American Midstream: Remorseless ArcLight Goes For The Jugular

Sometimes shareholders just cannot trust other shareholders to stand with them. General partner ArcLight has a fair number of limited partnership shares of American Midstream (AMID). After some bad luck and a misstep or two, the limited partner unit now trades for about a third of the highest price just a couple of years back.

One would have thought that ArcLight would work to restore the luster of this once thriving partnership. But instead, ArcLight knows a great deal when it sees one. The end of the third quarter is “window dressing time” for institutional funds. Therefore, to the detriment of long-term unit holders, ArcLight would like to take the partnership private at the “bottom of the market”. In fact ArcLight even waited for the window dressing period to depress the unit price as much as possible when making its latest offer to buy the partnership.

The offer from ArcLight was for a whopping $6.10 per limited partner unit. The shares of course rallied above that price. But ArcLight knows Mr. Market pretty well. Long-term holders would probably get disgusted enough to sell their shares to traders who would be happy for a small short-term profit.

ArcLight can increase the offer another 10% to 15% down the road to assure market acceptance at a premium to what the units are trading. However, ArcLight typically does not go for small profits. The firm usually aims to make far more money than 15%. The actions of ArcLight actually give credence to the value arguments that American Midstream is probably worth about $10 to $12 per limited partner unit. ArcLight is probably betting that the market will not bid the unit price to anything close to full value. Then ArcLight can take American Midstream private and realize the value of the assets in other ways.

This ArcLight strategy takes advantage of the very poor market attitude towards this limited partnership. Normally, after a period of poor earnings and an over-extended capital structure, Mr. Market wants a growth track record before restoring a partnership to its full value. ArcLight appears to be impatient with Mr. Market. So the general partner has devised a way to speed up the return to full valuation.

A few years back an investor could hardly imagine this situation. American Midstream was growing and the unit prices were heading towards the high teens. Periodic distribution increases were the order of the day. Then came the merger with JP Energy Partners. The ballyhooed effects of that merger were definitely not apparent after one year. The unit price lagged severely as it often drifted towards $10.

Source: American Midstream Presentation At MLP & Energy Infrastructure Conference May 2018

ArcLight sold some under-performing divisions and then replaced those divisions with other divisions. But then a pipeline ruptured at the bottom of the sea and forced the general partner to contribute to the partnership while Delta House awaited the return of contracted volumes. Some commentators saw no progress between contributions from the general partner the year before for a warm winter.

Then came the disastrous offer for Southcross Energy Partners (SXE). That was it. Mr. Market had had enough of missed guidance and unfulfilled promises. A distribution cut to deleverage the balance sheet was the final nail in the coffin. The partnership units were left for dead.

But this is one general partner that is not about to leave a discount on the table. It matters not that ArcLight helped the partnership earn that discount to asset values. If the market would not value the partnership properly in the eyes of the general partner, then the general partner would buy the partnership. Later the partnership could be sold in pieces or repackaged and sold to the public at a later date. Profit is profit. ArcLight is not an organization that leaves spare change hanging around.

The Southcross merger termination came with an announcement that Moody’s upgraded the liquidity rating of the partnership. That was followed by the second-quarter report where management announced a lower leverage ratio and further progress towards forecast goals for the year. Still the progress made did not impress Mr. Market at all. After all, the distribution had been cut significantly. Therefore nothing else mattered but that distribution cut.

Obviously long-time shareholders would like to see the general partner make good on those long-term (great return) promises. Obviously, ArcLight never told the other shareholders that the bright future the general partner had in mind did not include the limited partner unit holders. Evidently the limited partners could bear the risk of failure without the rewards of success.

Hopefully the limited partners now realize that ArcLight managed the partnership for aggressive growth. Income, even speculative income was never the main goal. The generous distributions were a side benefit of a very aggressive growth strategy. More importantly, if the market punishes the partnership “too much,” then ArcLight as the general partner will take the partnership private to realize a second profit by obtaining full value for the partnership assets.

Maybe ethical behavior would dictate a public auction and sale of the limited partnership assets (or some sort of recapitalization followed by a return to growth). Clearly ArcLight went for the maximum profit plan and set the ethics part aside. This is something that potential long-term holders should keep in mind for any future ArcLight-led ventures that are potential investments. Clearly, ArcLight looked out for the interests of ArcLight first without worrying about the future consequences caused by unit holders taking a loss in their American Midstream investment.

Investors can vote no on the coming shareholder vote for the ArcLight offer. Probably the best that will happen is a 10% to 15% increase in the offering price. The conflicts committee clearly has proven to be a rubber stamp body that is worse than useless to the small shareholder. Lawyers may not be much help in this situation either. Probably the best thing to do is sell the investment and move on. Promise yourself that you will not support any ArcLight ventures in the future regardless of the profit potential. If enough investors shun ArcLight’s products, then maybe it would behave differently in the future. But definitely do not count on an overnight transformation in favor of the small investor.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

Disclosure: I am/we are long AMID.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Paul Rosen