both will beat expectations in 4Q and in 2014.
Management left guidance in place for ATLS of $1.70-$2.00 for 2013 and $2.50-$2.75 in 2014. I think they are going to beat the 2014 number by coming in at $2.85, or up 65% YOY. The 2014 exit rate could be $3.10-$3.20 annualized which gets you over $75 per unit at a 4% yield.
Short-term, the next catalyst will be an announcement on the ARP syndicate fund raising which I am expecting to be $200 MM. Atlas Growth Partners (AGP) will be a big driver in 2014 when this private MLP will be announced. They will price the equity to yield 7% which will provide an attractive acquisition vehicle. I wouldn't be surprised when AGP is announced it will be coincident with property acquisitions in the Marcellus when the non-compete with Chevron lapses in 2014. I am sure, ATLS will sell it's E&P property into AGP and ARP will probably also sell some into AGP. Most importantly, ATLS will retain the GP and IDR's of yet a 3rd operating MLP creating mounting upside for ATLS unit holders.
ATLS is something you just want buy & hold for the next 5 years as the annual distributions are going to triple from here.
RRB, The $300 MM shown in the private placement filing is a placeholder. Demand for these type of private MLP's has been very high. I wouldn't be surprised if they raised a lot more than $300 MM, perhaps $600-$900 MM. The selling concession is indeed 10%, so a huge incentive for the brokers listed in the SEC doc to sell the placement. I imagine ARP will retain the GP and have an LP interest in the new private MLP. This capital will be used to drill out ARP's excess inventory. The capital raised will go to AGP. But think about it, ARP equity market cap is $1.2 B. Effectively, if they raised $900 MM, it would increase the equity value of ARP as the market is placing little value on these assets. Once the private MLP is creating DCF, the exit strategy would be to take the MLP public thereby crystallizing value. In the interim, ARP receives another source of cash flow. This is speculation on my part but a lot of capital is going into the private MLP sector and then coming out as public entities at a later point
I am getting more bullish on ARP and even more so on ATLS. We will get the earnings report and conference call on Thurs/Friday. We will get more visibility on the disruption by Trans-Co in the Marcellus and production level in the Utica and Marble Falls. I think what is going to move the unit price is the carve-out from ARP - Atlas Growth Partners that was initially filed with the SEC in May and amended in October. I hope we can get some commentary on how this capital raise is progressing - I think this could be really big. My guess is the communication will be cryptic at best as they are in the midst of a private placement but I plan to keep my ear close to the ground. The trend in the MLP sector going into 2014 will be drop-down activity and carve-out MLP transactions. The other news going into year-end will be the capital raise for the ongoing syndication business. In the next 6 months I see the ARP units trading north of $25 and on their way to $30. To keep the acquisition engine running, they need ARP trading at these levels........ Long & Strong.
Agree with everything you point out. As always, the way to play ARP is through the GP as you get the levered growth through the IDR's and now the potential for M&A premium to build in all the GP's given the Devon transaction.....
The miss in the quarter at ARP had little to do with ARP. Issues with Trans-co in the Marcellus and a plant fire in the Utica were the main causes of the 3Q miss. Once resolved, these cash flows will be realized. Lack of growth? ATLS distribution is going to be north of $1.70 in 2013 and easily north of $2.50 in 2014 for 50% growth. Find that level of distribution growth in the MLP sector - you can't. Furthermore, you have to believe every investment banker just watched the the Devon drop down transaction. Atlas is a perfect candidate for this type of transaction as well.
The market action in ATLS has been impressive as of late. Routinely, the volume has been just shy of 1,000,000 per day. Yesterday, 423,000 shares crossed pre-market at 9:16 at $49.81. We are going to see some new blood in the ATLS name - probably not until February as the volume didn't pick up until post 9/30 so not in the November 13-F filings. Obviously some old blood is selling as well but Cooperman has recently been promoting the name so not him. What has been impressive is the units have held their price of around $50 during this distribution phase in trading so sellers and buyers about equally balanced on volume.
Long and Strong!
Harehau, You can't just get rid of ATLS the GP - ARP and APL would need to offer to buy out their respective GP interests and they are very valuable. Right now this GP interest (ATLS) is trading in aggregate for about $2.4 B. APL trades for $3.4 B and ARP $1.3 B. It would be so dilutive, especially to ARP, that it makes no economic sense to buy out the GP. We all need to calm down, we will get through this bump in the road and at the end of the day, the Cohen's have created a lot of value in the course of a little over 18 months and assembled a very valuable grouping of assets.
David, I appreciate your perspective......and past pain. I did not become a unit holder until October 2011, so I have seen nothing but the ups with ATLS. The GP/IDR/MLP structure has so many positive attributes, especially from a tax perspective. The energy/shale/tight oil & gas play has very positive fundamentals, perhaps for the next 20 years, so the wind is at one's back. Owning ATLS, given the IDR carry feature, is like being the GP of a hedge fund with a 50% carry on an industry (energy) with a 20 year tail wind. Think about that, why wouldn't one pay a premium to participate? I view this as a long term investment; however, I also recognize that the long term is made up of many short terms in the forms of quarters and we just had a hiccup. I think we will get back on track in a quarter or two and we will be fine. ATLS is probably trading at a 7% yield on a 2015 distribution - not bad. Furthermore, the call option ATLS possesses on acquisitions at ARP/APL is extraordinary.
All need to calm down. Flow rates in Marcellus and Utica look outstanding. The fire at the plant in Ohio taking away Utica condensate was not in the control of ARP or Cohen. The pipeline issues in Marcellus will get resolved. Wells in Marble Falls look to be producing 100-300 BOD and they have identified additional pay zones. The operational ramp at APL in S. Texas is disappointing and we can argue if we paid too much but having plants sitting in front of Pioneer and demand for new plants every 18 months is where you want to be. This is nothing more than rapid growth being absorbed. We have rich person problems that can be solved. The multiple that ATLS trades reflects the growth rates in distributions and on that metric we still look amazingly good, the best of all pure play GP's. It will continue to trade at 3.5 - 4.0% going froward given the growth. The market pays up for growth. We still have the fund raise to be announced which expect to be around $250+ MM as well as the new structure that is going to crop out of ARP.
Lastly, Morgan Stanley just came out with a continued overweight recommendation of ATLS - they lowered their price target to $66 from $70. Morgan now owns one of the largest distribution arms in the country with Smith Barney.
All will be fine. Take out the fire retardant and put out the fire on the tops of your head (maybe side of your head for some of you!)
Obviously the pre-announcement from APL lowering guidance for 3Q and second half of 2014 put a dent in the Atlas entities yesterday. The good news for APL is they left 2014 guidance unchanged. Furthermore, at least ARP and ATLS did not revise guidance following APL. ARP's guidance is $2.35+ for 2013 and ATLS is $1.75 - $2.00. If ATLS hits the mid-point that implies $1.10 of 2nd half distributions and ARP must deliver $1.30 to hit the $2.35.
Anything Cohen does is with an eye to enhancing the value of ATLS, not necessarily ARP or APL, although their interests should be somewhat aligned. The Cohen's own size in the GP ATLS - I would never lose sight of this point. No one can argue that dropping the E&P assets out of ATLS and into ARP was a bad trade. In fact, it almost instantaneously created a 20% increase in ATLS value. I think they are trying to do the same - enhance the value of the GP.
I think it is going to be a simple drop down of excess ARP acreage into new MLP that the company has no plans to drill any time soon. Initially, ARP owns 100% of the LP interest and then gets diluted down as new MLP issues equity to drill this acreage. The GP interest in the new MLP probably will have little value given the speculative nature of the acreage. ATLS could pay ARP consideration to gain control of the GP of new MLP. The consideration payment, approved by ARP's independent directors will protect Cohen's from self-dealing. After the transaction, all GP's consolidated with ATLS and ATLS controls a solid pipeline in APL, a solid E&P asset in ARP and a call option on gas prices and speculative acreage in new E&P MLP. All speculation on my part but a possibility. We all know they are up to something, we just don't know exactly what it is........
RRB, Exactly. I can't understand why one would own the operating MLP when the economics to the GP are just so much more compelling. I've owned ATLS the GP in size since single digits and now the IDRs are right at the inflection point of full payout for both operating MLPs. I can see ATLS pushing up to $80 - 100 over the next 18 months if not sooner. This is such a home run.......... You should check out the call volume in ATLS for the Jan 60s, the APR 60s and APR 70s over the last week. Someone is making a significant bet over next 6 months....
RRB, I don't entirely understand your logic. If ARP drops down assets into a new MLP, day one ARP owns 100% of the LP interests. If the new MLP chooses to issue equity, ARP's interest will be diluted, but in theory, ARP would not dilute it's interest unless they thought the returns earned on the capital raised exceeded the level of expected dilution.
Mark my words, if ARP drops down assets to a new MLP, ARP's units will trade up to high 20's and ATLS will trade up into the 60s.
RRB, I don't think they will screw this up as this time around as they have first class advisors associated with the HY bond issuance. Regarding their land position, they have roughly 7 years of identified drilling so everything else will be dormant until year 8. Why not monetize now - the NPV calculation is highly accretive to shareholders. Just because they drop down the assets doesn't mean they won't participate in the upside. It might mean they lay off some of the speculative drilling risks to a new class of investors - not the worst thing.....
RRB, my guess is the lawyers have put Ed in a box. I suspect ARP is about to drop down a new MLP with excess land speculative inventory. I also suspect they will structure this in a way the ATLS ends up with the GP interest and ARP with the LP interest. This seemed to be intimated by Ed during 1Q conference call. Perhaps, ATLS will pay ARP a modest consideration to purchase the GP interest. This will be very positive for ATLS and a wash to slightly positive for ARP. Why? Because the Cohen's own a lot of ATLS relative to ARP and APL. I have no idea but this is my best guess at this stage. Can't wait to see what actually unfolds.......
Ed presented at the SF conference yesterday on behalf of ARP. Ed is cocky but a money maker. No new news came out of his formal presentation. The Q&A was held in a break-out room that was not covered by web-cast. Ed did intimate that news will be forthcoming on drilling programs. I suspect the bigger news that might be coming soon is a potential new MLP to be formed out of ARP based on the comments Ed made earlier in the year following 1Q earnings. I suspect the deal may be structured in some way where ATLS holds the GP interest in the new speculative MLP. Perhaps ATLS will have to pay some level of consideration to get control and ownership of the new GP of the MLP. Just speculating but ATLS seems to have caught a bid lately while ARP languishes at $21 and APL around $39. Just proves my thesis is the best way to play the Atlas complex is through the GP that the Cohen's hold the most of relative to ARP & APL.
On Thursday, someone bought a sh*tload of April 60 calls (over 5000) and another 5000 or so April 70 calls of ATLS. It looks like a new position as I couldn't detect that anyone was selling Jan calls and rolling them into April. Alot of money has been made in the Jan 14 calls, especially at the 25 and 35 strikes. LEAPs are fundamentally cheap as Black-Scholes does a poor job of pricing long-dated options. However, LEAPs don't make as much sense if you like the distributions, especially when they are just a return of capital.