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Due to a generous 8.7% discount to its post-buyout price/unit, we just increased our holdings of Southcross Energy Partners (SXE), a smaller midstream LP, which is being bought by American Midstream Partners LP (AMID).
The deal is supposed to close by the end of Q2 2018, and it has already been approved by SXE and AMID unitholders, and has received final state approval.
Deal highlights – Among many other positive attributes, AMID’s mgt. sees this deal as being immediately accretive to its Distributable Cash Flow. This makes sense – SXE used to pay $ .40/unit quarterly, but eliminated its payout in February 2016. However, SXE generated $ 25.36M, and AMID generated $ 89.88M in DCF over the past four quarters.
(Source: AMID site)
The new entity will also have a simpler structure, with four segments: Gas G&P, Natgas Transportation, Liquid Pipelines, and Offshore Pipelines, with the offshore segment being its largest, contributing 57% of gross margins:
(Source: AMID site)
AMID has significant offshore assets in the eastern Gulf of Mexico, an area which is projected to see 32% production growth over the next 3 years. Technological advances should also reduce production costs for Gulf oil.
AMID’s CEO detailed this growth on the Q1 ’18 earnings call:
“In February of this year, the Gulf of Mexico produced 1.7 million barrels per day of crude oil and 2.6 Bcf a day of natural gas. To put this in perspective, the Gulf of Mexico is the second largest crude oil producing base in The United States behind only the Permian Basin. It is producing roughly 30% more oil than either the Bakken or the Eagle Ford basins and 3 times more than the Anadarko basin, home of the SCOOP.”
“In Q1 ’18, AMID’s Okeanos pipeline had volume increases of over 10% vs. Q1 ’17, and were up 6% vs. Q4 ’18, due to additional volumes from dedicated wells tied into the system.”
AMID’s Delta House asset has been under maintenance, which has reduced its output. On the Q1 call, management pointed out that “current production is just under half of pre-maintained levels or about 55,000 to 60,000 barrels a day equivalent. However, by July, we anticipate the crude oil and natural gas volume should increase from current levels by 64% and 155%, respectively”.
In addition, AMID is receiving support from ArcLight Partners’ affiliate, Magnolia Infrastructure Holdings, LLC, “to provide additional capital and corporate overhead support to us during the first three quarters of 2018 in connection with temporary curtailment of production flows at Delta House. Pursuant to the agreement, Magnolia has agreed to provide support to us in an amount to be agreed, up to the difference between the actual cash distribution received by us on account of our interest in Delta House and the quarterly cash distribution expected to be received had the production flows to Delta House not been curtailed. Subsequent to the balance sheet date of March 31, 2018, we have received $ 9.4 million for such support”. (Source: AMID Q1 ’18 10-Q)
(Source: AMID site)
AMID has over 1,565 miles of natural gas and crude oil gathering systems, 8 processing plants with ~325 MMcf/d of capacity, 4 fractionation facilities, a fleet of 75 crude oil transportation trucks and 95 trailers, and ~20 NGL transportation trucks. Its onshore assets are located in some of the most prolific production areas, including the Permian and Eagle Ford basins:
(Source: AMID site)
(Source: AMID site)
AMID’s natural gas transmission segment has significant firm, take or pay contracted volumes in Arkansas, Alabama, Mississippi, and Louisiana, with a balanced customer mix.
Management commented upon the uptick in volume on the Q1 ’18 earnings call:
“AMID’s Southeast Natural Gas Transportation assets performed very well, establishing a new throughput record of over 835 million cubic feet a day. This segment experienced 75% growth in gross margin over 2017, as a result of the acquisition of the Trans-Union pipeline in the fourth quarter of 2017 and strong demand as a result of exceptionally cold weather across the Southeast US.”
A Backdoor Discount
SXE continues to sell at a discount to its post-buyout price, which is equivalent to .16 units per AMID unit. With AMID at $ 10.00 on 6/21/18, SXE should have been trading at $ 1.60, but it closed at $ 1.46.
SXE doesn’t currently pay a distribution, but after the buyout, the converted SXE units will receive the same $ .4125 quarterly payout as current AMID unitholders.
At $ 1.46, SXE is trading at a post-buyout equivalent of $ 9.13, which translates into an 18.08% yield. AMID’s next ex-dividend date should be ~8/3/18, with a pay date of ~ 8/14/18:
“AMID has agreed to acquire equity interests in certain Southcross Holdings’ subsidiaries that directly or indirectly own 100% of the limited liability company interests of the general partner of SXE and approximately 55% of the SXE common units by issuing 3.4 million AMID common units, 4.5 million new Series E convertible preferred units (the ‘Preferred Units’), options to acquire 4.5 million AMID common units (the ‘Options’) and the repayment of $ 139 million of estimated net debt. The Preferred Units will be issued at a price of $ 15.00 per unit and may be paid-in-kind at the AMID common unit distribution rate at AMID’s option for two years. AMID will have the right to convert the Preferred Units to AMID common units if the AMID 20-day volume weighted average price exceeds $ 22.50. The Options are American-style call options with an $ 18.50 strike price that expire in 2022.” (Source: AMID site)
There shouldn’t be any immediate threat of the Series E convertible preferreds converting into more AMID common units since they can’t convert unless AMID’s common price goes higher than $ 22.50, which is over twice its current price level.
Here’s the breakdown of pre- and post-buyout units, which will total ~63.22M after the deal goes through:
We calculated what the post-buyout distribution coverage should look like, using the combined trailing Distributable Cash Flow/Unit of both companies as of 3/31/18 vs. AMID’s current $ 1.65/year payout.
The initial post-deal coverage should work out to about 1.10X, which is what AMID’s press release listed:
“AMID expects the transaction to be single-digit accretive to DCF/unit in 2018 and 2019, approaching double-digit accretion in 2020. AMID expects to maintain a pro forma distribution coverage of 1.1 to 1.3 times”. (Source: AMID site)
Judging by AMID’s and SXE’s trailing figures, this deal should be just what the Dr. ordered – both companies should emerge stronger as one entity.
Due to non-core divestitures, AMID has had declining DCF and distribution coverage, with coverage falling to 1.04X. EBITDA has been down slightly over the past four quarters as of 3/31/18.
SXE’s EBITDA has been just about flat, but its DCF fell -17.82% over the past four quarters.
In addition to its divestitures, AMID’s management has made a series of acquisitions in order to transform the company into a more stable cash flow model. AMID hasn’t gone to the equity markets to fund these acquisitions.
(Source: AMID site)
The market has pressured SXE’s price/unit to an extreme point – it’s currently selling for just 15% of Book Value and .11X Price/Sales. SXE’s Price/DCF of just 2.81X is also the lowest valuation we’ve seen in many moons.
Another part of the rationale for this buyout is for the combined company to emerge with lower debt leverage. Since AMID hasn’t funded its growth via issuing more units, its debt leverage has increased:
“In conjunction with the transaction, AMID will continue executing against its stated capital optimization strategy to deliver a strong pro forma balance sheet with substantial liquidity. AMID is targeting an additional $ 400 to $ 500 million of non-core asset sales primarily related to its terminaling services segment.”
“These proceeds, incremental debt financing and modest equity will allow the combined entity to target closing pro forma trailing debt to EBITDA of near 4.5 times with a 12- to 18-month goal of near 3.5 times and target pro forma liquidity of $ 300 to $ 400 million.” (Source: AMID site)
In February, AMID announced a definitive agreement for the sale of its refined products terminaling business to DKGP Energy Terminals LLC, a joint venture between Delek Logistics Partners LP (DKL) and Green Plains Partners LP (GPP), for approximately $ 138.5 million in cash, subject to working capital adjustments. The transaction is expected to close in the first half of 2018.
AMID’s management just announced on 6/18/18 that it has “entered into a definitive agreement for the sale of its marine products terminaling business to institutional investors advised by J.P. Morgan Asset Management, for approximately $ 210 million in cash, subject to working capital adjustments. The transaction is expected to close in the third quarter of 2018.” (Source: AMID site)
We assembled this table to get an idea of how the proposed debt leverage is working out. As of 3/31/18, AMID had Net Debt/EBITDA leverage of 6.63X, its leverage was 8.03X, and the combined leverage was 7X.
In this table, we used AMID management’s Net Debt/EBITDA targets in tandem with its asset sales to see if the targets are realistic. Management is targeting annual post-deal EBITDA of $ 300M and a 12-month goal of ~4.5X leverage.
With the sale to DKL of $ 138.5M, and the $ 139M paydown of SXE’s debt, the initial Net Debt/EBITDA may be ~5.88X, which is much better than the Q1 ’18 figure of 7X.
Moving forward to Q3 ’18, with the JPMorgan $ 210M sale, the debt could reach $ 1,250.99M, with a Net Debt/EBITDA ratio of 5.04X. This is assuming a devil’s advocate scenario in which trailing EBITDA merely stays flat, at $ 248.52M, which may be too conservative seeing that mgt. is targeting $ 300M annually.
Management addressed post-deal debt and DCF on the Q1 ’18 call, asserting that it should generate $ 300M in EBITDA and hit $ 140M in DCF, which is much higher than the combined $ 115M AMID and SXE generated in the most recent four quarters:
“Following the closing of the Southcross acquisition and combined with a positive impact of recent growth initiatives, we remain on track to generate pro forma annualized EBITDA in excess of $ 300 million and approximately $ 140 million in distributable cash flow.”
It looks like the combined companies could hit that 12-month leverage target of 4.5X if they’re able to increase their EBITDA:
Debt Leverage: AMID’s 2018 Q1 10-Q states that, as of 3/31/17, its total leverage ratio was 5.23X. However, we came up with a higher figure of 6.6X. One of the distinctions that management makes is not counting non-recourse debt in its presentations – it refers to “compliance leverage”:
(Source: AMID 2018 Q1 10-Q)
Moody’s downgraded AMID on May 4, 2018, but note the reference to the financial support from ArcLight Partners:
“Speculative Grade Liquidity (SGL) Rating to SGL-4 from SGL-3. Other ratings remain on review for downgrade. The downgrade of the liquidity rating to SGL-4 reflects deterioration in liquidity and Moody’s expectation that AMID will have weak liquidity over the next 12 months as the partnership continues to rely heavily on its revolver while executing on aggressive growth strategies and repositioning of its asset base”.
“The SGL-4 liquidity rating reflects Moody’s expectation that AMID will have weak liquidity over the next 12 months. At year-end 2017, the partnership had $ 9 million of cash and only $ 48 million available under its $ 900 million revolver. Financial covenants limit access to less than the full revolver which expires in September 2019. ArcLight intends to support the partnership through April 2019 to comply with its financial covenants, if necessary. Also supporting the partnership’s liquidity is its ability to monetize assets. Moody’s notes that the partnership anticipates it will close on the sale of its refined products terminals during the second quarter of 2018 for $ 138.5 million (subject to working capital adjustments).” (Source: Moody’s)
Deal Execution – There’s always a chance that the buyout won’t go through. However, it has been approved by both boards, by the unitholders of both AMID and SXE, and 4/10/18 they received the final state-level regulatory approval for the merger. On the Q1 ’18 call, management said that “at this time, we expect to close this transaction during the second quarter.”
We increased our holdings of SXE, based upon the current post-buyout price discount, and the very attractive 18% post-buyout yield. Another plus is that a very supportive, veteran energy investing firm, ArcLight Capital Partners, owns ~27% of AMID’s units.
(Source: AMID site)
All tables furnished by DoubleDividendStocks, unless otherwise noted.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
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Disclosure: I am/we are long SXE, DKL.
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.
Platformization is a term in technology that I haven’t heard used much, at least not until I came to Bangkok to speak at a TechSauce event focused on the growing opportunity in Southeast Asia.
I moderated a panel with a group of platform innovators from the region — Go-Jek and Line — with brands that cross many vertical sectors from gaming and chat to ride-hailing and shopping.
These two companies have expanded far beyond their core service. And that makes sense to keep their users coming back for more from their brands no matter the service, said my panelists Ajey Gore, CTO of Go-Jek and Ariya Banomyong.
It’s also a defensive move. If they don’t extend to new areas, someone else. That someone else could very well be the Chinese tech giants who see Southeast Asia as the next opportunity. With a market size of 665 million and a culture that is more similar to China than western markets, China’s largest technology companies are entering the region, snapping up shares in the region’s rid-sharing and payment upstarts such as Go-Jek, Grab, Ola and Paytm.
So it can amount to a strategy of building a moat around your business to ward off rivals. It’s survival of the fittest, explained Go-Jek exec Gore.
This platform is well played by Go-Jek and Line, which can simplify the name of their services with Go and Line, just like Alibaba has done with so many of its offerings such as AliPay, AliCloud, AliHealth and so on.
How do startups fare in an environment where so much of the action is centered on these platform players?
Grace Xia, a venture investor with Jungle Ventures and former Tencent executive, says that startups aren’t cut out. They can become innovation pipelines to these platform companies. That could even lead to an acquisition by the biggies, which certainly is not unheard of in this fast-emerging tech innovative region.
Rebecca A. Fannin is founder/editor of news, events and research group Silicon Dragon. She is an author of three books on innovation and venture trends, and is a public speaker.
Does your site align with your brand and your story?
It’s not uncommon for organizations to refine their focus, home in on a specific niche, or completely shift gears after years in business. Whether you’ve refocused on a specific audience or adapted your service or product offerings, your website should reflect these changes and correctly position you within the marketplace.
Even if your products or services and target audience have remained the same, it’s important to continually check in on your site to make sure it’s accurately depicting your organization’s story –the vision, values and deeper purpose you serve. This goes beyond simple copy changes on your “about us” or home page. Micro messages deeply impact how your customers perceive you, so be sure you’re looking at the entire site –header, footer, navigation headings, drop down boxes, error pages, and the list goes.
Beyond the messaging, put your site’s imagery and overall design under the microscope. Does it still accurately portray what you have to offer and what you stand for? If not, you could be attracting the wrong customers, or worse, turning away the right ones.
Does your site support a frictionless customer experience?
This may not be as apparent to you or your team –you’ll have to get in the trenches and actually talk to those using your site. You might talk to existing customers, prospects you’re currently in conversations with, or perhaps create a focus group to go through the site and note any sticking points.
An unpleasant user experience is often the “silent killer” of most websites as most organization’s don’t know it’s creating an unpleasant experience unless a customer voices their opinion. This is why you have to talk to those who are actually using it. Questions to ask might include:
This feedback will help you identify if there are any common sticking points that could use improvement. You might also compare this to your website analytics data to see if there are congruences.
Are actions being completed or do your site visitors bail at a certain point? Are they engaging with certain pages more so than others or taking the desired actions? All of this can give you further details about whether a revamp of your site is needed.
Does your site support your content?
For most organizations today, their website serves as their primary information hub. Thus, it’s important it supports not only the volume, but the type of content you may be producing.
You may have great videos or a stellar podcast, but if it bogs down the speed of your site or fails to load, the result is a frustrating user experience. Your content should support your marketing, sales and customer experience efforts, but if the platform in which that content is delivered isn’t technologically or functionally sound, it can do more damage than good.
Monitor site load times, bounce rates and of course user feedback. If any of these areas is failing, it might be time to revisit the technology behind your site.
Is your site technologically dated?
Technology is changing at breakneck speed and it has required us to think about the various ways in which our customers and prospective customers want to engage with us and where they want to do it. It’s not enough to have a mobile site any longer. Now your site needs to work across various modern-day devices and produce an equally friendly and useful experience as the desktop version.
Additionally, security has become a heightened issue for organizations across nearly every industry. There’s nothing that can crush a brand quicker than a data breach.
If your site is operating on a dated platform or technology, it might be time for an overhaul of the underlying technology. Regular audits will help ensure you stay compliant, keep your customer’s information safe, and that you’re meeting their needs digitally, regardless of their device of choice.
Just like any other arrow in your quiver, your website is a tool. If it’s accurately reflecting your brand and up to date in terms of security and technology, that’s half the battle. The other half to consider is whether it’s fulfilling its job as a resource to customers (and prospects), and supporting your conversion goals.