Is MLP M&A Creating Value?

In 2010 Chesapeake Energy (NYSE: CHK) – the world’s biggest natural gas company at the time – was in dire straits. The company was struggling after natural gas prices plunged by 50%.
So it took an unexpected step and decided to spin off its gas pipeline company in a $513 million IPO. Simultaneously, Chesapeake sold part of its stake in the Master Limited Partnership (MLP) to a $15 billion private equity firm, called Global Infrastructure Partners.
That transaction created Chesapeake Midstream Partners. The idea was that the formation of the MLP would provide tax advantages to both Chesapeake and other shareholders of the new entity.
But it didn’t pan out as planned for CHK. A couple years later it was still suffering. The company had overextended itself, drilling too many new wells. Worst yet, natural gas prices were still depressed.
So Chesapeake started selling off more assets, including a $2.4 billion deal with Williams Cos. (NYSE: WMB) in 2012 that included a 25% “limited partner” stake in Chesapeake’s MLP and a 50% share of the “general partner” interest in the pipeline company.
New beginnings are a great time for a new name. So even though this MLP had been in existence since 2010, they re-named it Access Midstream Partners (NYSE: ACMP) on July 24, 2012.
Today, Access Midstream is in the center of another round of M&A.
The proposal on the table is that WMB will buy out Global Infrastructure Partners’ stake in ACMP for $6 billion. Furthermore, WMB plans to merge ACMP into its subsidiary, Williams Partners (NYSE:WPZ). I won’t get into all the details of the planned merger since there is already a lot of this analysis out there for public viewing.
What I want to answer is the simple question. Is value being created when these guys play MLP shuffleboard?
There are a lot of ways to slice and dice the deal to come up with an answer. But to me, two measures – the most important ones – give a definitive answer. At least for shareholders of ACMP.
Those measures are dividend payments and total returns, the main reasons investors buy MLPs (or any stock for that matter) to begin with. And the answer is, yes.
In the first four quarters as a public company (under a different name) after Chesapeake created ACMP, which included Q4 2010 through Q3 2011, ACMP paid out $1.43 in dividends.
Over the last twelve months, it has paid out $2.15 in dividends. That’s an increase of 51% in distributions over the last four years, and the MLP still yields 3.8%.
Considering both dividends and capital gains the stock has delivered a total return of 255% since going public in 2010, versus a return of 76% for the S&P 500.
Since ACMP took on its new name in July of 2012, when the second round of M&A activity was completed, shares are up by 139%, versus 46% for the S&P 500.
Given the performance of ACMP shares over these two timeframes, each of which began with a major M&A event, it’s hard to argue that shareholder value hasn’t been created. It has performed far better than the benchmark S&P 500.
So, will it happen a third time?
According to the terms of the proposed merger, ACMP shareholders should receive distributions in 2015 that are at least 25% higher than expected distributions in 2014. And distributions in 2016 should rise by another 20%.
With those distributions seemingly “locked in” shares of ACMP will yield over 4.5% in a year, even if the stock keeps climbing to $75.00. Again, it’s hard to argue that value isn’t being created for shareholders here given the likelihood of continued total return.
I think it’s pretty clear that MLPs are enjoying an extremely sweet mix of production growth and low interest rates right now. Lots of product to move and low cost leverage is a valuable mix indeed. Not to mention rampant investor demand for yield.
And looking at history, it appears to me that ACMP is one MLP poised to keep delivering to shareholders through this 3^rd round of M&A activity. I think the stock is a buy.

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