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Must-know: The upsides and downsides of Atlas Pipeline

Avik Chowdhury

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

(Continued from Part 6)

Bullish factors

Atlas Pipeline is currently yielding ~7.7%, which is higher than most other gathering and processing Master Limited Partnerships (or MLPs). In comparison, MarkWest Energy (MWE) is currently yielding 5.4%, Targa Resources (NGLS) is currently yielding 4.7%, and Access Midstream Partners (ACMP) is currently yielding 3.7%.

The backbone of APL’s consistent performance has been its asset base in the liquid gas-rich shales and basins. APL has assets in certain high growth areas such as the Eagle Ford Shale, Permian Basin, and Mississippian Lime that lead to higher earnings.

APL earns a significant part of its revenues from fee-based contracts negotiated with its customers. Approximately 83% of the gross margin of APL is under fee-based arrangements.

For 2014, APL has a large capex pipeline ~$450–$500 million. The projects, when they start operation, would result in higher distributable cash flow in the coming years, making APL an attractive investment opportunity.

Bearish factors

APL has more commodity exposure through its percentage of proceeds (or POP) contracts than most other companies in the gas gathering and processing space. Under POP contracts, processors receive an agreed upon percentage of the actual proceeds of the sale of the dry natural gas and natural gas liquids (or NGLs), or an agreed upon percentage based on index prices for the commodities. Under this contract, the lower the price of natural gas and NGLs, the less the processors margins will be. A downward movement in natural gas and NGLs would drive earnings lower under this contract. APL is managing the risks of operating in this business by using the hedging contracts.

APL has relatively high leverage. Pro forma for proceeds from sales of West Texas LPG leverage would have been 4.5x by March 31, 2014. Trey Karlovich, the chief financial officer of APL, commented in the conference call of 1Q14, “We expect the proceeds from the sales of West Texas LPG to further reduce borrowings outstanding under our revolving credit facility and pro forma for this transaction our March 31 leverage would have been about 4.5 times. We’ll continue to fund our $450 million to $500 million expansion capital budget for 2014 in the manner that minimizes dilution while working down our overall leverage.” The management of APL intends to better leverage ratio to reduce it to 4.25x by 2014. A rise in leverage ratio would make cost of capital more expensive for APL.

Capital market issues of APL

In March 2014, APL issued 5.06 million Class E Preferred Units at an offering price of $25 per Class E Preferred Unit. Net proceeds from the new issuance were $122.4 million. This was used to pay down the revolving credit facility and to fund a large portion of the capital expenditures. In general, MLPs rely considerably on external financing like debt and equity. Major midstream MLP names have raised capital recently to finance their growth and acquisition capex, as well as to deleverage. For more information, please read our article on “Why master limited partnerships have to rely on external funding.”

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).



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