Analyzing ACMP's first quarter earnings and key growth drivers (Part 3 of 8)
ACMP’s business model
ACMP’s natural gas pipeline networks supply gas to and from pipelines in the Barnett, Eagle Ford, Haynesville, Marcellus, Niobrara, Utica shales, and the Mid-Continent regions, which are also the areas covered by the company’s acreage dedications including more than 21,500 potential gross drilling locations.
The company’s business model includes fixed-fee contract structure and long-term gas gathering agreements. This structure helps ACMP mitigate its exposure to direct commodity price risk and provides it long-term cash flow stability. The company has entered into long-term gas gathering agreements with Chesapeake Energy Corporation (CHK) and other producer customers like Total S.A., Anadarko, Statoil ASA, Shell, and ExxonMobil, which include minimum volume commitments, periodic fee redeterminations, and other contractual provisions. CHK is the top customer for ACMP accounting for ~83% of 1Q14 revenues.
ACMP’s major long-term contracts
Barnett Shale region
ACMP gathers, treats, and compresses natural gas for Chesapeake and Total within the Barnett Shale region in exchange for specified fees per thousand cubic feet. Pursuant to the agreements, Chesapeake and Total have agreed to minimum annual volume commitments through December 2018 and June 2019, respectively. Approximately 75% of the aggregate minimum volume commitment is attributed to Chesapeake, and approximately 25% is attributed to Total. The minimum volume commitments increase ~3% per year on an average. In May 2012, ACMP entered into an agreement with Chesapeake and Total relating to the initial fee redetermination period. The additional redetermination of the Barnett Shale fee will begin on September 30, 2014, and can increase up to 27.5% of the original agreement rate.
In the Barnett Shale, operating income decreased by 64.1% in 1Q14 as compared to 4Q13 due to lower drilling activity. Average gas throughput declined to 0.973 billion cubic feet a day in 1Q14 from 1.02 billion cubic feet a day in 4Q13.
Eagle Ford Shale region
ACMP has an agreement with Chesapeake to gather, compress, dehydrate, and treat natural gas and liquids within the Eagle Ford Shale region against a service-based fee. The Eagle Ford fee is determined on a monthly basis according to the quantity of natural gas delivered for 2013 through 2014. Effective on January 1, 2015, the basis of calculating the fee will change to cost of service calculation that targets a specified pre-income tax rate of return on invested capital. This agreement will extend for 18 years.
In the Eagle Ford Shale, operating income decreased marginally by 2.7% in 1Q14 compared to the quarter-ago period. Average gas throughput remained steady at ~0.26 billion cubic feet a day in 1Q14 as compared to 4Q13 due to lower drilling activity at CHK and Total S.A., its two major customers.
Haynesville Shale region
ACMP has an agreement with Chesapeake for gathering, treating, and compressing natural gas in exchange for fees per million cubic feet. Its Springridge gathering system is subject to the redetermination mechanism. Following the last redetermination ending 31 December, 2012, the subsequent redetermination periods started in 2013, and will continue through 2020. The Mansfield Gathering System has an agreement with Chesapeake for a minimum volume commitment for each year through December 31, 2017. The fee is subject to an annual 2.5% rate escalation, while it can increase up to a maximum of 15% of the original rate.
In the Haynesville shale, operating results improved for ACMP. In 1Q14, it recorded operating loss of $2.9 million versus operating loss of $5.4 million in 4Q13. Average throughput decreased from 0.584 billion cubic feet a day in 4Q13 to 0.558 billion a day in 1Q14.
In the Mid-Continent region, ACMP has an agreement for system-based services fees per million cubic feet for natural gas gathered and per million cubic feet for natural gas compressed. These fees are subject to an annual 2.5% rate escalation. The fees are in place since September 2009 and extend through 2019. Note that gas throughput for this region fell to 0.56 billion cubic feet a day in 1Q14 from 0.57 billion cubic feet a day in 4Q13.
Utica Shale region
In this region, ACMP has commercial agreements with Chesapeake, Total, and Enervest. In the Cardinal Joint Venture, in which ACMP has 66% interest in a wet gas gathering system, the agreement extends from January 2012 through mid-2032. The Utica Dry facility, in which ACMP has 100% ownership interest in four dry gas gathering systems, has an agreement starting from July 2012 and extends up to mid-2027. There is no cap on the fee adjustments.
In the Utica Shale, operating income jumped by ~348% in 1Q14 over 4Q13. Gas throughput increased substantially from 0.16 billion cubic feet in 4Q13 to 0.23 billion cubic feet per day in 1Q14. For detailed discussion on Utica shale, read Part 5 of this series.
Marcellus Shale region
Through its subsidiary Appalachia Midstream Services, ACMP owns 47% interest in ten natural gas gathering systems that consist of approximately 823 miles of gathering pipeline in the Marcellus Shale region. The region is characterized by dry and wet natural gas. The northern Marcellus Shale is lean and dry while the southern Marcellus shale gas in wet. Wet gas requires little or no treatment for removing natural gas liquids (or NGLs).
Average throughput increased from 1.1 billion cubic feet a day to 1.20 billion cubic feet a day in the Marcellus region for ACMP. For detailed discussion on operation in this shale, read the next part of the series.
Niobrara Shale region
ACMP’s asset footprint at Niobrara shale region is characterized by thicker wet natural gas, which results in higher initial production rates and requires treatment and processing to remove NGLs prior to delivery to the pipeline grid.
In this shale, operating income increased 115% from $1.3 million in 4Q13 to $2.8 million in 1Q14. Average throughput remained almost unchanged from 0.024 billion cubic feet a day to 0.027 billion cubic feet a day in 1Q14. The company is constructing a new natural gas processing facility at the Converse County in Niobrara and expects to start production from 4Q14.
Access Midstream Partners, L.P. (ACMP) is a master limited partnership operating in the midstream energy space. Williams Companies (WMB) and Global Infrastructure Partners jointly own ACMP’s general partnership. The majority of ACMP’s revenues come from Chesapeake Energy (CHK). ACMP is part of the Alerian MLP ETF (AMLP) and Chesapeake is part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Browse this series on Market Realist: