Atlas Energy (NYSE: ATLS)
Events: Quick Idea Write-Up
December 15, 2014
- Recent PPS: $26.31
- Shares Out: 52 million
- Market Cap: $1.4 billion
- MTM FVPS: $29.65
- Normalized FVPS: $37.42
A huge thanks to @BluegrassCap for this idea – I had not even looked at this situation until he outlined it on Saturday via Twitter. I am more than comfortable with limited analysis on this one as it is a very straight forward event-driven situation with a near-term special situation attached that limits capital at risk. As Carl Icahn would say, it’s “a no brainah.”
Situation. Targa Resources (NYSE: TRGP) is acquiring the midstream assets of ATLS for a total consideration of $25.86 in cash ($9.12) and stock ($16.74 at TRGP’s most recent closing PPS). Prior to closing, ATLS will spin off Atlas Energy Group, which is to be comprised of a 24.7MM share stake in Atlas Resource Partners (NYSE: ARP) – worth $4.74 per ATLS share at the most recent close – net debt of $2.70 and a Hodge-podge of various E&P and GP/LP assets worth approximately $5.63 if valued at a 10% yield. Conservatively, ATLS is worth $33.54, with the deal consideration comprising 77% of the FVPS. Looked at another way, an investor today pays $.45 (ATLS PPS – deal consideration) for assets conservatively worth $7.68. With $9.12 of cash received via the deal consideration, only 65% of capital invested is truly at risk.
Normalized FVPS. Non-ARP and Lightfoot distributable cash flow is approximately $.39 per ATLS share. If valued at a 5% yield, these assets are worth $3.89 more than the FV outlined above assumes, for a total “normalized” FVPS of $37.42.
Home Run FVPS. Again thanks to @BluegrassCap for this piece of information – Energy Transfer Equity (NYSE: ETE) proposed to buy TRGP back in June 2014 when TRGP was trading around $140 per share. TRGP currently trades for less than $93. While not essential to the investment, if TRGP were to be taken out at its previous high of $140, that would lead to a “home run” FVPS for ATLS of approximately $46.
There are numerous ways to win here with minimal downside risk outside of an utter implosion in U.S. midstream capital investment. While E&P MLPs should not be valued at the typical “toll taker” midstream company valuation (i.e. a 4% or 5% dividend yield), I am comfortable with the “normalized” valuation above (that values the distributable cash flow at 5%) due to the natural gas-oriented asset base of the proposed Atlas Energy Group, the visibility provided by the public trading value of ARP and the likely undervaluation of the TRGP shares to be received in via the deal consideration. At a price/normalized FVPS of 70%, the IRR is particularly attractive given the catalysts in place to close the valuation gap within a 12-month time frame.