|Shares Out. (in M):||53||P/E||0||0|
|Market Cap (in $M):||193||P/FCF||0||0|
|Net Debt (in $M):||975||EBIT||0||0|
American Midstream Partners, LP is a MLP controlled by Arclight Capital Partners, LLC. On September 28, 2018, Arclight made a $6.10 bid for the outstanding common units it did not already control (approximately 37mm units). This bid occurred shortly after AMID paid a $17mm break-up fee as part of a broken acquisition AND cut the dividend by 75% from $1.65 annually to $0.4125 annually in July 2018. On December 31, 2018, AMID announced a covenant renegotiation with its credit facility lenders who "demanded" that the dividend be totally suspended until the company reaches less than 5x total leverage. As such, AMID cut its distribution on December 31, 2018 to zero and four days later Arclight came back with a revised and lower offer of $4.50 per unit. In addition, the credit facility expires within a year as AMID allowed the facility to go "Current liability" pending the outcome of the ArcLight negotiation and subsequently AMID’s auditors issued a “going concern” designation. Sounds, like a nightmare? Well, it is all smoke and mirrors and AMID could double or triple by the end of the year and resume a distribution (even sooner if AMID's asset sale targets are achieved).
My thesis is that a "fake liquidity crisis" has been “gamed” by Arclight to lower the unit price as part of a predatory offer process. AMID's largest contributor to profitability, the Delta House Offshore Floating Production System, had a terrible 2018. In Q3 2017, Delta House ran at a througput of 122,000 barrels per day. AMID raised its stake in the asset from 20.2% to 35.7% on September 29, 2017. Almost immediately after raising the stake, throughput fell to 60,000 barrels per day in Q4 2017 (Q1 2018 40,000; Q2 2018; 60,000; Q3 2018 90,000). Thereby, AMID suffered in its credit ratios as its most important asset's profitability collapsed as debt climbed as a result of the purchase of the asset and other transactions in Q3/Q4 2017. However, we now know that Delta House is operating at "maximum capacity" (120,000-135,000 barrels per day) according to its operator, LLOG Exploration:
The stealth move by ArcLight, however, is that this return to maximum capacity has not been reflected in current financials (it will start showing up in Q4 2018 but might not fully be reflected until Q1 2019). In addition, given that the credit facility lenders stripped out the sale of the Refined Products and the Marine Terminals, the total leverage ratios now stand in the 6x range (as witness by the 8-K filed on December 31, 2018 eliminating the distribution and resnegotiating the total leverage covenants). This temporary apperance of inflated leverage ratios casued the cut in the distribution to zero which flushed out many retail and institutional holders who will not own an MLP not paying a distribution. Coupled with the fact that ArcLight has put a cap on the public units by reducing its offer from $6.10 to $4.50 (the market thinks ArcLight will cut over and over), ArcLight is attempting to take advantage of this situation by rushing the partnership private as the business is now firing on all cylinders and can continue to deleverage through increased EBITDA from Delta House, using the $85mm in annual savings from the elimination of the distribution, and selling assets at greater than 10x (Marine Products went for approximately 13.4x and Refined Products Terminals went for approximately 10.5x).
In Q1 and Q2, 2018, ArcLight reported $52.4mm and $51.2mm in adjusted EBITDA. In Q3, 2018, the quarter that many would look to in evaluating ArcLight’s offers and the earnings power of AMID, AMID reported just $35.2mm in adjusted EBITDA. However, that “fall” in EBITDA occurred even as reported non-GAAP “Total Segment Gross Margin” in the Q3 2018 press release climbed from $64.0mm in Q1 2018 to $65.1mm in Q2 2018 to $74.5mm in Q3 2018! A student of accounting might ask, what happened? On August 1, 2018, AMID sold its Marine Products Terminals division for $210mm (for approximately 13.4x EBITDA). Assuming an even-spread of earnings throughout the year, the sale would have caused a drag of only $2.6mm for August and September 2018 (that loss would have been accounted for in the non-GAAP Total Segment Gross Margin figure as well). As such, one would have expected that EBITDA would have been around $49.0mm all else being equal.
However, the truth rests in how AMID reports adjusted EBITDA. AMID has several unconsolidated affiliates including the all-important Delta House Offshore Production System that are unconsolidated and report “Earnings in unconsolidated affiliates” on the Income Statement. AMID then deducts “Earnings in unconsolidated affiliates” from Net Income and adds back “Distributions from unconsolidated affiliates” to come up with its quarterly adjusted EBITDA calculation. In Q3, “Earnings in unconsolidated affiliates” climbed from $10.5mm in Q2 2018 to $24.6mm in Q3 2018. However, in Q3 2018, “Distributions from unconsolidated affiliates" FELL from $20.7mm to $19.7mm sequentially even though "Earnings in unconsolidated affiliates" improved by $14.1mm! While it is unclear what happened, my hypothesis and suspicion based on how a game could be played is that one of the unconsolidated affiliates held back its distribution for a quarter or two either because of some needed investment (Delta House is going to grow further) or to help ArcLight in its efforts to take AMID private at rock bottom prices by deflating EBITDA in the short term. I like to call this a "fake liquidity crisis".
Prior to the sales of the Marine Products Terminals (13.4x) and the Refined Products Terminal (in December 2018 for an estimated 10.5x) total leverage had climbed to 5.7x. That is high for the MLP asset class that is mostly under 5x leverage now and heading to 4x on an adjusted basis. At AMID, after the Refined Products sale in late December 2018, proforma debt is approximately $975mm and assuming Q4 EBITDA of $45mm (TTM EBITDA will be approximately $185mm minus approximately $20.8mm for the EBITDA from Refined Products and Terminals included in 2018 results but backed out for total leverage calculations = $164.2mm). $975mm in total leverage divided by the $164.2mm in TTM EBITDA adjusted for asset sales yields a Total Leverage to EBITDA ratio of approximately 5.94x.
In late September 2017, ArcLight sold AMID a 15.5% additional stake in its Delta House Offshore Production System (in unconsolidated affiliates). Shortly after the sale, production volumes fell from 122,000 barrels per day to 60,000 barrels per day in Q4 2017. Volumes bottomed in Q2 2018 at approximately 40,000 barrels. This presentation lays out the details:
ArcLight agreed to “make whole” the profitability shortfall from Delta House in March 2018. From the quarterly reports, it appears that the “make whole” was booked in Q1 and Q2 2018 where EBITDA averaged $51.8mm (then plummeted without a distribution increase described above in Q3 2018 creating a “fake crisis”). Assuming Marine Products sold for 13.4x ($210mm/13.4x = $15.7mm reduction in annual EBITDA) and Refined Products for 10.5x ($125mm/10.5x = $11.9mm reduction in annual EBITDA) then quarterly EBITDA would be reduced by approximately $6.9mm). Subtracting this adjustment from the Q1/Q2 2018 average yields adjusted quarterly EBITDA of $44.9mm which annualizes to $179.6mm in run-rate EBITDA.
Another way to review and estimate EBITDA is from AMID's failed takeover of Southcross where it filed a Form S-4/A in February 2018 estimating adjusted EBITDA of $246mm in 2019 (at the time, Delta House was expected to be back to 100% throughput in mid-2018 so the 2019 forecast assumed a full Delta House contribution). If one were to deduct EBITDA from the two asset sales ($31mm assuming 11x), the company itself estimated EBITDA of $215mm in 2019! Its 2018 forecasts were inaccurate as AMID expected Delta House to reach full productivity in Q2 2018. However, according to slide 10 of the presentation and the press release from LLOG Exploration above, that has just occurred in Q4 2018 and beyond.
Here is a link to the Form S4/A that AMID filed on February 9, 2018 in conjunction with its failed Southcross merger. On pages 93-94 of the document in the section entitled, “Certain Unaudited Financial Projections of AMID”, AMID forecasts 2019 EBITDA of $246.022 million:
I suspect the truth lies somewhere between $179.6mm and $215mm. AMID spent upwards of $85mm in growth capex in 2018. Assuming a 12% cash return would suggest an incremental $10.2mm in EBITDA as those investments bear fruit. AMID also has an option to buy a 25% stake in the 2bcf/day Pascagoula Gas Plant from Enterprise (announced in August 2018) after it directs some of its gathering pipes from another Enterprise plant that is consolidating two, 2bcf/day plants into the one at Pascagoula. It is difficult to assess, but my “guess” is that the 25% stake will come with $5-$10mm in extra EBITDA for AMID at a discounted valuation of 5x.
To further bolster my claim, take into consideration this analysis of Delta House. In 2017, Delta House contributed $41.3 million in earnings from unconsolidated affiliates and distributions followed closely at $43.7 million (AMID owned 20.1% through the first 3 quarters and 35.7% in Q4 2017). Delta House averaged 112,000 barrels per day in throughput for the first three quarters of 2017 which then plummeted to 60,000 barrels in Q4 2017. Therefore, Delta House’s run-rate earnings were understated due to the lower ownership interest and the lower operating throughput in Q4 2017.
Through the first 3 quarters of 2018, Delta House contributed $23.1 million in earnings from unconsolidated affiliates. On an annualized basis, that is a paltry $30.8 million for 2018 as Delta House averaged around 63,000 barrels per day in the first three quarters. It will likely do better in the Q4 2018 so I am willing to assume Delta House will deliver approximately $35 million in earnings from unconsolidated affiliates to AMID for the year.
Delta House operated at 122,000 barrels per day in Q3 2017. In that quarter, it contributed $12.5 million to AMID’s earnings from unconsolidated affiliates. However, AMID bought an additional 15.5% in Delta House during that quarter (on September 29, 2017) so I would assume that only a sliver of that number reflects the extra three days during the quarter in which AMID owned the additional stake. Let’s say I reduce the figure for the quarter to $12.4 million just to be intellectually honest to back out the extra three days of higher ownership in the quarter. In Q3 2017, AMID owned 20.14% of Delta House. If I estimate TOTAL Delta House earnings based on that ownership position, I arrive at $61.7 million for the entity in Q3 2017 (Deltah House's financials are filed as an exhibit to AMID's 10-K's). Now, if I assume the current ownership stake of Delta House of 35.7%, that would imply theoretical run rate earnings to AMID at 122,000 barrels per day of $22.0 million per quarter. That estimate annualizes to a stunning $88.0 million which suggests that in 2019, if Delta House were to average 122,000 barrels per day in throughput, AMID will earn an estimated $53.0 million ($88 million - $35 million) more in 2019 than in 2018!
It is hard to figure out how much of ArcLight’s support agreed to cover some shortfalls at Delta House was in the numbers for 2018, however, the Q’s indicate approximately $17.7mm ($9.4mm Q2 and $8.3mm Q1). Above, I indicated that TTM EBITDA for 2018 will be approximately $164.2mm (backing out the EBITDA from asset sales) which includes this $17.7mm. The difference between the added profit of $53mm YOY and what is counted in 2018 EBITDA is approximately $35.3mm. As such, another back-up estimate for the real EBITDA here is $164.2mm + $35.3mm, or $199.5mm!
I believe that Delta House will run higher than 122,000 barrels per day and that some of this improvement will be offset when the 7% cash flow share kicks in for the Class B shareholders of Delta House. Those two items will likely offset each other at 135,000 barrels is greater than a 7% improvement relative to that 122,000 barrel figure from which I am basing my estimate.
For our purposes here, I will assume EBITDA of $195mm for 2019 that does not include any payment to Enterprise for the Pascagoula option or any incremental EBITDA from it.
Arclight's predatory tactic of lowering the bid has placed an artificial ceiling on the stock in order to influence a Fairness Opinion from an investment bank. ArcLight is in the process of taking another MLP private, TransMontaigne Partners, LP (TLP) where Arclight increased its original bid by 9%. If one were to review that Fairness Opinion in that transaction, the bankers look at premiums relative to 30, 60, and 90-day VWAP AND EV/EBITDA calculations. Here, given the stock’s performance after the second dividend cut and the lower offer, AMID will scream cheap to bankers doing a VWAP analysis. In my view, that is exactly what ArcLight wants as AMID was trading at $3.15 per unit before ArcLight made a revied offer of $4.50 per unit!
The second part of the Fairness Opinion will be an EV/EBITDA multiple analysis. In my view, the multiple range that will be presented will be 9.0x-11.0x. Assuming 10x, $195mm in EBITDA, $317mm in preferred stock, 53.1mm common units, and $975mm in debt after the two assets sales and excess cash going to pay down debt, I arrive at $12.39 per share. There is some unconsolidated debt that might knock $0.50 off of my estimate so let’s call the midpoint valuation $11.90 per share (deduct approximately $3.00 for the low end and add $3.00 for the high end).
The two bids made by Arclight have not been accepted by the Conflicts Committee made up of three independent board members. It must clear that Conflicts Committee. If it does, then ArcLight controls 51% of the vote and the deal will be approved. An activist individual shareholder has begun to educate and highlight the situation to these three members of the Conflicts Committee making it harder for them to ignore that the public record now shows the games being played:
In my view, ArcLight tried to pull a fast one by negotiating through subtraction. It knows that bankers will look at trailing price action as part of its analysis. In my view, ArcLight hopes that either the bankers or the Conflicts Committee won’t understand the real numbers here and that this “fake liquidity crisis” which led to the elimination of the distribution provides the perfect window to steal the company.
If one were to assume, $195mm in 2019 EBITDA, I estimate interest payments of $80mm (assuming preferred stock takes all cash) and maintenance capex of $15mm. Assuming a more modest growth profile in growth capex of $40mm, AMID can pay down $75mm in debt in 2019. Doing nothing else, AMID's debt will exit 2019 at $900mm and at $195mm in EBITDA, total debt/EBITDA will be at 4.6x (they can resue a distribution when total leverage is less than 5x)!
In the BOFA conference presentation from December 2018, AMID indicated that it is interested in selling additional assets upwards of $350-$400mm in 2019. Assuming one sale of $200mm at 10x, the company would exit 2019 with $700mm in debt ($975-$75-$200) and $175mm in EBITDA ($195mm - $20mm) which is leverage of 4.0x which was somewhat reflected in the BOFA presentation. AMID could resume distributions handily!
In guessing a distribution based on these metrics, $175mm less $64mm in interest less $13mm in maint capex, DCF would be approximately $98mm. Assuming unit count climbs slightly to 55mm, that creates a DCF/unit of approximately $1.78 per share (MLP's generally trade 7.5-10x this figure). Assuming the company pays out $75mm would create a distribution of $1.36 per unit and at a 10% yield a target price of $13.60.
ArcLight has given the Conflicts Committee until January 31, 2019 to respond to its offer (letter is attached to their 13D filing on January 3, 2019). The letter references that the Conflicts Committee has engaged advisors. It is likely that the Conflicts Committee is awaiting a Fairness Opinion from which to negotiate with ArcLight. The activist has created pressure on the situation by publicly calling out the fact pattern here so it has become harder for the Conflicts Committee to let ArcLight "steal" the partnership. In my view, ArcLight's original offer of $6.10 was an attempt to try and take AMID private in the $7 range. As the MLP space deteriorated in November/December 2018 along with the price of oil, ArcLight got aggresive. However, while valuations contracted in those months, they have since recovered around half of that loss in January 2019. In addition, there is no reason to believe that AMID's profitability has been impacted. In fact, the opposite has occurred at Delta House is not "exceeding expectations" and is at "maximum capacity".
There is a possiblity that the Conflicts Committee and ArcLight agree to a price between now and January 31, 2019. However, given the facts presented above, it will be difficult for the Conflicts Committee to accept either bid. If the Fairness Opinion's view of value based on EV/EBITDA mirrors mine, then the range for value will be $9-$15. The Conflicts Committee, with this added scrutiny, will not be able to accept a price out of the range.
So then what happens? It is possible that the Committee will come out publicly rejecting the offers. It is also possible that ArcLight might throw in the towel and allow AMID to accrete back to values that are normalized and take another swing at it down the road when better information and a better fact pattern for a take private has emerged. This is ArcLight's last vehicle in the public markets and they are risking being shut out of future equity capital markets given their tactics. Value clearly shows $9-$15. If the Conflicts Committee were to look at it and say that at the end of 2019 the stock will be in that range but there will be risk between here and there, they might be able to justify a deal around $8.
Regardless, the value is here and the business is performing on all cylinders (just not optically). It is possible that after a solid Q1 with Delta House at full steam, AMID enters into a new credit facility that gives them credit for Delta House performing at full steam in its definition of EBITDA and a distribution timeline and path will be revealed. However, gameplaying all scenarios finds it difficult to imagine that $4.50 or $6.10 will be accepted and that the ultimate take-out will be higher especially if AMID is properly shopped to all buyers.
|Entry||01/23/2019 10:48 PM|
Interesting. Why did SXE walk away? A lot of self dealing for Arclight. It's not clear to me why they can't keep the entity public and continue to self deal and steal economics. Why do they need to take private? Any sense of their reputation in the industry? I'm not super familiar. Thanks.
|Entry||01/24/2019 12:30 AM|
ArcLight has a very good reputation. They are currently raising fund seven. This is out of character according to several investors in their private equity funds. My opinion is that this is their last exposure to public MLP equities and the next time that they enter back into the public equity markets it will be as a “C Corp” with improved governance where they can claim better protections for shareholders. Kind of a middle finger to the structure on the way out...
AMID couldn’t close the financing for SXE and SXE chose to walk and redeem their $17mm break-up fee after AMID tanked their stock with the distribution cut. Part of the financing trouble was that Delta House rolled over around the same time as the SXE deal was announced and AMID was hoping to raise equity as part of the SXE deal. There was also an FTC issue that caused AMID to find a new buyer for the Refined Products terminals, delaying that sale by six months (just closed December 2018). At some point, around the break in the SXE transaction, ArcLight woke up and transitioned to predator.
AMID is an investment in Fund Five at ArcLight. Vintage 2010. 10 year life with a two year extension. They would likely cut SG&A and continue selling assets at 10x+.
|Subject||Delta House Valuation|
|Entry||01/24/2019 12:39 PM|
How are you thinking about Delta House in your valuation? The October 2017 dropdown was a 15.5% interest for $125.4mm, which implies an 8/8 Delta House valuation of $809mm. Using that valuation, AMID's current 35.7% interest in Delta House is worth $289mm (.357*809) or 3.3x your $88mm estimate of AMID's pro rata share of Delta House run rate earnings. Dropdowns do not occur at premium valuations, but I do not think that Arclight would do a dropdown at 33% of fair market value (3.3x/10x).
If we assume that the drop was done at a discount and the right multiple for Delta House is 5x (instead of 3.3x) that implies a value for AMID's Delta House interest of $440mm (5*$88). If we assume 10x for the $107mm remaining EBITDA ($195-88) that implies $1,070mm value for a total combined valuation of $1,510mm, right on top of where it trades today (~7.7x blended average EBITDA multiple).
Am I missing something?
|Subject||Re: Delta House Valuation|
|Entry||01/24/2019 01:55 PM|
Great question. AMID bought four slugs of Delta House:
The original acquistion was completed in 2015 and and was done according to the press release at 5x 2016 EBITDA. The original acquistion of the the 12.9% stake for $162mm. At the end of 2015, there was $293.4mm in debt at the Delta House level which implied a total EV of around $1,549.2. At the 5x level, EBITDA was expected to be $309mm but according to the 10K filed in 2017 (Exhibits 99.2 and 99.3), 2016 EBITDA came in around $248.2mm implying an ultimate valuation of 6.25x. In 2016, the platform averaged around 90,000 barrels per day.
An additional 1% interest was acquired on April 25, 2016 for $9.9mm. Delta House ended 2016 with $40.5mm in debt. EV would have been approximately $1030.5mm implying a 4.33x multiple paid.
On November 1, 2016, AMID bought an additional 6.24% stake in Delta House for $49mm from unrelated third parties. That implies a $800mm valuation for the entity and a multiple of 3x.
On September 29, 2017, AMID bought an additional 15.5% stake in Delta House for $125.4mm. Delta House did $237.5mm in EBITDA in 2017 which included a terrible Q4 at 60,000 barrels per day. Looking forward, that sale was completed at an $809mm value, as the entity became debt free at the end of 2017. However, 2018 EBITDA is dramatically lower, and will barely break $100mm. That transaction (possibly known by ArcLight) was done at 8.5x.
One of the key "benefits" of the MLP structure is that the sponsors will sell assets into the MLP's at a discounted valuation in order to support the equity price and distributions. So I take their implied multiple with a grain of salt. AMID merged with JPEP that was also an affiliate of ArcLight and I believe massively underperformed expecations (thus the situation we are currently in). ArcLight was a decent sponsor until then. They helped defray $25mm in operating costs from JPEP in 2017 and plugged $17.7mm in expenses related to Delta House in 2018.
They also clearly sold these assets for "cheap" to help stabilize AMID in the middle of the oil crisis in 2015 and 2016 and likely did the same to help plug some of the holes reltated to JPEP underperformance in 2017. AMID stole the extra 6.9% stake in 2016 from the sellers who were likely in distress given the collapse in the oil markets.
Therefore, it is hard to know what the right value is for Delta House. It is clear that given British Petroleum's announcement of an additional 1 billion barrrels in the Thunderhorse field and LLOG's announcement of connecting new wells from Nearly Headless Nick in the 287 Block of the Mississippi Canyon, this asset just got an enormous boost in its useful life and the value went up and ArcLight knows this:
I wouldn't read too much into values paid becasue 1) they were mostly completed during an oil crash 2) they were done by a supportive sponsor to stabilize AMID 3) supportive sponsors sell assets at discounts to the going market rate to MLP's all of the time. Given the latest developments, I would have no problem putting an 8-9x mutiple on Delta House, maybe more, and it is clear that many of their land based assets are fetching 13.4x and 10.5 in the open market. If I used a blended multiple of 11x for non-Delta House ($107mm in 2019 EBITDA) and a much lower 6x for Delta House ($88mm in 2019 EBITDA) gets me an EV of $1705. Still a $9 target for AMID assuming year end debt of around $900mm after they use the savings from a zero distribution to deleverage. However, I think 6x is way too little for Delta House given the long-term visibility into field development.