ATLAS ENERGY LP ATLS
October 25, 2014 - 10:50am EST by
cwtdal
2014 2015
Price: 7.07 EPS $0.00 $0.00
Shares Out. (in M): 57 P/E 0.0x 0.0x
Market Cap (in $M): 401 P/FCF 0.0x 0.0x
Net Debt (in $M): 125 EBIT 0 0
TEV ($): 526 TEV/EBIT 0.0x 0.0x

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  • Energy
  • Stub
  • GP
  • Spin-Off
  • Oil and Gas
  • Dividend yield
  • Sum Of The Parts (SOTP)
  • MLP
  • Special Situation
 

Description

Atlas Energy, L.P. (ATLS) is the General Partner of Atlas Pipeline Partners, L.P. (APL) and Atlas Resource Partners, L.P. (ARP).  On October 13, 2014, APL announced it was selling itself to Targa Resources Partners LP (NGLS) and simultaneously, Targa Resources Corp (TRGP) was purchasing all related GP interests and shares of APL owned by ATLS.  The remaining stub or “spinco”, as of the close on October 24, 2014, is priced at $7.04 and has an effective yield of 17.7%, which is a HIGHER yield than the underlying LP (ARP’s current yield of 14.3%) which is shocking given that the ATLS stub is the general partner with substantial IDR rights and is expected to enter the “high splits” in the near term.  I believe a more appropriate yield for the stub is 8%-9% which equates to a price target of $13.89-$15.63 into the deal close sometime in Q1 2015 which is an expected return of 122% on the high end in less than five months.

A share of ATLS reflecting the transaction with TRGP consists of the following:

  • $9.12 in cash and 0.1809 shares of TRGP which have a combined value of $32.16 and will be distributed on the close of the transaction
  • 100% general partner interest and incentive distribution rights (IDR’s) in its E&P subsidiary, ARP, as well as approximately 24.7mm ARP units, which includes 3.75mm Class C Preferred Units in ARP that receive approximately the same dividend as common shares in ARP
  • 80% general partner interest and IDR’s as well as an 8% LP interest in ATLS’ E&P Development Subsidiary
  • 16% GP interest and 12% LP interest in Lightfoot Capital Partners, which has a 40% LP interest in Arc Logistics Partners LP (ARCX), an independent US based energy logistics service provider
  • Net production of approximately 11.5 million cubic feet per day of natural gas production in the Arkoma basin
  • Approximately $125-$150mm in new debt

Excluding the cash and TRGP shares with a combined value of $32.16 that will be distributed, the value of the stub is $7.04 given the current price of ATLS of $39.20.  In the release related to the transaction, ATLS indicated that the expected initial annual distributions would be $1.25 per unit indicating a current yield of 17.7%.  However, a full understanding of ARP's distribution is required as most of the $1.25 per unit distribution will come from dividends on the ARP shares the ATLS stub owns and GP and IDR rights held by the stub in ARP.

There are approximately 57mm fully diluted units of ATLS outstanding when multiplied by the current stub value of $7.04 is approximately $401mm in market cap.  Including expected new debt of $125mm, the EV of the new entity is $526mm.  The SOTP value of the assets are as follows:

  • 24.7mm shares of ARP (no premium given for preferred shares) = $408mm
  • Current GP and IDR payment stream of $16mm annually should be valued around 13x = $208mm (takes no consideration of likely distribution increases at ARP)
  • Current cash flows from ATLS’ E&P interest (soon to grow) are approximately $1mm, valued at 13x = $13mm
  • $15mm in ARCX shares with no value attributed to GP interest  in Lightfoot Capital Partners
  • Assume Arcoma gas assets worth approximately $45,000 a flowing BOE which equals approximately $86mm

Adding these assets yields a SOTP value of approximately $730mm.  Backing out the expected $125mm in pro-forma debt yields a stub equity value of $580mm, or $10.61/share.  I believe that this SOTP value is low because it assumes no growth in any of the GP earnings streams of the stub which is highly unlikely.  In addition, over time, retail investors seeking yield will make this stub a yield oriented play.

I believe that there are three reasons for the disconnect between the value of the stub and the underlying LP:

  • Given the bloodshed in the energy sector in October, MLP focused investors and hedge funds in general are concentrated on surviving the year and are not looking for new ideas in the energy space.
  • There is an extraordinary amount of capital required to express a position in the stub.  In a market where retail is likely not currently active and energy and MLP focused investors have taken down gross capital exposure, this stub position will suck down a lot of “dry powder”.  For example, to express a 10,000 share investment in the stub with a current value of $70,400, an investor would have to buy 10,000 shares of ATLS worth $392,000 and short 1,809 shares of TRGP worth $230,358.  Therefore, an investor has to put up $622,358 in gross capital to express just a $70,400 bet.
  • Given the recent price action in natural gas and oil, investors are likely assuming some distribution cut at ARP in the coming years.

The value of the stub will be realized as the company attends conferences and explains the story into the deal close in Q1 2015.  In addition, I believe there are additional catalysts that could play out:

  • ARP could buy back it’s IDR stream from ATLS spin or buy all spinco at a premium.  Now would be the “cheapest” time to do it as ARP is entering the “high splits” of 50/50 for its IDR and such a move would accelerated distribution growth and valuation at ARP.
  • ARP is likely to increase confidence that the distribution is not going to be cut but is going to be raised.  On the call announcing the sale to Targa, management was extraordinarily bullish on the prospects for ARP and said, in effect, that the distribution will be going up.  I believe that there are several things potentially in play: the fundraising partnership business is going quite well for the year, ARP is looking at ways to increase acquisition activity without having to tap the capital markets which is always good for an IDR holder and the underlying, or ARP is going to be sold.  Based on the language in the ATLS conference call discussing the Targa acquisition of ATLS and APL, we are likely to get an update on whatever is going to happen before ARP’s November 11, 2014 earnings conference call.

 

Links to the call can be found here:

http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=197317&eventID=5171686

 

ARP currently yields 14.3%.  In a follow-on note or update, I will articulate why I believe that the distribution is secure at ARP.  The appropriate dividend yield for a GP of an upstream MLP should be 8%-9% yielding a price target of $12.50-$15.63.  I will provide comps in an update to this post (VIC community please advise if you would like me to add any or consider particular comps).

The next two weeks are critical as I suspect investors will receive a substantial update with respect to spinco and ARP.  Please read the deal release and listen to the conference call.  At a minimum, it will become clear that the dividend at ARP ($0.1966 per month or $2.36 annually) is well secured and a target of up to $15.63 at spinco is based on sustainable cash flows from the dividend paid monthly at ARP.  It will also become clear that the IDR revenue stream will accelerate in the coming year.

 

ATLS announcement of Targa deal:

http://phx.corporate-ir.net/phoenix.zhtml?c=197317&p=irol-newsArticle&ID=1976851

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Now to 11/11/14 - Expect an announcement on the status of the ATLS spinco as well as a potential acquisition of ARP, acquisition of ATLS by ARP, or other transaction designed to articulate the sustainability and growth of the dividends at ARP (which make up a large portion of the cash flows in the ATLS spinco).  The later will increase the value of ATLS' IDR rights in ARP.
 
Q1 2015 - Deal close.  ATLS/ARP will be attending multiple conferences which will highlight the value of the stub/spinco and the durability of the ARP distribution.
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    Description

    Atlas Energy, L.P. (ATLS) is the General Partner of Atlas Pipeline Partners, L.P. (APL) and Atlas Resource Partners, L.P. (ARP).  On October 13, 2014, APL announced it was selling itself to Targa Resources Partners LP (NGLS) and simultaneously, Targa Resources Corp (TRGP) was purchasing all related GP interests and shares of APL owned by ATLS.  The remaining stub or “spinco”, as of the close on October 24, 2014, is priced at $7.04 and has an effective yield of 17.7%, which is a HIGHER yield than the underlying LP (ARP’s current yield of 14.3%) which is shocking given that the ATLS stub is the general partner with substantial IDR rights and is expected to enter the “high splits” in the near term.  I believe a more appropriate yield for the stub is 8%-9% which equates to a price target of $13.89-$15.63 into the deal close sometime in Q1 2015 which is an expected return of 122% on the high end in less than five months.

    A share of ATLS reflecting the transaction with TRGP consists of the following:

    Excluding the cash and TRGP shares with a combined value of $32.16 that will be distributed, the value of the stub is $7.04 given the current price of ATLS of $39.20.  In the release related to the transaction, ATLS indicated that the expected initial annual distributions would be $1.25 per unit indicating a current yield of 17.7%.  However, a full understanding of ARP's distribution is required as most of the $1.25 per unit distribution will come from dividends on the ARP shares the ATLS stub owns and GP and IDR rights held by the stub in ARP.

    There are approximately 57mm fully diluted units of ATLS outstanding when multiplied by the current stub value of $7.04 is approximately $401mm in market cap.  Including expected new debt of $125mm, the EV of the new entity is $526mm.  The SOTP value of the assets are as follows:

    Adding these assets yields a SOTP value of approximately $730mm.  Backing out the expected $125mm in pro-forma debt yields a stub equity value of $580mm, or $10.61/share.  I believe that this SOTP value is low because it assumes no growth in any of the GP earnings streams of the stub which is highly unlikely.  In addition, over time, retail investors seeking yield will make this stub a yield oriented play.

    I believe that there are three reasons for the disconnect between the value of the stub and the underlying LP:

    The value of the stub will be realized as the company attends conferences and explains the story into the deal close in Q1 2015.  In addition, I believe there are additional catalysts that could play out:

     

    Links to the call can be found here:

    http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=197317&eventID=5171686

     

    ARP currently yields 14.3%.  In a follow-on note or update, I will articulate why I believe that the distribution is secure at ARP.  The appropriate dividend yield for a GP of an upstream MLP should be 8%-9% yielding a price target of $12.50-$15.63.  I will provide comps in an update to this post (VIC community please advise if you would like me to add any or consider particular comps).

    The next two weeks are critical as I suspect investors will receive a substantial update with respect to spinco and ARP.  Please read the deal release and listen to the conference call.  At a minimum, it will become clear that the dividend at ARP ($0.1966 per month or $2.36 annually) is well secured and a target of up to $15.63 at spinco is based on sustainable cash flows from the dividend paid monthly at ARP.  It will also become clear that the IDR revenue stream will accelerate in the coming year.

     

    ATLS announcement of Targa deal:

    http://phx.corporate-ir.net/phoenix.zhtml?c=197317&p=irol-newsArticle&ID=1976851

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Now to 11/11/14 - Expect an announcement on the status of the ATLS spinco as well as a potential acquisition of ARP, acquisition of ATLS by ARP, or other transaction designed to articulate the sustainability and growth of the dividends at ARP (which make up a large portion of the cash flows in the ATLS spinco).  The later will increase the value of ATLS' IDR rights in ARP.
     
    Q1 2015 - Deal close.  ATLS/ARP will be attending multiple conferences which will highlight the value of the stub/spinco and the durability of the ARP distribution.

    Messages


    SubjectRE: Dividend
    Entry10/26/2014 11:56 AM
    Membercwtdal
    • 24.7mm shares of ARP at $2.40 = $59mm (remember that the 3.7mm preferred shares have an equivalent dividend to the common
    • $10mm from Arkoma
    • Curent $16mm from IDR and GP interests at ARP growing to at least $20mm
    • $1mm from Lightfoot Capital Partners
    • $1mm from Atlas Growth Partners

    Total sum of revenues is approximately $91mm.  Expenses are as follows:

    • G&A of approximately $10mm (most G&A goes with sale)
    • $125mm in new debt at 6% = $7.5mm
    • $1.5mm in Arkoma maintance capex

    Approximate DCF of $mm.  57mm shares.  $1.26 per unit.

    Hope this helps.


    SubjectRE: RE: Dividend
    Entry10/26/2014 12:05 PM
    Membercwtdal
    24.7mm shares of ARP at $2.40 = $59mm (remember that the 3.7mm preferred shares have an equivalent dividend to the common $10mm from Arkoma Curent $16mm from IDR and GP interests at ARP growing to at least $20mm $1mm from Lightfoot Capital Partners $1mm from Atlas Growth Partners Total sum of revenues is approximately $91mm. Expenses are as follows: G&A of approximately $10mm (most G&A goes with sale) $150mm in new debt at 6% = $8.25mm $1.5mm in Arkoma maintance capex Approximately $70.5mm in DCF. 57mm shares. $1.25 per unit. Changed debt to $150mm. Lowered interest to 5.5%.

    SubjectRE: RE: Dividend
    Entry10/26/2014 12:40 PM
    Memberutah1009
    As someone who has invested in various Atlas entities for ten years, I dont see how this has $10m of G&A. The audit alone for the holdco cost over $3m, directors made over $1m, and you can bet your life that Jonathan and Ed will make a combined $12-20m. Other NEO's will make another $7-10m. This is going to have something like $30m of G&A I think. 

    SubjectRE: RE: RE: Dividend
    Entry10/26/2014 01:01 PM
    Membercwtdal
    I am relying on what is in print on the $1.25 dividend along with my calculations.  They just put it in print 15 days ago and would have had to have an estimate of go forward G&A at the time to make it. However, call the company and walk through it with them.  I have and believe $10mm is a decent estimate for G&A. 
     
    We will know what is going to happen by the November 11th earnings call.  My guess is that we will see further meat on the bone with respect to ARP's dividend or a possible strategic transaction and you will be more comfortable with the DCF per unit and dividend for the stub.
     
    On a side note, if I take your assumed extra $20mm in G&A, still a $0.90 distribution.  Stub should be worth $10-$11.25 assuming a 8-9% yield.  Still represents a subtantial premium to the current stub value of $7.04 of 42%-60%.  

    SubjectRE: RE: RE: RE: RE: Dividend
    Entry10/26/2014 02:08 PM
    Membercwtdal
    Spoke with Brian. Agree on all. Intuitively agree on point about same asset trading at big premium. It should trade at some premium due to IDR. These guys won't sit still is very true.

    SubjectStub with today's energy sell off yielding 20.7%
    Entry10/27/2014 10:48 AM
    Membercwtdal
    Two developments today:
     
    1) Weakness in energy markets
    2) Upgrade of TRGP by Global Hunter
     
    Given the selloff in energy, and the outperformance of TRGP due to an upgrade, the stub now yields 20.7%.
     
    ATLS at $37.96
     
    TRGP at $126.01
     
    0.1809 shares of TRGP = $22.80.  Plus $9.12 in cash = $31.92.
     
    Stub trades at $6.04.
     
    $1.25 expected yield.
     
     
     
     

    SubjectAnnouncement
    Entry11/05/2014 09:59 AM
    Membershoobity

    HI cwtdal,

    Any thoughts on the announcement today of next year expectations by ARP?


    SubjectRe: Announcement
    Entry11/19/2014 04:26 PM
    Membercwtdal

    I think the biggest "at risk" piece to their expectations are the fundraising goals.  They have in the past raised numbers much larger than their 2015 goal of $275mm but I would imagine it will be harder to get investors excited about owning a piece of a well through an investment partnership in this tape.  However, the real benefit of the oil and gas partnership business to the individual investor is an 85% shield of the investment value against income in the year in which the investment was made.  So it ends up being mostly the value of the tax shield in the first several years.  The company claims it has significantly increased its distribution network this year for soliciting investments in the partnership business so it is unknown how that will work. 

    Nat gas has moved up and they increased their hedges there.  They have some differentials which are wide a some natural gas hubs and others that have narrowed for the unhedged volumes.  So jump ball.

    Oil is decently hedged but unfortunately they did not get all of the Eagle Ford volumes hedged prior to the acquisition's close.  $83 average price doesn't seem unrealistic given 70% of volumes are hedged at $90.

    Net, I believe that $2.40 is a doable and realistic distribution. 


    SubjectRe: Friday's Price Movements?
    Entry11/19/2014 04:33 PM
    Membercwtdal

    Sorry, I missed this one.  Still trading at a big yield.  TRGP has certainly been down but the stub has not increased in nominal value. 

    It is still a head scratcher why a GP would trade at a discount to the LP.  I still believe that this stub takes up too much capital, the energy tape is far from stable, and investors must be showing some skepticism over ARP's projected 2015 numbers (addressed in another post I just made). 


    SubjectATLS
    Entry01/27/2015 08:32 PM
    Memberjhu2000

    Are there any tax issues that ATLS unit holders will be subject to as a result of the spin off of Atlas Energy (new co,) and the acquisition of TRGP.I understand the tax impilcations will vary depending on the tax basis of each individual ATLS unit holder.My question is (1) what is the imbedded tax liability that easch ATLS unit holder will be subject to, apart from individual basis, as a result of an MLP ( ATLS) being aquired by a C-corp(TRGP).(2) Is this tax the result of ATLS's nonrecourse liabilties to each unit hiolder?

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