American Midstream Partners (AMID) is a strong growth-focused master limited partnership. It is specifically involved in gathering, treating, processing, fractionating, and transporting natural gas, oil, and condensate to link producers and suppliers to diverse natural gas, NGL, and oil markets.

Like similar MLPs, this particular partnership operates more than 3,000 miles of pipelines that gather and transport over 1 Bcf/d of natural gas, including three interstate and five intrastate pipelines. In this column, we provide an update to operations of the company that partners who have invested or are considering investing should be aware of.

Big Moves in 2017

During 2017, American Midstream made considerable progress in executing on a capital redeployment strategy of simplifying its businesses while gaining asset scale and density in core operating areas. After reviewing and investigating the activity this quarter we will tell you that this has been a very busy year, and especially busy fourth quarter for the partnership.

It is our opinion that the company has taken important steps to optimize its spending and operations this year. In 2017 the company acquired and announced more than $1.8 billion of accretive growth transactions ultimately continuing the transformation into a growth-oriented partbership. There were notable strengths and weaknesses to be aware of. Let us discuss.

Offshore Pipelines and Services

The offshore and pipeline services is a key segment for the company, but margins have taken a lump. Segment gross margin was $22.9 million for the three months ended December 31, 2017, a decrease of 6% compared to the same period in 2016.That said, cash distributions are up here.

Cash distributions were $29.6 million for the three months ended December 31, 2017, a 40% increase compared to the same period in 2016.Cash distributions increased due to additional equity ownership interests in Delta House to 35.7% and Destin to 66.7%.

The partnership also realized a 19% increase in throughput volumes on its Okeanos Pipeline due to increased deepwater production.Right now there is a production delay that should cease early in Q2 2018., so be aware that Q1 2018 could see some pressure. When full production resumes, along with these four tie backs, the partnership anticipates Delta House to run near nameplate capacity for the foreseeable future.The partnership expects the associated resource potential in the prolific deepwater Gulf of Mexico, specifically the Mississippi Canyon block, will continue to drive predictable fee-based cash flow across its entire offshore segment.

Gas Gathering and Processing Services

The gas gathering and processing services segment saw some key improvements, and saw margin expansion. Gross margin was $11.2 million for the three months ended December 31, 2017, an increase of 5% compared to the same period in 2016.

The increase reflected additional NGL volumes from new contracts in the partnership’s East Texas assets attributable to higher prices and producer development activity. Here is where we are bullish. The partnership “anticipates increased volumes across its entire Gas Gathering and Processing Services segment throughout 2018” resulting from significant commercial opportunities in the Permian and Eagle Ford Basins, as the partnership foresees continued growth in producer development activity. We expect this to help offset weakness in the offshore pipeline services segment.

Liquid Pipelines and Services

The liquid pipelines and services also saw a nice boost in Q4. Segment gross margin was $7.9 million, an increase of 2% as compared to the same period in 2016.Cash distributions were $2.3 million for the quarter, a 72% increase compared to the same period in 2016.

Growth was driven by higher throughput volumes on the Tri-States pipeline from increased activity and incremental volume from higher natural gas liquid deepwater Gulf of Mexico production.The partnership continues to “see growth potential across the liquids business and is evaluating multiple organic growth opportunities for new volume dedications on the Silver Dollar crude pipeline”. We think that is strong, and look forward to what comes out of it. We will also add that the partnership is also seeing increased drilling activity around its Bakken assets. The partnership s currently evaluating multiple organic growth projects which it projects “would generate double-digit returns”, which is very bullish.

Natural Gas Transportation Services

The natural gas transportation services segment saw some growth, mostly on the back of acquisition activity. That said, margins improved. Segment gross margin was $6.3 million for quarter, a 15% increase compared to the same period in 2016.

The increase was primarily attributable to the acquisition of Trans-Union pipeline in November 2017 that further strengthened its growing Southeast gas transmission assets.The partnership also realized higher rates due to continued strong industrial and residential demand within the rapidly growing Southeast markets. We anticipate strength to continue in this segment, with revenues and margins dependent on pricing of the underlying natural gas commodities and subsequent deals.

Terminalling Services

Finally, in the terminalling services segment, there were some notable weaknesses. Despite an overall strong quarter and strong 2017 operationally, this segment was a drag. Gross margin was $7.6 million for quarter, down 32% compared to the same period in 2016.

The decrease in gross margin was primarily attributable to a reduction in storage and utilization at the Cushing terminal and associated higher operating costs.This decline was partially offset by an increase in commodity sales at the refined products terminals, but the decline in segment performance was more than noticeable.

Looking Ahead

We are pretty pleased with the progress we are seeing in this partnership. That said, the company is addressing its weakness in terminalling services. Last month, the company announced the execution of an agreement to sell its refined products terminals for approximately $138 million, further demonstrating the capacity and willingness of the partnership to reallocate capital to higher growth strategic opportunities.

In addition, the partnership recently announced the Southcross acquisition, which furthers the partnership’s ability to participate in the full midstream value chain, from well head supply to downstream end user markets in the strategic Gulf Coast.It has significantly improved the asset base and has helped solidify its strategic footprint a midstream player.

Still, losses continue. Net loss attributable to the partnership was $131.3 in 2017, as compared to net loss of $51.3 million in 2016. Adjusted EBITDA was about flat year-over-year, which suggests that the partnership is turning the corner. This is particularly helpful since the company is paying $1.65 per unit annually, and there is a 1.1 distribution coverage ratio.

In 2018, we anticipate continued operational efficiencies to be explored, as well as strategic sales and acquisitions as the partnership focuses its efforts. Ultimately, the higher oil and gas prices go, the better for the company. The underlying commodities have a positive risk-reward ratio here, so we remain bullish through the next year.

Note: This article appeared first on our partner site TalkMarkets

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