Why SouthTX is the new growth engine for Atlas Pipeline

Market Realist

Must-know: Atlas Pipeline's 1Q14 earnings analysis (Part 5 of 7)

(Continued from Part 4)

The arrival of SouthTX

The SouthTX gathering systems were formed as part of the TEAK acquisition. On May 7, 2013, APL acquired 100% equity interests of TEAK Midstream LLC for $974.7 million in cash. The TEAK assets, which were subsequently transferred to APL and renamed as SouthTX, provided additional gathering and processing capacity as well as fee-based cash flows for APL. In addition to the existing Silver Oak I plant, which is a 200 million cubic feet per day cryogenic processing facility, APL is constructing the Silver Oak II plant. The plant will have capacity to process 200 million cubic feet per day and is expected to be in service by 2Q14. Statoil Natural Gas LLC and Talisman Energy USA Inc. are the primary producers in the SouthTX segment.

APL recently connected newly acquired gas from one of its customers in the Eagle Ford Shale. APL expects incremental volumes should materialize from this connection during May 2014. Another significant connection is expected later in the same month. Approximately 95% of revenue earned in SouthTX is fixed fee-based that gives a stability to the company’s cash flow. APL was able to get nine new producers in the fourth quarter of 2013 and in early 2014. Together, this would bring 50,000–65,000 thousand cubic feet per day on system in 2Q14 and could grow to 90,000 thousand cubic feet per day by the end of 2014.

WestTX system

WestTX’s natural gas gathering pipelines are located across seven counties within the Permian Basin in West Texas. It processes through four plants at the facilities at Consolidator, Driver, Midkiff, and Benedum. Pioneer Natural Resources Company (or PXD), a major producer in the Permian Basin, owns the remaining interest in the WestTX system. PXD is the largest customer of APL. The primary producers on the WestTX gathering system include COG Operating LLC, Laredo Petroleum Inc., and Pioneer Natural Resources USA Inc.

APL has recently executed a contract extension with PXD. The contract now expires in 2032. It has similar contract terms as the previous contract, but it also includes further areas of mutual interest. Currently, PXD and APL are working together to further develop an increasing footprint in the Permian Basin—one of the most lucrative oil and gas producing regions in the United States.

APL is constructing a new 200 million cubic feet per day processing plant, known as the Edward plant. The plant is expected to be in service in 2Q14. The additional plant will increase the WestTX aggregate processing capacity at this segment to approximately 655 million cubic feet per day from the current capacity of 455 million cubic feet per day.

Recently, APL approved the construction of a new 200 million cubic feet per day processing plant. The plant will be located in the northern part of the Permian Basin and is expected to be in service in 2Q15. This new plant and the Edward plant will serve the expanding activity in the Permian Basin, increasing the company’s processing capacity in the Permian Basin to 855 million cubic feet per day, after completion. The construction costs for the plant are expected to be $100–120 million. The majority of the capital is scheduled to be invested in 2015.

Pat McDonie, the president and chief operating officer of APL, commented in the earnings conference call of 1Q14, “due to significant producer activity across our Permian system and more recently an increase in activity in the northern part of the Permian Basin, we announced the commissioning of a new 200 million a day cryogenic processing plant that will be placed in its service in the second half of 2015. This plant will be constructed on the north portion of our gathering system supporting the ongoing development in Martin County and providing substantial operational flexibility. We will have the operational capability to utilize all of our processing capacity across our system, regardless of what area of the Permian Basin, the future growth in volumes comes from.”

Atlas Pipeline Partners (APL) is a master limited partnership operating in the midstream energy space. APL’s general partner is owned by Atlas Energy, L.P. (ATLS). APL is a component of Alerian MLP ETF (AMLP), MLP ETF (MLPA), and Global X MLP & Energy Infrastructure ETF (MLPX).

Continue to Part 6

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