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Must-know limits to Access Midstream Partners’ downside

Kshitija Bhandaru

An investor’s must-know guide to Access Midstream Partners (ACMP) (Part 5 of 5)

(Continued from Part 4)

What limit’s ACMP’s downside? One key factor that underpins ACMP’s business model is that much of its revenues come from long-term fixed-fee contracts with minimum volume commitments and periodic fee redeterminations. For example, in the Barnett region, which makes up over 30% of ACMP’s current margins, the company has contracted with Cheasapeake Energy (CHK) and Total Corp. (TOT) to provide natural gas gathering and processing services. Under the contract, both CHK and TOT have agreed to certain minimum volumes of natural gas that ACMP will gather, with 3% escalation through mid-2019. Plus, the fees that ACMP charges for its gathering services in the Barnett are subject to 2% escalation each year at the beginning of the year. ACMP notes in its 10-K that if CHK or TOT didn’t meet the minimum volume, they’d still be required to pay the same amount of fees as if ACMP had actually gathered the natural gas. Under this agreement, ACMP has limited downside in the Barnett. Even if natural gas prices fall precipitously, causing producers to cut back on drilling and possibly causing many natural gas gathering systems to see less throughput (and, in turn, less revenue), ACMP would still see a certain and predictable level of minimum revenues from these assets. In other basins, ACMP has other contract provisions, such as payments based on cost of service calculations (which provide for a predetermined rate of return). In either case, ACMP has a generally well-protected downside in the major bear case of most natural gas gathering and processing MLPs, which is that natural gas prices fall so much that drilling in serviced basins slows down or stops. ACMP provides in its latest presentation a comparison of its business model versus other midstream MLPs (see above), which emphasizes that its cash flows over the next few years should be relatively stable with limited downside. However, note that its currently contracted provisions, such as minimum volume commitments, have a set termination date and aren’t guaranteed to extend. Plus, it’s very important to note that most of ACMP’s current revenue comes from Chesapeake, and any business risk to CHK could ultimately affect ACMP. Natural gas gathering and processing is a major area of operation for master limited partnerships (or MLPs) that also involves companies such as Regency Energy (RGP), MarkWest Energy (MWE), and Enterprise Partners (EPD). Note that these companies in total make up a significant portion of the Alerian MLP ETF (AMLP). To learn more about investing in energy MLPs, see Market Realist’s Master Limited Partnerships page.

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