Access Midstream Partners - CMD Acquisition Transformational, But Good For Unit Holders?

| About: Access Midstream (ACMP)
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Last week, Access Midstream Partners ("ACMP") announced a transformational acquisition where it agreed to acquire Chesapeake Energy's (NYSE:CHK) Chesapeake Midstream Development (CMD) assets for $2.16 billion in cash. ACMP is a midstream MLP, which had been part of the CHK family until this past summer, when CHK sold its limited partner and general partner interests in ACMP to private equity funds run by Global Infrastructure Partners. CHK is the second-largest natural gas producer in the United States; and as we know, CHK could not get the gas it produces to consumers without the infrastructure provided by companies such as ACMP and CMD.

The acquisition of CHK's CMD assets adds natural gas gathering and processing (G&P) assets in the Eagle Ford, Utica and Niobrara liquids-rich plays to ACMP's already large asset base. It also expands ACMP's existing positions in both the Haynesville and Marcellus dry gas plays. This acquisition will make ACMP the largest G&P MLP when measured by both volume and invested capital. In addition to adding to ACMP's G&P asset base, this acquisition also gives ACMP entry into gas processing. CMD's business is built on long-term low-risk G&P contracts that provide downside protection (ex. 10-20 year exclusive acreage and volume commitments, firm transport revenue, etc.) for ACMP. These protections will allow for more predictability and certainty in ACMP's cash flows. As before, ACMP will have no commodity exposure.

The slide below shows the regions in which ACMP was and will be active before and after its acquisition of CMD.

Before this transaction, ACMP had $3.8 billion of invested capital deployed over seven basins, with an acreage dedication of 4.4 million acres. ACMP was servicing 2,825 wells that were producing of 2.8 Bcfd of natural gas. After this acquisition, ACMP will have $6+ billion of invested capital (with the opportunity to deploy significantly more) in 10 basins, servicing 3,909 wells. As of Q3:2012, this footprint was producing 3.9 Bcfd of natural gas. Most importantly, however, dedicated acreage will nearly double to 8.7 million acres, potentially doubling ACMP's revenue opportunity. Because of the activity in some of the acquired basins, the CMD acquisition also allows ACMP to add ExxonMobil, Shell, and Enervest as customers.

Is the Acquisition a Good Value?

Clearly this acquisition makes ACMP a bigger company. But bigger isn't necessarily value creating. As might be expected from an acquisition of this size, management expects there will be a dramatic improvement in results. The chart below shows the total and incremental impact this acquisition could have on ACMP's EBITDA and CAPEX.

As we can see from Chart 2, this acquisition is not only strategically significant to ACMP, but it should also significantly increase ACMP's EBITDA and organic growth prospects, as measured by growth CAPEX. Management's post deal EBITDA guidance for 2013 increased by 46% versus previous guidance, and 2013 EBITDA guidance increased by 68% versus previous guidance; clearly a step function, rather than an incremental gain.

It is well and good to increase a company's growth rate via an acquisition, but judging whether or not a deal is good for investors is a three-step process where we must answer three questions: Was the acquisition reasonably valued? How will the acquisition affect ACMP's value? How will the acquisition affect share/unit holders?

Is CMD Reasonably Valued?

Chart 3 lays out the EV/EBITDA valuation for the CMD assets. Please note that the values to the seller, CHK, and ACMP are different because of ACMP's capital structure. - ACMP's capital structure includes a general partner (GP), which holds incentive distribution rights (IDRs) that allow the GP to receive a higher percentage of quarterly distributions after minimum distribution levels to ACMP have been achieved, and as additional target levels are met. These higher percentages range from 15% up to 50% of incremental cash flows. Because of the IDRs, ACMP's fully diluted enterprise value is higher than just the sum of its net debt and publicly traded equity. In this case, because this deal will push ACMP into its highest (50/50) IDR tier, where 50% of incremental distributable cash goes to the ACMP units and 50% goes to the GP as IDRs, we estimate the value of the equity ascribed to ACMP's GP to be equal to ACMP's common equity, or half the total equity.

It It is important to note that even though CHK only sold CMD for 8x 2013 EBITDA, CHK trades at 6-7x LTM EBITDA and still feels like it got a premium valuation for the assets it sold. Similarly, ACMP also feels like it got a good deal because it paid less than its 13x fully diluted 2012 EV/EBITDA multiple and its 11-12x fully diluted 2013 EV/EBITDA multiple.

How Will the Acquisition Affect ACMP's Value?

Because the acquisition of CMD will push ACMP into its 50% IDR tier, we assumed that ACMP's GPs will receive value equal to the of ACMP's unit holders when valuing just CMD. This methodology can over value a GP's portion of the total equity until a MLP's GP distributions are greater than a MLP's distributions to its common units. Chart 4 below shows that even when we value ACMP's GP proportionately to its equity distributions.

In order to do an apples to apples analysis of ACMP's valuation with and without the acquisition of CMD, we use a prorated equity valuation of the ACMP GP's equity and look at ACMP's value as a whole. - The GP equity value is lower than in the analysis in Chart 4 because the acquisition of CMD is incremental. As a result, ACMP's LP units still receive a great majority of the total equity distributions, and the GP still receives a small minority of the total equity distributions. As ACMP's business and cash flows grow, the IDR waterfall will accrue a disproportionate proportion of ACMP's DCF to the GP, increasing the GP's relative equity value, but this will occur gradually. - The analysis in Chart 4 shows that this acquisition is mildly dilutive in 2013 and should be accretive beginning in 2014.

How Will the Acquisition Affect ACMP Unit Holders?

Even if the acquisition of CMD is reasonably valued and is accretive for ACMP as a whole, the bottom line for ACMP unit holders is distribution growth and unit price appreciation. Chart 6 estimates ACMP's 2013 and 2014 distributions after the company's various IDR tiers. Chart 6 also attempts to estimate a future unit price based on these estimated distributions. Before we can do this, we must first take a look at the potential dilution that may take place to fund this acquisition and ACMP's 2013 organic growth CAPEX. 2014's EBITDA growth will not be possible without the 2013 CAPEX.

As we know, the price of ACMP's acquisition of CMD is $2.16 billion, and ACMP plans to spend $1.65 billion on organic growth projects in 2013. It is likely the company will have to pay ~$100 million in financing, advisory, legal, and other fees for this acquisition and to raise the capital to pay for its 2013 plan. To finance this spending, ACMP raised $1.4 billion in debt and $500 million in equity in December 2012. Additionally, ACMP's GPs have committed to invest $1.16 billion into ACMP common and Class B/C equity securities. This leaves ACMP to raise $550 million of additional debt and $280 million of additional equity to fully fund its 2013 plan. If we assume all equity issuances are done at the $32.15 price of ACMP's December follow on offering, we estimate ACMP will need to issue a total of 50 million common units to fund this plan. Please note that ACMP's 2014 capital plan will require an additional $500 million of debt and $500 million of equity. These new units will absorb some of the incremental cash flow ACMP receives from its acquisition of CMD.

The analysis in Chart 6 estimates ACMP's 2013 and 2014 distributions and also estimates a future unit price for ACMP based on these estimated distributions.

If ACMP hits the midpoint of its EBITDA guidance, we estimate ACMP will be able to distribute $2.02 per unit (an increase of 19% over 2012) in 2013 and $2.31 per unit (an increase of 14% over 2013) in 2014. If we use AMCP's current market dividend yield of 5.25%, we estimate that ACMP units could be worth $38 per unit by the end of 2013 and $44 per unit by the end of 2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.