ATLS the GP of ARP, APL and now AGP is a leveraged play on the performance of the underlying listed MLP's. The leverage is not necessarily financial leverage through the use of debt, but rather, the leverage inherent to the GP's contractual participation in the earnings and cash flow of the operating MLP's through the incentive distribution rights, or IDRs. Basically, once the IDRs are in the money, the GP shares in the cash flow dollar for dollar. This increases the cost of capital for the MLP but the return on capital for the GP is incredibly high. In fact, the incremental capital the GP needs to put up is zero so mathematically the return on capital is undefined (really good) as the denominator in the calculation is zero.
You will notice that the GPs always trade at a significantly lower yield than the underlying operating MLP's. In this case, ARP trades to an 11% yield, APL 8% and ATLS 4%. This is justified given the GP's much higher yield or distribution growth rate given the leverage to the IDRs, plus the very high returns on invested capital. Inherently, the GP will always be a more volatile security given these dynamics. In my case, I own 2 shares of ATLS for every share of ARP I own. ATLS has the upside but ARP protects my downside. If I only had to own one and I didn't want to look at it for 3-5 years, I would own ATLS as it is a superior mouse trap bar none.... I predict this will be one of the best performers on the NYSE over the next 3-5 years. It trades to little over a $2 B market cap. There is a lot of room to the upside as we are not even close to dealing with the math of large numbers yet.....
At mid-point, the units are yielding 5.4%. The group average for GP's is about 3.6%. If we were so lucky to trade back to this level our upside would be $61 this year. A 4% yield gets you to $55. My target is somewhere in the the middle this year of $55-$60. Given the miss at APL, ATLS should trade at a discount to the group. APL needs to get back on track and hit and exceed some targets. APL could buy the Chevron pipe which could be upside. ARP will always be on the acquisition hunt which is also upside. I'm keen to learn when will Atlas Growth Partners be formally disclosed more broadly. In December, they modified their Form D SEC filing to increase the amount expected to be raised for AGP from $300 MM to $500 MM.
Any way you look at ATLS the GP, there are multiple forms of upside to this story especially over the next few years. I still think you see these units priced north of $100 in 3-5 years with distributions of $5 or more.....
I totally agree. Someone has been leaning on the units over last week subsequent to APL call. Can't wait to hear what ATLS provides for distribution guidance for 2014/15. We should hear about ARP syndicate raise. Perhaps something on Atlas Growth Partners as well.
Yes, I'm in ARP. I own 1/2 as much of ARP relative to ATLS, or 100,000 units. They announced the January distribution after close yesterday of $0.1933, or $0.58 quarterly, or $2.32 annualized.
My guess is ARP units trading weak as market anticipates supply to fund last acquisition. I also sense ARP is up to something big on the acquisition side. Should be an interesting earnings call this week at ARP/ATLS. Also, we should hear ARP's January distribution to be paid in March.
Most companies issue secondaries on a drive-by basis these days meaning they notify the market 6-8 hours before the close, and then price the offering off the closing price. Many times the issuer will issue the shares under Rule 144A and then exchange the same securities for registered shares once the S-3 becomes effective. I wouldn't be surprised if APL issue the securities tonight.
If a deal can be done and $31 and it is accretive, so be it. Obviously more accretive at $34 - $36 but that price was a few weeks ago. As an ATLS holder, as long as it is accretive and more units are issued, ATLS comes out way ahead.
Hoping for purchase of the Chevron pipe for $400 - $500 MM.
Interesting timing. I bet this secondary is geared toward showing Jeffries, Chevron's advisor, that APL has the financial flexibility to bid and close on the Texas pipeline 20% owned by APL and 80% by Chevron. Atlas and Chevron have done a few deals over the years. I bet this secondary will be followed up by APL buying the 80% of the pipeline it doesn't own from Chevron. On the conference call, Dubay said they were interested in buying as long as accretive. This is a positive for APL & ATLS.
They are calling for an annualized exit run rate for 2014 of $2.60 which is $0.65 per unit. Not much in distribution growth rate in 2014 from APL. However, I suspect this is an expectations game and they have probably learned their lesson. My guess is they beat this number a fair margin.......The projects they list are actually fairly impressive and they set for nice growth in out years.........
My back of envelope calculation is about $0.10 of DCF to ATLS given high splits on IDRs. We are in the money. They are probably working on more deals at ARP. I also think APL buys Chevrons 80% share of the TX pipe. More accretion.....
Your numbers are correct. There are a couple Wall Street earnings models that are pretty good. One thing you have to remember is ATLS holds roughly 7.5 MM preferred units of ARP that participate in the dividends one for one and convert into common units I believe in 3 years. APL does get an IDR holiday between 0.65 - 0.70 based on a deal from long ago. I believe it is a $$$ driven holiday and it kicks in at $0.65 so the high end may change with share issuance.
I think the 4Q earnings call has been delayed as they are waiting for the Engineering Reserve report for both ARP and ATLS. After doing a little more home work, I believe the reason ATLS did show an increase in distribution this quarter was due to the timing impact on the drawdown of their credit line (interest charges) to fund the asset purchase's of the preferred and E&P from the last ARP transaction.
Interesting, ARP may actually announce it's January distribution payable in March prior to the 4Q conference call...... This will give us a tell on the ATLS distribution for the March quarter given the math discussed above.
Yes, I'm a big bull. By end of this year, ATLS should be annualizing $2.80 in distributions, or $0.70 per quarter. At a 4% yield, this gets you to a $70 unit price. By the second half of 2015, we will be annualizing $3.50+ which would get you a $88 unit price at 4%. Hard to find those types of names in a market that has been picked over. Plus, one gets the downside protection of the yield.
I do believe they are up to something. My guess is APL is trying to figure out how to buy the other 80% of the Chevron pipe they don't own and make it accretive. We know they are forming a 3rd MLP at Atlas Growth Partners which will give us a new IDR stream down the road. Plus, we will have a liquidity event when they take it public. ARP has filed a very broad shelf registration so I'm sure you are right that they are up to something on the acquisition front.
I believe they are awaiting their engineering report on the state of ARP's reserves. My guess is their reserve position has improved meaningfully given the uplift in NG prices recently making more drilling locations economic. Once they have this in hand, they will announce 4Q results. In addition, ARP will announce results of their syndicate fund raising which I believe will come in better than $150 MM.
Enjoy the ride!
Chevron has put it's Texas pipeline for sale. APL owns 20% of the pipe. The dilemma for APL is buying the 80% owned by Chevron, selling it's 20% interest with Chevron, or just holding the 20% and settling in with a new partner and operator. For Chevron, it probably gets a higher value if it can sell 100% as buyers are reluctant to take on an unknown partner. Obviously, APL will play the card of trying to buy the 80% cheaper than if went to auction. Chevron might take a cheaper price to avoid the auction selling process and cost. It would be a big deal for APL as the pipe is reportedly worth $1.0 B. I think this would come down to how much paper in the form of APL Chevron would be willing to take. Chevron taking the equity would make it easier to raise debt capital for APL.
When Chevron announced the sale of it's pipe, APL's units traded down about $2 as the market anticipated more shares from APL and it has weighed on APL's trading performance ever since. I have no idea if APL paid $1.0 B if the deal would be accretive or how much future capital the pipe requires. One thing I do know is APL cannot afford to do non-accretive deals.
It will not be three equal monthly installments. They will be gradually increasing the Distribution over time. Last year, 2013 distributions totaled $2.19, including the distribution paid Feb 2014. My guess is they will be closer to $2.60 in 2014. Therefore, the distribution will be gradually rising over time and month to month, sometimes flat, sometimes up.
ATLS should have increased 4Q distribution to $0.49 from $0.46 given $0.02 increase at ARP. Given share difference (59.5MM at ARP and 51.4 MM at ATLS) and IDR kicker at ATLS, this how is should have translated to $0.03 to ATLS. I speculate they spent the $0.03 on start-up expenses of Atlas Growth Partners, a private MLP that will form the 3rd IDR stream for ATLS. Therefore, if this spend is one-time in nature, we can bank $0.03 for 1Q. Furthermore, should APL increase by a couple pennies and ARP increase by a couple pennies, this could translate into another $0.06 - $0.08 for ATLS. (We will get a faster read through on ARP with them going monthly distribution). Overall, when you add this all up, we could be looking at a $0.10 increase in distribution for ATLS in 1Q. Although largely hedged, the small unhedged portion of production should be benefitting from higher commodity prices which should further support the thesis.
The news flow should also be pretty good. We have conference calls, some news on syndicate capital raise at ARP and hopefully some color on Atlas Growth Partners. Long and Strong! Good to be owning rising distribution plays in a sloppy market with a falling 10-year treasury. Oh yeah, I forgot ARCX that went public in 4Q. ATLS has a 20% interest in Lightfoot that took ARCX public. Although small, it looks like ARCX will throw off $1 MM annually to ATLS which is another $0.02 to the good guys!!
It will be interesting to see how they deal with number of days in the month. with only 28 days in Feb, the cash flow is less than 31 days in January. My guess is they will even this out by adjusting coverage ratio. Since they only disclose their DCF quarterly still, they have the flexibility to adjust DCF coverage of distribution. My guess is $0.59/3 for January, $0.60/3 for February and $0.61/3 for March.
Interestingly, the $0.02 increase at ARP should have translated into a $0.03 increase at ATLS given share differences and IDR kicker for ATLS. However, ATLS only paid out $0.46, flat to 3Q. This translates into about $1.5 MM. My guess ATLS spent the $0.03 on Atlas Growth Partners, the third MLP in the Atlas family. If I'm correct, and ARP increases as above and we get a couple pennies out of APL, plus the one-time spend in 4Q on AGP is gone as speculated, we could get a big increase in ATLS distribution for 1Q. Long both ARP and ATLS although favor ATLS 2 to 1.
No, the 4Q quarterly distribution to be paid in February and the the January monthly distribution to be paid in March......
Don't quite understand the math as distribution was up at ARP to $0.58 from $0.56. There are 59.5 MM shares at ARP vs 51.4 at ATLS. Therefore a $0.02 increase at ARP should translate into a $0.03 increase at ATLS given share count difference and IDR kicker. So, either ATLS held back $1.5 MM and had a coverage ratio in excess of 1.0, or they spent the money on something. I bet they spent the money on the start-up of Atlas Growth Partners.........
ARP & ATLS probably tomorrow. I imagine DCF coverage is not that great at APL given weather, etc.