American Midstream: Despite Yield, Buying Appears Early

It is a tumultuous time in the master limited partnership (“MLP”) space, with perennial underperformer American Midstream (AMID), like many, undergoing deep structural change. The company has historically been a poor place to invest: the trend has been in a downturn for years. Transitioning a business into new markets often creates significant short-term pain, and at first glance I do not fault company vision. In fact, I think management’s choice to focus on demand-driven Gulf Coast assets is the right play if the company wants exposure to growth, but that does not make American Midstream a great buy in and of itself.
Like many MLPs, the problem is poor execution, high current leverage, and punitive cost of capital to fund that shift. Borrowing is prohibitively expensive at American Midstream, with the company essentially priced out of both the equity and debt markets when it comes to (most) accretive transactions. That has not stopped management from going on an acquisition binge, with actual operating results muddied from quarter to quarter as the puzzle pieces shift. In my opinion, as there is already a history of a small distribution cut in 2016, management needs to get to the point and cut the distribution materially to allow self-funding of its projects and to get leverage under control. That is when investors should buy if they truly are interested in owning an interest in the entity.
In getting into this position, American Midstream has been,... Read more