American Midstream Partners LP (NYSE:AMID) is another beaten down Master Limited Partnership (MLP). AMID closed Friday at $7.33 and currently pays an annual distribution of $1.89 for a distribution yield of 25.8%. AMID is typical of the MLPs covered in this series in that it has declined like a paralyzed falcon and had negative GAAP earnings in 2015 due to impairments. Previous articles in this series have covered; first - the compression companies, second - Azure Midstream (NYSE:AZUR), third - Capital Products Partners (NASDAQ:CPLP), fourth - Crestwood Equity (NYSE:CEQP), and fifth - JP Energy Partners (NYSE:JPEP). There series is targeted at MLPs whose share price has declined precipitously but whose economic prospects suggest substantial opportunities for appreciation.
AMID is in three lines of business: gathering and processing, transmission, and terminals. Most of its business is servicing the natural gas industry, although the terminals have liquid storage facilities and largely serve the oil industry. Most AMID facilities are in the Southeast United States, although some gathering and processing operations are in Texas and North Dakota. AMID has been growing by adding facilities and adding to its minority interests in unconsolidated entities. Because of the addition of new facilities, 2015 full year results do not provide an accurate picture of likely 2016 results.
Financial Performance - In 2015, AMID had losses on a GAAP basis but this was due to non-cash impairment charges. Adjusted EBITDA was $66.3 million and distributable cash flow (DCF) was $51.6 million. Interest expense was $14.7 million and AMID closed out the year with $527.4 million in debt. Results generally trended up with fourth quarter adjusted EBITDA at $20.4 million (annualized to $81.6 million) and DCF of $14.3 million (annualized $57.2 million). AMID projects very substantial growth in 2016 with adjusted EBITA of between $105 million and 120 million and DCF of between $70 million and 85 million. These projections are discussed in AMID's most recent conference call.
Capital Structure - AMID has gone through some changes to its capital structure but, based upon its most recent annual report, AMID has 31.8 million common units and 9.2 million Series A preferred units. The preferred units are entitled to receive a distribution of $2.00 a year per unit before the common units receive distributions. The general partner can elect to pay the distribution to the preferred unit holders in kind (more preferred units) rather than in cash. ArcLight is not only the general partner but also the owner of the preferred units and it has been making an election to receive distributions in kind which reduces the cash drain on the partnership. The conversion price for the preferred units is $15.94.
General Partner Support - ArcLight appears committed to AMID in several ways. First of all, by electing to take its preferred unit distributions in kind, ArcLight is essentially "buying" more preferred units each quarter. In addition, ArcLight has been buying common units and now owns 3.6 million common units or more than 11% of the total number of outstanding common units.
Distribution Security - Although none of the MLPs covered in this series have highly secure distributions, AMID's metrics offer some encouragement to the unit holder. Assuming that AMID hits to bottom of its DCF prediction range and even assuming that ArcLight starts taking cash distributions rather than in kind distributions on its preferred units, AMID would have $51.6 million available for distribution to common unit holders. This would support distributions of $1.62 on common units, which would involve a reduction from the current distribution level but would still produce a yield of 22.1% at the current unit price. My assumption is that ArcLight will continue to take distributions in kind on the preferred units until DCF can cover the $1.89 distribution level, but, even if it doesn't and even if AMID hits only the bottom of its range, buyers of AMID at the current price would receive a very generous yield.
Risk Factors - The big risk factor is that the financial performance falls well below the bottom of the range. This is, in turn, could cause leverage issues given the $527.4 million in debt. It could be caused by a decline in natural gas production, which would be due, in turn, to the enormous excess of natural gas in storage as we reach the end of the heating season. 2016 could turn out to be a "perfect storm" for natural gas as the high storage volumes depress demand over the summer months during which empty storage capacity is typically filled. 2016 is probably also the last year in which natural gas exports do not play a major role in increasing demand for natural gas. Some exports are already under way but the volume will pick up in 2017. Lower natural gas production and less transmission of natural gas from the field to storage facilities will adversely impact the financials of MLPs like AMID.
On balance, I am a buyer here. As noted in previous articles, I would not "put all my eggs in one basket" with this sector. Each individual stock may have its own risks and these can be mitigated by buying a "basket" of several of these companies. I would not in all at once. A number of these companies may implement dividend cuts and that usually provides an investor with an opportunity to buy at a lower price. On the other hand, the surplus of natural gas in storage is likely a one time event and, over time, natural gas production will return to levels which approximate consumption minus net imports. Net imports will decline substantially over the next few years due to exports and domestic consumption should increase slowly.
Disclosure: I am/we are long AMID, AZUR, JPEP, CEQP, CPLP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.