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Atlas Pipeline Ups Ownership in Eagle Ford Midstream

Atlas Pipeline Partners LP stepped deeper into the Eagle Ford Shale in South Texas on Tuesday with a $1 billion cash agreement to buy privately held Teak Midstream LLC, a natural gas gathering and processing operator.

The acquired assets include Silver Oak I, a 200 MMcf/d cryogenic processing plant, and 265 miles of 20-to-24-inch high pressure gas gathering lines with 750 MMcf/d of throughput capacity.

The gathering system originates in Dimmit County, on the western edge of the Eagle Ford play, and moves rich gas east through Webb, La Salle, McMullen and Live Oak counties to the Silver Oak I plant in Bee County. A second system moves rich gas from the prolific Karnes County area to the Silver Oak plant.

Silver Oak I ramped up last November, supported by long-term agreements with Comstock Resources Inc., Talisman Energy USA Inc. and Statoil Natural Gas LLC.

Also included in the transaction is Silver Oak II, a proposed 200 MMcf/d cryogenic processing plant that is to be in service in early 2014.

The Atlas Energy LP subsidiary, which is a big operator in the Permian Basin, estimated that total capital spending associated with building out Silver Oak II and other projects in the shale play would be about $100 million over the next year.

Teak, based in Dallas, is backed financially by private equity firm Natural Gas Partners, and Bryant H. Patton of Brycap Investments Inc. is a business adviser. About 80% of Teak's current gross margin is derived from fixed fee contracts, with most of the volumes under minimum volume commitments, the partnership noted.

Proforma for the transaction, Atlas Pipeline's overall cash flow mix is forecast to be more than 50% fixed fees by the end of 2014. Beyond 2014, more expansions are planned, with the possibility of adding a third 200 MMcf/d processing facility and more gathering lines in the Eagle Ford, it noted.

Based on the forecasted earnings and cash flow from the Teak assets, the pipeline expects to receive an additional $25-40 million of annual distributable cash flow as the acquired assets grow and mature, which represents about 45-75 cents/common unit on an annualized basis.

As part of the acquisition, Atlas Energy agreed to invest $20 million of $400 million in newly issued Class D convertible preferred units in conjunction with the financing. The transaction is set to close before the end of June.

The transaction would add to Atlas Pipeline's Eagle Ford portfolio. Last December it paid $600 million for all of Cardinal Midstream LLC's assets, giving it cryogenic processing plants and midstream infrastructure in the Eagle Ford, Woodford, Haynesville and Fayetteville shales, as well as the Granite Wash and Avalon formations (see Shale Daily, Dec. 6, 2012).

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