Delta House Project to Turn American Midstream’s Fortunes

Company Overview

American Midstream Partners LP (AMID) was founded in 2009 as a Delaware Limited Partnership in order to own, operate, develop, and acquire a diversified portfolio of midstream energy assets. It currently owns and operates twelve gathering systems, five processing facilities, three fractionation facilities, three interstate pipelines, five intrastate pipelines and four marine terminal sites for gathering, treating, processing, transporting natural gas, fractionating natural gas liquids ((NGL)), and storing specialty chemical products.

The business of American Midstream Partners LP is divided into three segments, gathering and processing, transmission and terminals. The first business segment process and gather natural gas liquids and the transmission segment operate the transportation of of the processed materials. Finally, the terminals segment provides above-ground storage services at the marine terminals, where commodity brokers, refiners and chemical manufacturers store their range of energy related product line.

American Midstream Partners LP owns a 50% undivided, non-operating stake in a natural gas processing plant in southern Louisiana in the United States and a 67% non-operating stake in an offshore oil pipeline. This company is currently operating over 3,000 miles of pipelines that transport over 1 Bcf/d of natural gas per year. In addition, they also have an above-ground storage facility to hold 1.7 million barrels of NGLs.

Drop-down Plan from ArcLight Capital Partners in the Delta House Project

Since its inception, American Midstream Partners LP had a strategic focus on the eastern Gulf of Mexico, where there is substantial opportunity of sustained superior performance ((SSP)).

Back in December 2012, American Midstream Partners LP formed an equity consortium with ArcLight Capital Partners to source and execute the Delta House project. It is a fee-based floating production system ((FSP)) located in the deepwater of the Gulf of Mexico. This project utilizes a semi-submersible FPS for exporting oil and gas through a pipeline that commenced operations in the Q2’15.

As soon as the Delta House went into operation, ArcLight Capital Partners and American Midstream Partners LP started a formal discussion on a drop down plan.

On August 10, the same day it released the Q2’15 earnings, American Midstream Partners LP announced its intention of an affiliate of ArcLight Capital Partners with a plan to drop down 25 percent of ArcLight’s 51.7 percent controlling interest in the Delta House project. This drop down transaction would basically restructure the asset allocations of the consortium, where American Midstream Partners LP would acquire the assets from the consortium, then contribute those assets back to it.

Both of the stakeholders of this plan announced to close the drop down transaction by the end of 2015 for face value of $162 million. The plan also emphasized that there are possibility of future drop down transactions based on market factors, such as energy price levels.

Increasing American Midstream Partners LP’s stake in this Delta House project and “will complement our existing eastern Gulf of Mexico operations and further expand our footprint into the operating core of the Mississippi Canyon,” said Stephen Bergstrom , the Executive Chairman, President and Chief Executive Officer of the company.

Better than Expected Q2’15 Earnings

American Midstream Partners LP surprised the market with its Q2 earnings, as it announced earnings per share ((EPS)) of $0.04 against a consensus Street estimate of $0.1. Compared to Q2’14, this is an increase of $0.35!

cash_from_operations

Figure 1: American Midstream Partners LP Quarterly Cash from Operations

Source: YCharts

If we take a look at American Midstream Partners LP’s cash flow, it is crystal clear that the company is on the verge of a growth momentum.

Investors are Optimistic

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Figure 2: American Midstream Partners LP Price Chart

Source: finviz

A picture is worth thousand words and this price chart says it all about the drop down plan. A day after releasing the Q2 earnings and announcing the intention to increase its stake in the Delta House project, American Midstream Partners LP’s stock price jumped from $9.62 to $15.02 per share, an increase of 56.13% within a day.

The Delta House project went into operation in Q2, and American Midstream Partners LP’s quarterly cash from operation spiked to $20.5 million from $2.6 million within two quarters.

Therefore, acquiring an additional stake in the Delta House project makes a lot of sense as it would help American Midstream Partners LP to upsurge its size and scale through incremental fee-based cash flows supported by long-term contracts.

Conclusion

Skeptics are concerned about the medium term forecast of low prices and its impacts on the sector. However, the Energy Information Administration ((EIA)) forecasted the Henry Hub NGL price to average $2.97/MMBtu in 2015, which is $0.04 higher than its May forecast.

American Midstream Partners LP fundamentals clearly demonstrate how it has the potential to benefit from this additional aid from the market.

Meanwhile, Barclays analyst Richard Gross has upgraded American Midstream Partners LP to “Equal-weight” to “Overweight,” with a price target of $20. At the time of writing this analysis (August 17, 2015), American Midstream Partners LP’s stock was trading at $14.08 per share, giving it a 42.05% upward potential by the end of 2015, when the Delta House project drop down transaction is scheduled to be settled.