Midstream gathering and processing company Atlas Pipeline Partners, L.P. (NYSE:APL) recently announced a major acquisition related to the Eagle Ford Shale. The company is paying a billion dollars in cash in a deal to acquire privately held TEAK Midstream. With a deal this large its important to take a deeper look to see what it means to Atlas’ investors.
With a market capitalization of $2.3 billion, the TEAK Midstream deal is a big one for Atlas Pipeline Partners, L.P. (NYSE:APL). The company is using a $400 million secondary offering to fund the equity portion of the deal while it has committed bank financing to fund the rest of the cash required to close the transaction. Current investors are being diluted; however, overall the deal looks like a very good one for investors thanks to three very important components.
One of the major benefits of this deal is that it gets Atlas Pipeline Partners, L.P. (NYSE:APL) a foothold in the Eagle Ford Shale. The Eagle Ford has seen amazing production growth over the past few years thanks to its liquids-rich characteristics and proximity to the energy markets along the Gulf of Mexico. Because of this, Atlas had been looking for an entry point into the Eagle Ford, which it has now found in TEAK. However, as important as access to the Eagle Ford’s growth is to the company, its only part of the reason why this is a very solid acquisition.
The most important aspect of this deal, in my opinion, is that 80% of TEAK’s current gross margin is from fixed-fee contracts. This is highly secured revenue which is important to provide stability to the company’s distribution. Once the transaction closes and the Atlas’ near-term growth projects come online, 50% of Atlas Pipeline Partners, L.P. (NYSE:APL)’ cash flow will be fixed-fee.
There is a real effort on the part of midstream companies to increase fee-based revenue. As I mentioned, this stabilizes cash flow and leads to a much more secure distribution which is something that’s important to investors. Top midstream operator Enterprise Products Partners L.P. (NYSE:EPD), for example, boasts of fee-based margins of more than 80% this year. Enterprise Products Partners L.P. (NYSE:EPD) has invested billions to steadily increase that number which just two years ago was just slightly over 70%. With more than 30 consecutive distribution increases, this has been money well spent. Atlas, on the other hand, has a long way to go to get its fee-based margins that high, but its heading in the right direction.
That leads me to the third and final positive of the acquired Eagle Ford assets. These fixed-fee assets come with an embedded upside of organic growth opportunities. For example, the Silver Oak cryogenic processing plant which is in the process of being expanded could more than triple in size over the coming years. As Atlas Pipeline Partners, L.P. (NYSE:APL) expands this asset, it will be add even more fixed-fee revenue. There’s further organic expansion opportunities, as well as the opportunity for bolt-on acquisitions as Atlas builds out its Eagle Ford presence in the coming years.
This transaction is a continuation of Atlas’ rapid expansion of the past couple of years; it’s the second-largest recent deal, as the company also purchased Cardinal Midstream late last year for $600 million. Acquisitions, however, are just part of the story here as Atlas has been spending on a variety of organic growth projects to drive returns.