APL 1Q14: "Enormous Value" Creation?

"So far, truth and good have prevailed.  Our stock closed last week near a three-month high.  I'm hopeful that partly as a result of this call, and the very positive news and results recently announced, APL stock price will begin to reflect more of the enormous value that we are producing for our unit holders and other constituents." - APL CEO Eugene Dubay, 5/6/14 CC

Soft 1Q14 financial results……Atlas Pipeline's (APL) reported adjusted EBITDA came in at $90.8MM, below Bloomberg consensus of $93.2MM.  Excluding stock-based comp and premiums paid, we have adjusted EBITDA at $81.7MM and open EBITDA at $90.1MM (all pre GP drag).  Reported DCF was $60.8MM and APL claims that coverage was 1.09x.  Know that APL’s definition of coverage conveniently disregards the PIK distribution to the convertible preferred unitholders.  After backing out SBC, non-cash interest expense, GP distributions declared, and PIK distributions declared, LP DCF was $0.45/unit for 0.73x LP coverage, before any adjustment to reported M-CapEx.  M-CapEx was only $5.3MM in 1Q14, down from $7.8MM in 4Q13, and just 11% of D&A.  Management claims that M-CapEx will be back-end loaded in 2014, but the full-year guidance of $30 - $35MM pales in comparison to the G-CapEx guidance of $450 - $500MM.  As we have already argued, APL’s reported M-CapEx is unrealistically low, such that DCF is not indicative of this Company’s true earnings power.  Speaking of earnings, LP GAAP net loss (estimated until we get the 10-Q) was ($22.8MM); excluding one-time items, LP net loss was ($2.7MM) or ($0.03/unit).  This was the 4th consecutive quarter that APL has posted GAAP and adjusted net losses to its LPs.  See Table:

 

APL 1Q14: "Enormous Value" Creation? - apl1

Weak volumes, particularly in the Eagle Ford……Volumes were disappointing, with only the Permian ("WestTX") posting sequential volume growth (processed gas +7.1% QoQ).  Consolidated gathered gas volumes were -1.4% QoQ, processed gas -1.4%, NGL sales -4.5% and condensate sales +23.4%. Eagle Ford ("SouthTX") processed volumes and NGL sales were -30% QoQ.  With 93.8 MMcf/d of processed gas in 1Q14, Silver Oak I operated at 47% of nameplate capacity (200 MMcf/d).  We note that APL changed how it reports SouthTX volumes in this PR (see Footnote #4) in an effort to make the weak results look a bit better; APL is now including third-party processed volumes in the SouthTX number.  APL does have a 140 MMcf/d minimum volume commitment (MVC) for Silver Oak I, which masked the weak on-the-ground performance.  Silver Oak II is scheduled to come online in June 2014, another 200 MMcf/d processing plant.  Silver Oak I has been operational for more than 18 months and is running at just 47% capacity utilization… We wonder where are the Silver Oak II volumes going to come from, and what the margins will look like.  We thought that TEAK would disappoint this year, but this result is worse than we expected.  On the CC mgmt guided to a strong 2H14 ramp (typical), suggesting that Silver Oak I would be full and Silver Oak II at ~100 – 150 MMcf/d by YE14.  That seems optimistic to us given Silver Oak I’s ongoing issues, but we'll see.  In the chart below we show APL's net processed gas volumes per debt-adjusted unit since 1Q11.  We calculate the debt-adjusted unit count by dividing the quarterly change in debt by the quarterly VWAP of APL.  We treat the convertible equity as equity (common units) and the perpetual preferred equity as debt (debt-adjusted units); we think the chart shows the dilution / value destruction well:

APL 1Q14: "Enormous Value" Creation? - apl2

Paying a distribution does not = creating value……APL management touts all the value it creates/is creating for APL unitholders, but we’re having a hard time seeing it in the actual results.  EBIT per fully diluted unit was $0.34 in 1Q14, down 25% from $0.45 a year ago.  APL’s annualized ROIC (pre GP drag) in 1Q14 was ~4.7%, well below its WACC.  APL has posted GAAP and adjusted net losses to its LPs in each of the last 4 quarters.  The 2Q13 $1B acquisition of TEAK Midstream (Eagle Ford) gets worse with every quarter of disappointing results (fear not, the guidance remains optimistic).  Processed gas per fully diluted unit was -9.5% YoY in 1Q14, and -11.1% YoY on a per debt-adjusted unit basis.  The Company is again highly-levered at ~4.5x debt/reported EBITDA pro forma the recent West TX LPG sale, putting equity holders in an uncomfortable spot.  The de-leveraging that management hopes for will not come without additional equity, a distribution cut, or asset sales, as APL is FCF negative.  We think that APL has little room for error – both operations (volumes, project execution) and the macro environment (commodity prices, cost and availability of capital) need to be strong for APL to avoid another 2008-like debacle.  APL’s equity price has gone nowhere for 3 years amid ideal macro and industry conditions – the tailwinds are unlikely to be so strong going forward, and APL is now in the 50%/50% IDR split, without much additional debt capacity, and sub-1.0x coverage.  The bull case is the familiar, “next quarter … next year,” as it often is for any company that relies on capital raises to fund distributions.  We’re not convinced, and reiterate our APL fair value price of $17.00/unit (up ~$1.00/unit from our prior FV price due to the TX LPG asset sale announced today) based on 12x EV/2014e EBITDA – M-CapEx (an 8.3% earnings yield):

APL 1Q14: "Enormous Value" Creation? - apl5

 

Our preferred way of expressing our negative view on APL is via short the General Partner, Atlas Energy (ATLS), which reports AMC tomorrow 5/7.

 

Original Analysis: Hedgeye Best Idea: Short ATLS, APL (4/24/2014)

Kevin Kaiser

Managing Director