Natural Gas Companies Increasingly Important

Natural gas prices are still very low and supplies seem abundant. That happens to be two of the reasons that natural gas is becoming more of the "economically reasonable, environmentally better" energy alternatives for the time being.

Companies that are in the business of transporting and distributing natural gas in the US are increasingly seen as important parts of the energy infrastructure. Atlas Pipeline Partners (NYSE:APL) is one of my favorites in this category, but the price per share has been a nightmare for shareholders over the past year.

Things are looking "up" in more ways than the direction of the share price. A recent presentation that the management of APL left on their web site tells the story better than I could (see here).

On April Fools' Day, the company made some announcements that finally encourage us as shareholders to believe that debt is being reduced and better days are ahead:

Atlas Pipeline Partners, LP,has entered into a definitive agreement to form a joint venture with a subsidiary of Williams (WMB) ("Williams") to own Atlas Pipeline’s Marcellus Shale gathering system and processing facilities as well as other Appalachian systems owned by Atlas Pipeline.

The new joint venture, Laurel Mountain Midstream, LLC (the "joint venture"), intends to be the leading gathering system in the southwestern Pennsylvania portion of the Marcellus Shale. Atlas Energy will be the anchor shipper on this system. Upon the formation of the joint venture, Atlas Energy has agreed to sell to the joint venture two natural gas processing plants and associated pipelines located in southwestern Pennsylvania for $12 million in cash. Completion of the joint venture formation is subject to customary closing conditions.

"We are pleased to be entering into this relationship with Laurel Mountain Midstream, LLC. This transaction should enable Atlas Energy to accelerate development of its leading Marcellus Shale acreage position and further solidifies Atlas Energy’s position as one of the leading operators in the Marcellus Shale,” stated Richard D. Weber, President and Chief Operating Officer. “Our Marcellus Shale operations will now benefit from the capital, experience and deep technical resources that Williams brings to this joint venture.”

My colleague and mentor Chris Mayer reported to us Friday morning his reaction to this news:

All of that is very good news. There are two more asset sales remaining: the NOARK Pipeline System and the Nine Mile plant. Forced to venture a guess, I’d say these gross around $400 million, but we’ll see. These asset sales significantly reduce the financial risk in APL.

Also, on Monday, APL put out an 8-K alerting investors that it has put up a new presentation on its Web site. APL had not had a presentation for several months. This new presentation included a key slide on commodity price sensitivity.

This information was quite helpful. It shows that based on year-to-date average prices for oil ($42), natural gas liquids (56 cents) and natural gas ($4.57), APL would earn $1.73 per unit (!) in distributable cash flow. The stock trades for just under $5 per unit as I write. So the stock trades for 2.9 times distributable cash flow.

The slide also included scenarios in which energy prices fall. The good news here is that even under these scenarios, APL continues to generate significant cash flow.

As I said before and will say again -- APL is a speculative buy. It could go to $15-20 per unit…or not. (The stock could go even higher with better energy prices). We have a long way to go still. But things are moving in the right direction now.

"Commodity price sensitivity" also impacts big companies like Chesapeake Energy (NYSE:CHK) and ConocoPhillips (NYSE:COP), so smaller income-oriented MLPs like APL are not alone in that department.

Natural gas prices may follow oil prices as summer arrives. The natural gas producers like CHK, although nicely hedged for now, need higher prices to make exploration and production financially feasible.

All these factors bode well for our APL. Considering the turmoil, disappointment and confusion we've experienced with APL all I can say is, "buyer beware--APL is not for the faint-hearted--it is higher risk with potentially higher reward."

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will!

Disclosure: Author holds long positions in APL, CHK, COP

Comments

[Skip Olinger:]

Marc,
You are long on opinion and short on detail here. How much cash is APL getting from Williams to pay down their debt? Is not the goal to pay down debt to avoid covenant breech? I see no mention of that. How did you or your mentor come up with $400M for the sale of NOARK? What effect on Adj EBITDA will that sale have. NOARK is one of their few assets that generates revenue from fee or toll contracts so the sale further exposes the company to commodity risk. And, could you please enlighten us all as to why your favorite pick of all the NG transportation companies is APL? If you like transportation and distribution, why on Energy Transfer or Enterprise Products. They are bigger, not in financial peril. They make much more of their revenue from fee based contracts, not keepwell contracts. I have to be blunt here in the interest of trying to keep high quality analysis on SA; I don't care about your "feelings" about a company. I am interested in hard analysis as to why APL is now a deep value play with little downside risk and very large upside. I see nothing here that tells me how and when APL will raise sufficient capital to pay down debt to avoid default. It won't matter how much they earn if the bank defaults their loan. This is an interesting story so do some real analysis before you publish. There is no value in putting up a piece that tells readers to look at the company's powerpoint.

Apr 05 03:27 PM

[Marc Courtenay:]

Thanks for your straight forward comments Skip. Go to their web site and read their 8-K and their presentation. My friend Richard Wendling Bearfactsspecialistrep... wrote the following that might be useful to you: 3) APL is carrying 1.5 Billion in debt on their balance sheet. While this is a major negative it is also a positive. APL had five major projects over the last several years related to pipelines and pumping stations, which caused that debt load. As the chart below indicates four of the five are now
completed (see their web site or email Richard for his charts at
comments@bearfactsspec...
The debt load can now be reduced.
4) APL has a current book value of $13.73 per share, which means that at its current price it is trading at 1/3 of its true value making its current stock price a steal.
5) APL has just agreed to a joint venture with Williams Company. Under the terms of the agreement they are to receive $90 million dollars up front, an additional $25 million in obligation rights and a 49% equity stake in any product produced in the Marcellus Shale project. This $115 million plus the moneys generated by the 49% equity stake will go directly to paying down debt. Couple this with the fact that they are selling two processing plants to the joint venture for $12 million each and you have $135 million immediately pared from your debt balance sheet which reduces it by 10%.
6) Couple that with the fact that earnings are expected to increase for the remainder of the year and well into 2010, (expected earnings of $600 million) the majority of which will be put against debt and their negative balance sheet becomes much more positive. The projected earnings for APL are listed at the top of the next column. Why is this chart important? Look at the last quarter of 2008, a terrible quarter for the markets yet APL’s consensus estimates were for $.35 and they generated $.66 nearly double estimates. If this holds true, and I expect it will and more than likely will increase then APL can be virtually debt free by the end of the year.
7) APL is also looking to sell two minor stakes it has to pay off the remaining debt currently owed without the earnings money listed above. If that happens 65% of that money listed above as earnings is returned to shareholders as dividends. $600 million time 65% equals 390 million divided by 50 million shares and that is a net return to us of $7.80 in dividends without any price appreciation in the issue.
Now having said all of this look at the chart (again, ask Richard to send it to you)
You will see that as the issue neared its lows in early November volume increased dramatically. It actually increased by 10 times daily average for those four plus months. Why? Simple, this specialist knew that oil and natural gas prices would rise again, he knew that APL’s build outs were near completion and that there were potential mergers and joint ventures on the horizon.
Knowing all of this he needed to accumulate as much stock as cheaply as possible. Since their were so few shares outstanding he needed a prolonged slump in oil and the markets to drive his issues price low enough to scare investors from the stock so he could accumulate those shares for his personal long term investment accounts.
Now as the chart above indicates the stock has been moving slowly higher. It has been moving along the current support/resistance green/orange lines drawn off of the gap at the $4.00 level. If I am correct in my expectations for this stock it will move up and close the next gap in the stocks price at the $7.60 level.
It can then move higher until it reaches its next level of technical overhead resistance, the green line at the $12.80 to $13.00 level. Depending on the severity of the increase in oil and natural gas prices in the coming months due to inflationary pressures the stock could move up to the $18.00 orange line before pausing. After that I expect it to breakout next year and move up to and through the next levels of resistance at the $50.00 range.
While many say I am overly optimistic in my judgments on where this issue will move to I actually believe that I am being conservative in my expectations.
With the way that the current president and his administration are spending money like “drunken sailors on leave” they are going to create massive inflation in the world. This inflation will raise commodity prices dramatically; oil, gas, natural gas, aluminum, precious metals and gold all will advance by leaps and bounds.



On Apr 05 03:27 PM Skip Olinger wrote:

> Marc,
> You are long on opinion and short on detail here. How much cash is
> APL getting from Williams to pay down their debt? Is not the goal
> to pay down debt to avoid covenant breech? I see no mention of that.
> How did you or your mentor come up with $400M for the sale of NOARK?
> What effect on Adj EBITDA will that sale have. NOARK is one of their
> few assets that generates revenue from fee or toll contracts so the
> sale further exposes the company to commodity risk. And, could you
> please enlighten us all as to why your favorite pick of all the NG
> transportation companies is APL? If you like transportation and
> distribution, why on Energy Transfer or Enterprise Products. They
> are bigger, not in financial peril. They make much more of their
> revenue from fee based contracts, not keepwell contracts. I have
> to be blunt here in the interest of trying to keep high quality analysis
> on SA; I don't care about your "feelings" about a company. I am interested
> in hard analysis as to why APL is now a deep value play with little
> downside risk and very large upside. I see nothing here that tells
> me how and when APL will raise sufficient capital to pay down debt
> to avoid default. It won't matter how much they earn if the bank
> defaults their loan. This is an interesting story so do some real
> analysis before you publish. There is no value in putting up a piece
> that tells readers to look at the company's powerpoint.

Apr 05 08:05 PM

[Castrese Ti...:]

Couple this with the fact that they are selling two processing plants to the joint venture for $12 million each........
----------------------...

Actually it's ATN selling those plants to the JV, not APL.
Anyway, it does not change that much. I'm of the same feeling as the auhor here: APL is a multi-bagger from the current price.

Sorry if some people is not comfortable with "feelings", but I can add that our feelings are educated ones.............

Apr 06 05:27 AM

[johnmorrison9:]

I am long APL and per thier confrence call they are selling some properties to pay down debt. I understand that some think they can't manage their debt, so time will tell.
I also read elsewhere that this company can sustain it fat dividend, and that these firms are takeover targets, so I remain cautiously optomistic.

Apr 06 09:39 AM

[MattZN:]

Poor APL has gotten beaten down a lot. I own a small amount long as well, since late last year, though it has taken a lot of care to keep my position above ground.

I agree that APL represents a fairly significant upside possibility if they can get a handle on their debt issues. There are risks other then debt, however, such as the possibility of being a M&A target due to their consistently low near-term valuation. Plus the more assets they have to sell, the lower their future DCF. The latter seems to be what investors are worried about the most at the moment.

For investors not willing to take on the high level of risk represented by a G&P with such a small market cap, there are plenty of other companies in the MLP space to choose from. APL is worth a small investment to me, but it's still a small investment relative to what I have in e.g. the pipeline space.

-Matt

Apr 06 11:25 AM

[dino33ca:]

Mr. Courtenay,

Are you not recommending Peyto Nat Gas fund any longer? Just curious, thanks for the great article.

Apr 06 03:19 PM

[Marc Courtenay:]

I haven't been able to follow Peyto Natural Gas for a quite a while. I do own my original shares and plan to hold them until I can do further research. If I come up with new conclusions I hope to let you know. In the meantime keep a close eye on their web site and company annoucements.


On Apr 06 03:19 PM dino33ca wrote:

> Mr. Courtenay,
>
> Are you not recommending Peyto Nat Gas fund any longer? Just curious,
> thanks for the great article.

Apr 06 07:22 PM

[SeanHuggies:]

Marc,

Nothing specific about your article in this comment, but I just wanted to let you know your work is great and I always look forward to your articles.

Keep up the good work,

Ryan Vanzo

Apr 06 09:40 PM

[ed233:]

Mr Obama has been advocating clean energy. Why has he not introduced a plan that would provide for all state, municipal and federal vehicles be converted to natural gas. He could get the states and municipalities to go along as part of his funding to these levels of government. There is plenty of natural gas and this would reduce the US dependence on foreign oil. A lot of vehicles have been converted to propane. It seems to me a logical choice for natural gas not to mention that it is cleaner and there is an abundance to cover the governmental sector. The cost of the conversion could be part of the funding stimulus.

Apr 07 07:59 PM

[ocean 2026:]

In point #4 you equate book value with true value; they aren't always the same. You need to evaluate the assets and liabilities and give us some evidence as to value.

If book value were true value RADON would be a steal selling at 10% of book. On the other hand, Devon Energy's (DVN) book value doesn't take into account the real present value of its reserves. DVN's real value is well over $100. Disclosure - I bought some last week at $45.

Apr 11 05:55 PM

[ocean 2026:]

In point #4 you equate book value with true value; they aren't always the same. You need to evaluate the assets and liabilities and give us some evidence as to value.

If book value were true value RADON would be a steal selling at 10% of book. On the other hand, Devon Energy's (DVN) book value doesn't take into account the real present value of its reserves. DVN's real value is well over $100. Disclosure - I bought some last week at $45.

Apr 11 05:55 PM

[ocean 2026:]

In point #4 you equate book value with true value; they aren't always the same. You need to evaluate the assets and liabilities and give us some evidence as to value.

If book value were true value RADON would be a steal selling at 10% of book. On the other hand, Devon Energy's (DVN) book value doesn't take into account the real present value of its reserves. DVN's real value is well over $100. Disclosure - I bought some last week at $45.

Apr 11 05:56 PM

[PeteK:]

Castrese Tipaldi;
Thanks for your educated feelings.
APL at this price, a giant steal !!

Apr 18 10:56 PM