Can Chesapeake..Ahem..Access Midstream Partners Move On?

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Income investors tend to shy away from sizzle. After all, drama can detract from the serious business of maintaining and growing a payout over the long term. Accordingly, master limited partnership (MLP) investors greeted Chesapeake Energy’s (NYSE: CHK) July divestiture of its 42 percent stake in the former Chesapeake Midstream Partners LP with apparent relief.

Since then, the midstream MLP further distanced itself from the taint of its association with Chesapeake by changing its name to Access Midstream Partners LP (NYSE: ACMP), and its unit price jumped 20.5 percent versus just 0.6 percent for the Alerian MLP Index. But as I’ll detail below, despite appearances, Chesapeake is still very much involved with Access.

Though it’s the second-largest natural gas producer in the US, Chesapeake Energy is perhaps best known for its brash CEO Aubrey McClendon, who’s currently engaged in an epic struggle with activist investor Carl Icahn over control of the firm. Icahn is Chesapeake’s second-largest investor, and earlier this year he used that leverage to successfully shake up the board by wresting the chairmanship from McClendon in favor of an independent chairman, as well as winning major shareholders the right to appoint several independent directors.

In late November, Icahn reported that he’d boosted his stake in the troubled energy producer by 1.5 percentage points to 9 percent of shares outstanding. Fortunately for Access Midstream investors, this clash of egos is hopefully more a source of entertainment than concern at this point.

Earlier this year, Chesapeake faced a liquidity crisis due to the crash in natural gas prices, which forced it to raise capital by selling off assets, including its stake in the MLP. That helped shore up Chesapeake’s balance sheet, which should bode well for Access, since Chesapeake remains its primary customer.

The MLP originally issued its initial public offering in mid-2010 as part of a joint venture between Chesapeake and the private equity firm Global Infrastructure Partners (GIP). In early July, Chesapeake sold its share of the MLP to GIP for $2 billion. Following the transaction, GIP now owns 100 percent of the general partner interest and 69 percent of the limited partner units.

Beyond the fact that Access is no longer as obviously burdened by the headline risk of Chesapeake, the MLP has several characteristics that make it worth watching in case its units fall further and present a more attractive entry point.

Stable Operations

Although the firm’s operations focus on natural gas gathering, which involves collecting gas produced at the wellhead for takeaway by pipelines, Access doesn’t face the direct risk of exposure to commodity prices. Instead, it has fixed-fee arrangements with the ability to escalate and redetermine fees at regular intervals, which allows for steadily growing cash flows. It also has long-term acreage dedications of 10 to 20 years in key geographies, such as the Barnett, Marcellus, Mid-Continent and Haynesville formations. And in terms of throughput, Access is by far the largest gathering and processing (G&P) MLP.

Its distributable cash flow, which is the primary measure of an MLP’s profitability, grew 27.3 percent year over year to $86.3 million, with a solid coverage ratio of 1.29. That enabled the firm to raise its quarterly distribution 3.6 percent sequentially and 16 percent from a year ago. The MLP’s latest payout of $0.435 per unit marks its eighth consecutive quarterly increase. Its units currently yield 5.3 percent.

Access maintains a strong balance sheet with a debt-to-equity ratio of 0.6 and no maturities on long-term debt until 2021. It does have a $1 billion credit revolver that it can tap for borrowing through mid-2016.

The company expects to spend $660 million in organic growth capital expenditures for 2012 and another $550 million to $600 million in 2013, with the potential for asset drop downs from former parent Chesapeake.

The Ties That Bind

And that latter detail brings up an important consideration. Although Access is no longer partly owned by Chesapeake, it did earn 80.5 percent of its $460.1 million in year-to-date revenue from a wholly owned subsidiary of the natural gas producer. It also still relies on Chesapeake’s staff for general and administrative functions, and it employs another Chesapeake subsidiary for compression services.

Adding to customer concentration concerns is the fact that the MLP derives another 14.6 percent of sales from French energy major Total SA (NYSE: TOT). That means Access is currently dependent on two firms for just over 95 percent of its revenue.

So while monitoring this MLP, it will also be worth paying attention to its ability to diversify its customer base by securing new long-term contracts with other energy producers. Check out our free report for 5 more high-yield MLP Investments.

This Article by Ari Charney was originally posted on Investing Daily under the title Chesapeake’s All-Access Pass.