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Atlas Pipeline: Call Option on Oil

Tim,
I think you have missed a key point. I spoke with the company a week ago to try to understand how they do, in fact, generate revenues. It is more complex than it looks. You are right, they do make most of their GP on the sale of NGL's.

However, the key point is that the correlation between the price of NGL's and the price of oil has broken down. The company got in trouble a few months ago as a result. They hedged their NGL's using crude oil as a proxy. However, oil went up (remember?) and NGL's did not so the company was underwater, had to break the hedges right at the peak oil price and raise $200M to pay off the hedges.

As I understand it, NGL prices remain low as a result of 2 things: 1) the hurricanes badly damaged several gulf coast refineries so they are unable take NGL's. This has driven down the price substantially. 2) there has been a general drop in the demand for the refinery products made with NGL's due to the economy. So even when the refineries get fixed there is no guaranty that demand for NGL's will pick up.

The next point is that one should understand that NGL's are hard to hedge out much past 6-9 months. So the company remains exposed to price fluctuations on NGL's gong forward.

My final point is that I have to admit I screwed up here big time buying this company. I bought the stock (not a big position) and I did not fully understand how the company generates its GPM or revenues and what the risks were. My Bad! It is VERY complicated to figure that out with APL. You have to know how much NGL's they generate from the gas they buy and/or transport. You have to know the price of NG as they have to buy NG in some contracts to offset the amount of NGL's they strip out. You have to know how much volume they transport for each of the 3 types of contracts they use. You have to know the price of NGL's. Lastly, you have to know how much they have hedged, at what price and what contracts they apply to. It is a very complex algorithm.

In conclusion, APL is not a proxy for oil price increases at all. It is a proxy for NGL's. It is also a proxy for NG pricing as they make more money when NG prices are high. They get a % of the proceeds. And, it is a proxy for how well they have hedged. If I were doing it again, I would buy Energy Transfer, a big pipeline that makes its money from tolls fees, not the sale of NGL's or I would buy E&P MLP's that produce oil, gas and to a lesser extent NGL's and just sell them. No complex stripping out NGL's and replacing with NG.