American Midstream Partners LP is continuing to expand its domestic infrastructure portfolio, despite market conditions, agreeing Monday to pay $225 million for a batch of pipeline systems that primarily transport natural gas-rich production from the eastern Gulf of Mexico (GOM).
The Denver-based partnership, backed by private equity fund ArcLight Capital Partners LP, acquired stakes in the Destin Pipeline gas system, as well as the Tri-States and Wilprise pipes, which carry natural gas liquids (NGL). ArcLight affiliate Emerald Midstream LLC bought interests in the three systems in March. In addition, ArcLight sold an additional 1% interest to American Midstream in Delta House, a semi-submersible floating production system in Mississippi Canyon Block 254, giving the partnership a 13.9% total stake.
American Midstream also acquired a majority stake from Chevron Corp in the Henry Gas Gathering System and in other gas, crude and saltwater onshore and offshore pipelines in the GOM. The Henry system offers multiple deliveries into the Fort Henry/Henry Hub gas complex in Louisiana.
"The acquisition of strategic midstream infrastructure serving prolific areas of the Gulf of Mexico is an important step toward transforming American Midstream into a significant and integrated participant in offshore infrastructure, particularly in the deepwater," CEO Lynn Bourdon said. "Our combined interests in the Destin and High Point gathering and transmission systems cover more than 10,000 square miles of active production in the Gulf. In addition, the onshore segment of Destin extends our gas transmission footprint into an active region serving the southeast marketplace."
The assets expand the partnership's existing GOM and Gulf Coast footprint with an estimated 200 miles of gas, crude and saltwater gathering pipelines both onshore and offshore Louisiana. Among other things, American Midstream now has a 49.7% stake in the 255-mile-long Destin system, with 1.2 Bcf/d of total capacity. A partnership affiliate also has an option in mid-2017 to acquire an additional 17% interest in the system.
The Tri-States and Wilprise pipelines together have 120,000 b/d of NGL transport capacity. The partnership acquired a 16.7% interest in Tri-States and 25.3% in the Wilprise pipeline. Tri-States traverses 161 miles to Louisiana-based fractionators, terminating in Kenner, LA, while Wilprise, a 30-mile-long pipeline, originates at Kenner and terminates in Sorrento, LA.
Delta House, which began operating last year, in December reached nameplate processing capacity of 200 MMcf/d of gas and 80,000 b/d of oil. Peak processing capacity is 240,000 MMcf/d and 100,000 b/d. It has 10 wells now in operation.
American Midstream is to operate the gas and saltwater pipelines, while an affiliate of joint venture partner Panther Offshore Gathering Systems LLC would manage the crude oil gathering systems.
The additional infrastructure increases the partnership's "size and scale through incremental fee-based cash flows supported primarily by take-or-pay contracts and life-of-lease dedications," Bourdon said. "When combined with our onshore gathering, processing, transmission and terminals infrastructure, we remain well positioned to continue operating successfully through the current industry downturn, while positioning the partnership to achieve significant long-term growth as industry conditions improve."
The newly acquired infrastructure complements American Midstream properties that serve the eastern GOM, including the High Point gas system in southeastern Louisiana. Two years ago it paid $115 million to buy some DCP Midstream LLC assets, including stakes in the 300 MMcf/d Mobile Bay plant in Mobile, AL; the 270-mile Dauphin Island system that delivers gas to Mobile Bay; and the Main Pass Oil Gathering System (see Daily GPI,July 17, 2014).
American Midstream also has been expanding in the U.S. onshore. Earlier this year the Federal Energy Regulatory Commission gave it permission to build the Natchez Pipeline to replace the Midla gas system, which traverses Louisiana and Mississippi (see Daily GPI,Feb. 5). In late 2014 the partnership also bought Costar Midstream LLC, which boosted its onshore gas and oil system (see Daily GPI,Oct. 14, 2014).
Meanwhile, the board declared a quarterly cash distribution of 41.25 cents/common unit, or $1.65/unit a year. However, in light of "continued illiquid and unattractive capital market conditions," the distribution/unit has been reduced by 13%.
By resetting the distribution, "we are creating additional liquidity to fund growth opportunities, or reduce borrowings on the revolving credit agreement, during a period of significant dislocation in the public equity markets," Bourdon said. "We are solidly in a position, absent a significant and unforeseen negative event that directly affects the partnership, to pay at least the minimum quarterly distribution going forward."
If American Midstream were unable to access public equity markets, "ArcLight has indicated the intent to continue supporting the partnership by providing...access to equity capital," he said.
The acquisitions were funded by issuing $120 million, or 8.6 million Series C convertible preferred units, to ArcLight, as well as $105 million in debt. In addition, the partnership gave ArcLight the right to acquire another 1.2 million common units at a strike price of $7.25/unit.