Atlas Turns on the Gas in Transformational Deal


The management team at oil and gas company Atlas Energy has really taken Warren Buffett's advice to heart. Buffett's old adage to "be fearful when others are greedy and greedy when others are fearful" seems to be that team's approach. After selling its shale assets to Chevron at the top of the market, the company has been diligently acquiring natural gas assets at the market's low. That blueprint continues to be followed as evidenced by the recently announced acquisition of substantial natural gas assets via its master limited partnership, Atlas Resource Partners .

Atlas' latest deal adds 466 billion cubic feet of natural gas reserves which it's purchasing from EP Energy for $733 million. These assets are located in the Raton Basin in New Mexico and Black Warrior Basin of Alabama and are currently producing about 119 million cubic feet of natural gas per day which practically doubles Atlas' current net production. Even more important is that these assets come with very low decline rates of 8%-10%, which also lowers Atlas' pro forma decline rate to 11%. That means the company needs to invest less maintenance capital to keep its production steady.

For Atlas' investors, the most important aspect of this acquisition is that it will enable the company to provide a substantial distribution increase to its investors next year. Atlas sees a minimum distribution of at least $2.60 per unit next year which represents a 27% increase over the current annualized distribution of $2.04 per unit. That means investors can lock in a yield of nearly 12% by purchasing units today.

As this deal clearly demonstrates, when the right deal comes along it can add significant income accretion to unit holders of oil and gas MLPs. We've seen several instances of this in the sector this year with LINN Energy's announced acquisition of Berry Petroleum for $4.3 billion adding in excess of $0.40 per unit to its distributable cash flow. That deal is the driving force behind LINN's announced 6.2% distribution increase, which will go into effect when the deal closes next quarter.

Other industry peers like BreitBurn Energy Partners have gone on record stating that it will see a $0.21 accretion to its distributable cash flow by investing $500 million to acquire assets that meet its criteria. Its consistent acquisition activity has produced distribution growth of 27% since the first quarter of 2010.

The problem, though, is finding that right deal at the right price. Vanguard Natural Resources for example reviews about 150 acquisition candidates each year and whittles that down to about 50 that are evaluated more deeply. Since its IPO, the company has only closed 18 transaction as few meet the stringent requirements needed to move the needle. It's a similar story at BreitBurn which screened 500 opportunities last year but just closed seven deals for about $600 million.

For Atlas investors this was the right deal at the right time. The company was able to snap up cheap natural gas assets which will yield a significant boost to its distribution. The assets also help to bring down the company's decline rate which provides an important base to the distribution. When added to the company's more than 1,200 potential drill sites throughout its portfolio, Atlas has a range of opportunities to grow through the drill-bit as it continues to seek out additional accretive acquisition opportunities.

The other area to watch if you are following the Atlas story is the midstream industry. Atlas Energy, through its stake in Atlas Pipeline Partners competes with the best of the bunch in that industry. That's why its important to know the competition, which doesn't get any bigger than Kinder Morgan. Its a company that investors should commit to memory due to its sheer size - it's the third-largest energy company in the U.S. - not to mention its enormous potential for profits. In The Motley Fool's premium research report on Kinder Morgan, we break down the company's growing opportunity - as well as the risks to watch out for - in order to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource.

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Fool contributor Matt DiLallo owns shares of LINN Energy, LLC. The Motley Fool recommends BreitBurn Energy Partners L.P. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published