Atlas siblings offer different profit opportunities

Posted by Tim

November 6, 2008

If one starts digging into the interrelated Atlas energy companies, you first get a headache, then you decide there may be some good profit opportunities. So far I have listened to 2 earning calls from the energy company and the pipeline folks. Atlas America (ATLS: 16.71 0.00 0.00%), which hold general partner interests and a significant portion of the LP units will report on Friday.

First up was Atlas Energy LLC (ATN: 15.02 0.00 0.00%) ATN is the natural gas exploration and production part of the equation. Atlas Energy currently is developing shale properties in Michigan, Tennessee, Indiana and the monstrous Marcellus Shale in Pennsylvania. From the 3rd quarter of 2007 revenues were up 19%, earnings up 21% and distributable cash flow up 17%. The company has had 6 straight quarters of record results since going public at the end of 2006. A dividend of 61¢ was declared giving the stock a current yield of 11%. Distribution coverage for the quarter 1.4 times in distributable cash. ATN sets itself apart from their peers in two ways. First, they generate funds for drilling expansion and additional revenue by selling individual tax-advantaged investor programs. They are not dependent on borrowing to fund drilling expansion. Second, they take a strong, active hedging stance to lock in profits for their natural gas production. Current hedges will ensure growing profits through at least the end of 2009. It is hard to believe the shares of ATN traded as low as $13.37 a month ago, pushing the yield to over 18%.

The conference call for Atlas Pipeline Partners (APL: 7.97 0.00 0.00%) and affiliated Atlas Pipeline Holdings (AHD: 5.19 0.00 0.00%) took a significantly longer than average 1.5 hours. It opened with CEO and Chairman Ed Cohen expressing his “anguish” at the valuation the stock market is putting on his company in comparison to the excellent performance he sees in their results. He came back to the topic several times during the call and I definitely got the message they want the market to value the company higher. Market concerns seem to be with APLs high debt load in the face of a possible slowdown in cash flow due to much lower natural gas prices. Atlas Pipeline currently generates about 82% of EBITDA from the processing of natural gas into other fuels under the collective name of NGLs (natural gas liquids). When asked about the affect of natural gas and oil prices on their margins the answer was that processing margins are affected by:

…NG liquid prices, natural gas prices, oil prices, the covariance between these prices and the influence of the company’s hedges on these prices.

I would find it hard for a stock analyst to get a handle on that well enough to predict the future for APL. The balance of EBITDA come from the fixed fees for the transportation and compression of natural gas.

The market has definitely priced in a distribution cut from the current 96¢ which provide a yield of 20% at the current stock price. If the distribution was cut to 80¢ (my guess as the minimum for 2009 based on comments in the conference call) the stock would still be yielding 16%. If the stock was priced at a more reasonable 12% yield on the hypothetical 80¢ distribution the stock would be 30% higher than it is now at around $26. The stock is way undervalued.

To reignite the stock price APL management is looking at several options to get the market to see more value in the stock. One idea proposed in the conference call was the combination of APL and AHD into a single entity. This would retain more distributable cash into a single stock and reduce the murkiness of the relationship. Currently whenever APL increases the distribution amount it is required to send the same amount of cash to AHD. A single company would be able to increase distributions at a much faster rate. APL is also actively researching selling off some of their pipeline and processing assets and use the cash to pay down debt. One problem some stock analysts have with the company is the amount of debt on the books.

I think both of these Atlas siblings are well managed and actively hedged energy companies that are currently very undervalued. This is from a combination of a general weakness in the stock market, falling natural gas prices, and the inability of the market players to separate the conservative players from the agressive. Atlas Pipline Partners (APL: 7.97 0.00 0.00%) is a component of this site’s Income Portfolio and Atlas Energy (ATN: 15.02 0.00 0.00%) is in the Opportunities Portfolio.