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Going for Growth

By Elliott H. Gue on May. 31, 2013

An ideal pick for investors seeking rapid distribution growth, Atlas Energy LP owns a significant equity stake and the general-partner interest in three entities: Atlas Pipeline Partners LP (NYSE: APL), which owns traditional midstream infrastructure; Atlas Resource Partners LP (NYSE: ARP), which owns upstream assets; and Lightfoot Capital Partners, a privately held outfit that incubates future MLPs.

In the first quarter of 2013, Atlas Energy LP increased its distribution by 3 percent sequentially, to $0.31 per unit and reaffirmed its guidance for a full-year payout of between $1.70 and $2.00 per unit–equivalent to a 58 percent to 86 percent increase from year-ago levels.

Although investors may scoff at the stock’s roughly 2.4 percent current yield, management’s outlook for distribution growth amounts to a forward yield of 3.3 percent to 3.8 percent. Much of this upside will come from growth initiatives under way at Atlas Energy LP’s limited partners.

Atlas Pipeline Partners LP

Atlas Energy LP owns roughly 6.4 percent of Atlas Pipeline Partners outstanding common units and a 2 percent general-partner interest that entitles the parent to incentive distribution rights (IDR).

The MLP will likely enter the high splits at some point in 2013, at which point Atlas Energy LP is entitled to 48 percent of all cash distributed after investors in Atlas Pipeline Partners receive a quarterly payout of more than $0.60 per common unit. (See MLP Basics: Incentive Distribution Rights Explained for an example.)

This IDR scheme is complicated by a 2007 agreement in which Atlas Energy LP agreed to allocate up to $3.75 million of its quarterly IDR back to Atlas Pipeline Partners, after the general partner collects an initial $7 million in incentive distributions. Even with this modification, Atlas Energy LP has significant leverage to Atlas Pipeline Partners’ impressive distribution growth.

Atlas Pipeline Partners, which went public in 2000, has amassed more than 10,000 miles of gathering pipelines and 14 gas-processing plants that can handle about 1.5 billion cubic feet annual throughput. Management estimates that these facilities operate at about 93 percent of their nameplate capacity.

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