Summit Midstream Partners - Another Public Offering Of A High-Yielding Partnership

| About: Summit Midstream (SMLP)
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Summit Midstream Partners (NYSE:SMLP) made its public debut on Friday. Shares of the growth-oriented limited partnership, which provides gas gathering and compression services in the Piceance Basin and the Fort Worth Basin, ended their first day up 5.5% at $21.11 per share.

The public offering

Formed in 2009 by members of management and Energy Capital Partners, Summit Midstream Partners owns gathering systems for natural gas. It owns 385 miles of pipeline and has 147,600 horsepower of compression available. The partnerships' systems generate fees by long-term agreements with major energy producers including Encana Energy (NYSE:ECA), Chesapeake Energy (NYSE:CHK), TOTAL S.A. (NYSE:TOT), Exxon Mobil (NYSE:XOM) and EOG Resources (NYSE:EOG).

The limited partnerships sold 12.5 million shares for $20 a piece. Summit Midstream raised $250 million in gross proceeds in the offering process. Based on the offer price of $20.00, the firm is valued at $976 million. Summit Partners has 24.4 million common units outstanding and 24.4 million subordinated units.

The offering took place right at the midpoint of the preliminary offering range of $19-$21 per share set by the partnership and its bankers. All shares, some 25% of the total outstanding share base, were offered by the firm. At Friday's closing price of $21.11, the partnership is valued at $1.03 billion.

Major banks which brought the partnership public were Barclays, J.P. Morgan, Bank of America/Merrill Lynch, Morgan Stanley and Deutsche Bank, among others.


Summit Midstream Partners operates in the volatile world of natural gas extraction in US basins. To shield the partnership from excessive price and volume volatility, Summit has minimum volume commitment agreements with the energy companies. Furthermore, projects are organized as areas of mutual interest, and have original terms of 10 to 25 years.

The company reported annual revenues of $103.6 million in 2011, more than triple the amount generated in 2010. The company reported annual net income of $38.0 million, compared to $8.2 million in 2010.

For the first six months of 2012, the company generated revenues of $75.9 million, up 85% compared to the first half of 2011. Summit Midstream Partners reported a net income of $16.7 million for the first six months of 2012, down 7% on the year.

Summit Midstream Partners intends to use the capital raised to repay $140 million outstanding under its restated revolving credit facility. Furthermore, $88 million will be paid to Summit Investments, to reimburse the company for capital expenditures.

The partnership operates with $7.6 million in cash by the end of June, 2012. Summit operates with $351.2 million in total debt, of which $140 million of its credit facility will be repaid. As such, the partnership operates with roughly $204 million in net debt.

Based on a rough annual revenue estimate of $160 million for 2012, the market values Summit Midstream Partners at 6.4 times annual revenues. The partnership could earn $40 million for the full year, valuing Summit at 26 times annual earnings.

Investment Thesis

The offering of Summit Midstream has been a reasonable success. Shares were offered at the midpoint of the initial guided price range. Shares rose 5.5% on their first day, ending the week at $21.11. The partnership expects to pay a quarterly dividend of $0.40 per share, for an annual dividend yield of 7.6%.

Last week, another limited partnership offering a high dividend yield, went public. Susser Petroleum Partners (SUSP) raised $195 million, offering a similar dividend yield of 7.6% at the time. Shares of Susser ended last Friday at $24.00, up 20% from the offer price.

Limited Partnerships are special investment cases. Before investing, investors should consider the tax implications and specific risks to investing in limited partnerships and do not get blinded by the 7.6% dividend yield.

With interest rates at historically low levels, investors are searching for yield. I would not be surprised seeing the shares trade towards the $25 mark in the coming weeks, as investors are hunting for yield.

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.