Is a 20% Yield Sustainable? Look at Atlas Pipeline Partners

First let me disclose that I own shares of Atlas Pipeline Partners (APL), and I'm delighted by yesterday's humbling earnings announcement by the company.

Wednesday, Atlas declared a quarterly distribution of 38 cents. While that is down from the 96 cents it declared last quarter, I think it lays to rest the market’s excessive worries about APL’s cash flows.

The stock is up nearly 22% as I write, but it appears we have a long way to go on the upside. Take a look at the shocking chart below compliments of Yahoo! Finance.

At the current price of about $7.50 per share, our yield is 20%. That’s on 38 cents annualized. I think that distribution will rise significantly if and when natural gas and natural gas liquids (NGLs) prices rise during the year. I believe they will.

An important statement from yesterday’s release:

Eugene N. Dubay, chief executive officer of the partnership, stated, ‘The distribution of 38 cents per common unit comes despite the devastating and rapid decline in commodity prices, which were down approximately 60% from the previous quarter. We are hopeful that NGL prices (up approximately 50% from December 2008) will continue to recover, and that our unit holders may receive the benefit from such recovery.

So despite the collapse in commodity pricing, APL still paid out 38 cents. And did so while maintaining a coverage ratio of 1.2 times. (Meaning, it paid out about 80% of its earnings.) Doesn’t seem like a company in trouble to me. The company also took a number of steps to reduce debt.

As Dubay mentions in the statement above, the price of NGLs -- a primary product for APL -- has already climbed 50% from December lows. I expect the distribution to climb as well.

I think the market is just wrong on APL. It’s overly worried about APL’s leverage, which is high, but manageable in the context of APL’s ample cash flows.

The replacement value of these assets is way above the share price. The stock would have to go up fourfold just to trade for book value, which itself understates the replacement costs of APL’s pipeline network.

The risk-reward here looks very skewed towards reward. There's always the unseen and the unknown, and don't forget "Murphy's Law". But based on what we see and what the company said yesterday, it's an opportunity too lucrative to ignore.

For those who haven't heard of it, Atlas Pipeline Partners, L.P. and its subsidiaries engage in the transmission, gathering, and processing of natural gas. The company primarily provides natural gas gathering services in the Anadarko, Arkoma, Golden Trend, and Permian Basins in the southwestern and mid-continent United States and the Appalachian Basin in the eastern United States.

APL also offers natural gas processing services in Oklahoma and Texas, as well as provides interstate gas transmission services in southeastern Oklahoma, Arkansas, and southeastern Missouri.

Atlas Pipeline Partners owns and operates a 565-mile interstate pipeline system that extends from southeastern Oklahoma through Arkansas and into southeastern Missouri; 7,870 miles of active natural gas gathering systems located in Oklahoma, Arkansas, and Texas; and 1,600 miles of active natural gas gathering systems located in eastern Ohio, western New York, and western Pennsylvania. Atlas Pipeline Partners GP, LLC serves as the general partner of the company. Atlas Pipeline Partners was founded in 1999 and is based in Moon Township, Pennsylvania.

With natural gas and the Natural Gas ETF (UNG) trading at 7-year lows, value and income investors can sit up and take notice. Just watching the price of Chesapeake Energy (CHK) the past couple of days bodes well for where natural gas prices might be as early as this summer.

Nothing in this world now is a "sure thing". But I like getting paid a yield of 20% while I'm waiting for my "ship" (natural gas and NGL) to come into port and deliver. Do your own due diligence before you agree or disagree with me and see what you discover.

Disclosure: Long APL.

Comments

[Scanio:]

If I had to bet on the price hike of gas later in the year, I would rather by Gazprom. In any case, looking at the diminishing oil price, it is rather safe to say the gas price might pick up only in the beginning of next year.

Jan 29 06:34 AM

[rhino25:]

Dude, you basically copy and pasted most of your analysis from a Chris Mayers alert

Jan 29 07:17 AM

[jpau:]

Marc, I think the market has this thing just about priced correctly right now. I've been following Atlas since last year. ATN, LINE, BBEP, MWP - many of these fell in similar fashion, but it appears that those did a better job of price-hedging than APL. That's a bit disconcerting, but the price seems right for the risk. They have pretty significant debt too, and there was considerable worry about their debt covenants.

That said, I picked some up yesterday because I agree with you that at the current price relative to book value, along with the payout percentage, it is too attractive to ignore. Makes me wonder if Klarman will add to his position this quarter, he also holds LINE and BBEP I think. Any thoughts on AHD? Their payout got crushed.

Jan 29 07:22 AM

[max135:]

I think that they are so many high yield Natural Gas Plays out there. Be careful and own a basket of these rather than one.

Jan 29 08:56 AM

[Marc Courtenay:]

The debt issue with APL is a great underlying concern, but the hope is the cash flow will carry the debt. The balance sheet and income statement for AHD looks scary, and it wouldn't surprise me if management puts the whole thing up for sale and tries a merger. The price tells us it is 'high risk". Appreciate your comments and I hope the price of APL will be boosted in the future by a boosting of the payout. Modest, very careful exposure to APL seems appropriate as the higher risk portion of an income with growth portfolio.


On Jan 29 07:22 AM jpau wrote:

> Marc, I think the market has this thing just about priced correctly
> right now. I've been following Atlas since last year. ATN, LINE,
> BBEP, MWP - many of these fell in similar fashion, but it appears
> that those did a better job of price-hedging than APL. That's a bit
> disconcerting, but the price seems right for the risk. They have
> pretty significant debt too, and there was considerable worry about
> their debt covenants.
>
> That said, I picked some up yesterday because I agree with you that
> at the current price relative to book value, along with the payout
> percentage, it is too attractive to ignore. Makes me wonder if Klarman
> will add to his position this quarter, he also holds LINE and BBEP
> I think. Any thoughts on AHD? Their payout got crushed.

Jan 29 03:11 PM

[Marc Courtenay:]

I couldn't agree with you more and I appreciate your caution. It is also been a good time to be accumulating UNG, which I have been doing at around $18.20 to $18.30, and I'm encouraged by today's natural gas market action. Hope you are doing well with your investments. These are very volatile markets indeed!


On Jan 29 08:56 AM max135 wrote:

> I think that they are so many high yield Natural Gas Plays out there.
> Be careful and own a basket of these rather than one.

Jan 29 03:13 PM

[Marc Courtenay:]

No, actually Chris must have copied and pasted his analysis directly from the company's public statement, a portion of which reads as follows:
In addition to cash flow related to ongoing operating revenues from which Atlas Pipeline is paying its quarterly distribution with coverage of 1.2x, the Partnership also generated $49 million of benefit from the following actions:

* The Partnership repurchased approximately $60 million in face amount of its Senior Notes in December 2008 for an aggregate purchase price of approximately $40 million, generating a gain of approximately $20 million;
* The Partnership entered into early settlement arrangements on approximately 13% of its commodity hedge contracts covering 2009 natural gas liquids (NGL) and condensate production volumes. The Partnership received approximately $19 million in net proceeds from these early settlements concluded in December 2008. The net proceeds from these settlements were used to reduce outstanding indebtedness; and,
* The Partnership recognized a $10.0 million benefit resulting from the early termination of certain derivative positions.

The Partnership also continues to consider additional strategic alternatives.

Eugene N. Dubay, Chief Executive Officer of the Partnership, stated, “The distribution of $0.38 per common unit comes despite the devastating and rapid decline in commodity prices, which were down approximately 60% from the previous quarter. We are hopeful that NGL prices (up approximately 50% from December 2008) will continue to recover, and that our unitholders may receive the benefit from such recovery.”


On Jan 29 07:17 AM rhino25 wrote:

> Dude, you basically copy and pasted most of your analysis from a
> Chris Mayers alert

Jan 29 03:17 PM

[Urbane Gori...:]

I'm not sure if I see the benefit of sitting on a stock that has dropped to 20% of it's value one year ago and has now cut the payout to 1/3 of what it used to be as well. Unless you think 'happy days are ahead', I'd say you just lost a lot of money. This is the problem with **all** dividend paying stocks right now that have high payouts..... Watch out below!

jegan

Jan 29 06:14 PM

[d_teller:]

MWE (Mark West Energy L.P), is in a similar precarious position with debt-capital-cash flow constraints...with some recent good news, but potential losses still exist.

Jan 29 09:16 PM

[d_teller:]

If you want to try a "basket" of these MLPs, without the hassle of K-1s, one could try Tortoise's "TYG" CEF.

Jan 29 09:18 PM

[jpau:]

I read this again, because it struck me as odd that they would sell 2009 hedges to make cash in Dec 2008. I fear that they might have been forced to do so in order to comply with debt covenants. Which means they are probably now praying that gas prices rise enough to cover them later this year. Thankfully, it was only 13 percent of their hedge contracts for 2009.

Jan 29 10:12 PM

[MDStudent101:]

Mr. Courteneay,

I've been sitting on the fence for quite some time on whether on not to purchase APL/AHD. Thank you for your article.

Like you, I am in a similar Midstream MLP boat, only with XTXI & XTEX. Like APL/AHD, these two boats have been taking on water for some time. I have often thought about jumping ship with these two, but valuation is such that it is far below the replacement cost of their assets. My concern is that their capital spending plans were budgeted with nat gas/NGLs being at much higher levels and that their debt burden might eventually crush them and cause them to become the Titanic. Any thoughts on XTXI/XTEX?

Just a few thoughts on future nat gas pricing:

With DD, DOW, NCX, and the other chemical companies earnings being crushed by the recession (I can only hope its not a depression), NGL pricing I'm afraid is going to be under pressure for quite some time.

Having just passed the midpoint of this winter and with all the cold weather that old man winter has thrown at us this winter, the EIA just came out and said that nat gas inventories are STILL almost 2% above 5 year levels. Thats concerning because there has been some significant drawdowns during the last few weeks and even with the Baker Hughes rig count in continual decline! That leads me to believe that there is still TOO MUCH nat gas supply out there. All this over supply is from the gas "gold rush" we had last year, and I fear that its going to take a full year and another cold winter next year to work off the extra supply in order for nat gas to rebound.

I suspect that nat gas/NGL is going to move sidways, maybe slightly lower for the remainder of the year. My hunch is that nat gas will briefly touch $4 and then bottom slightlly up from that level.

Lastly, there is an article that I stumbled upon that makes a bearish case for nat gas pricing. It was written not by some CNBC guest, but by an analyst with an energy investment firm. I invite everyone to read it and form their own opinion. The link is below:

www.rigzone.com/news/a...

Jan 30 01:48 AM