American Midstream acquires Costar Midstream

American Midstream Partners, LP has announced the acquisition of Costar Midstream LLC from Energy Spectrum Partners VI LP and Costar management for approximately US$ 470 million. Costar is an onshore gathering and processing company with its primary gathering, processing, fractionation, and off-spec condensate treating and stabilisation assets in East Texas and the prolific Permian basin, with a significant crude oil gathering system project underway in the Bakken oil play.

The acquisition was funded with 6.9 million American Midstream common units issued directly to Energy Spectrum and Costar senior management, which are subject to customary lock-up provisions, and US$ 272 million of cash from borrowings under the Partnership’s revolving credit facility and proceeds from the August 2014 private placement of common units. The acquisition closed 14^th October, 2014.

Total acquisition consideration for Costar equates to an Adjusted EBITDA multiple of approximately 10.5x for the full-year 2015. In addition, American Midstream expects to invest US$ 70 million to US$ 80 million over the next 12-18 months to complete the Bakken, Longview rail, and Permian off-spec condensate blending development projects described below. Upon completion of the development projects, the Adjusted EBITDA total investment multiple is expected to improve to approximately 8.0x when the development projects reach an annualised cash flow run-rate in 2016.

The senior management team of Costar, with an average of more than 30 years’ experience in the midstream industry, will join American Midstream to complete the existing Costar development projects, source additional growth opportunities associated with the Costar assets, and join with the Partnership’s existing corporate and business development teams to drive long-term operating scale and diversification for the Partnership.

“We are very excited to announce the acquisition of Costar Midstream, a transformative transaction that complements our existing midstream portfolio with a significant presence in East Texas, the Permian, and the Bakken,” said Steve Bergstrom, Executive Chairman, President and Chief Executive Officer. “The Costar deal is consistent with our growth strategy to pursue third-party acquisitions that enhance our current footprint of natural gas and crude oil midstream assets. The senior leadership team at Costar will join our team, and we look forward to working with them to drive further growth of the acquired assets and to find additional development and acquisition opportunities to build scale at American Midstream. With Costar’s recently completed Permian gas gathering and processing assets and the Bakken crude oil system that will be online shortly, coupled with the Partnership’s existing natural gas and crude oil assets in the Eagle Ford, American Midstream is now operating in a majority of the key energy resource plays in the US.”

“As we look forward, we are focused on integrating recently acquired assets, continuing to execute our strategic development projects in the Eagle Ford, and completing organic growth projects, including the expansion of Blackwater’s Harvey terminal. As a result of recent acquisitions and growth projects currently underway, we believe our 2015 Adjusted EBITDA will increase to nearly three times our 2014 Adjusted EBITDA forecast. Additionally, as a result of the accretive Costar acquisition, management intends to recommend to the board of directors a three to five percent increase to the first quarter 2015 distribution and an increase to the annual distribution of eight to ten percent going forward.”

Jim Benson, a Founder and Managing Partner of Energy Spectrum Partners (Energy Spectrum) added, "As a significant unit holder of American Midstream following this transaction, Energy Spectrum is pleased to be a part of the growth and future success of American Midstream and the continued success of the Costar management team. We are also pleased to be working with the existing management of American Midstream and continue to be excited and supportive of Steve Bergstrom's leadership and the continued support of ArcLight Capital Partners."

Costar Assets and Development Projects

Costar’s operating assets include the Longview gas gathering, processing, and fractionation complex and the Chapel Hill gas gathering, processing, and fractionation system, both located in East Texas. In addition, Costar operates the Yellow Rose gas gathering and processing system located in the Permian basin. Costar is also in the process of constructing an oil gathering system in the Bakken as well as a rail terminal in East Texas, and an off-spec condensate blending facility in the Permian. Asset details include:

• East Texas: Longview offers natural gas gathering and processing services with approximately 55 million ft³/d of cryogenic processing capacity located in Gregg County, Texas. Longview also offers natural gas liquid (NGL) fractionation through an 8500 bpd fractionator and off-spec condensate treating services. Chapel Hill is located approximately 20 miles west of Longview in Smith County, Texas, and offers natural gas gathering and processing services with approximately 20 million f³/d of cryogenic processing capacity and a 2000 bpf fractionator. In addition, Costar is developing a manifest rail facility on a 400 acre site adjacent to Longview that will increase Costar’s access to third-party upstream supply and downstream markets for its condensate treating services. The rail facility is expected to be operational in the second half of 2015.
• Permian: Yellow Rose is a 40 million ft³/d gas gathering and cryogenic processing system located in the Permian Basin in Martin County, Texas. The system commenced operations in September 2014 and is supported by a long-term dedication of more than 30 000 acres from the anchor producer customer. Production behind the plant is expected to increase significantly over the next several years as the anchor and other producers begin significant horizontal drilling of the Permian acreage served by Yellow Rose. In addition, Costar is constructing an off-spec condensate treating plant in the Permian, similar to the treating facility at Longview, in a joint venture with an industry partner. The Permian off-spec treating facility is expected to be operational in early 2016.
• Bakken: The Bakken oil gathering system is under construction in McKenzie County, North Dakota and is expected to begin initial operations in the fourth quarter of 2014 or the first quarter of 2015. The pipeline will have operating capacity in excess of 40 000 bpd, with a downstream connection to the Tesoro Logistics pipeline and the ability to accept volumes via truck. The gathering system is supported by a long-term dedication of approximately 24 000 acres from the system’s anchor producer customer. Costar is nearing execution of gathering and transportation agreements with other producers in the area, and will have the ability to source additional supply from outside the gathering system’s footprint through its truck-unloading facilities.

2014 forecast update

American Midstream updated its forecast for 2014 Adjusted EBITDA to a range of US$ 46 million to US$ 48 million and Distributable Cash Flow to a range of US$ 30 million to US$ 32 million. The updated 2014 forecast includes the benefit of the Costar acquisition for a partial quarter, including assumptions for costs associated with acquisition integration. The updated forecast also includes incremental costs associated with significant near-term company growth and the impact of delayed incremental volumes that were anticipated on certain legacy gathering and processing assets. The forecast does not include other acquisitions, drop downs, or asset development projects the Partnership is pursuing. Forecasted growth capital expenditures in 2014, which exclude capital for maintenance, were updated to a range of US$ 75 million to US$ 80 million to account for expected capital expenditures associated with the Bakken, Longview rail, and Permian development projects associated with the Costar acquisition.

The Partnership will provide its initial forecast for 2015 Adjusted EBITDA, distributable cash flow, and growth capital expenditures in mid-November in conjunction with the release of third quarter earnings.

In conjunction with the Costar acquisition, management intends to recommend to the Partnership’s Board of Directors an increase in the quarterly distribution of approximately 3% to 5%, beginning with the first quarter 2015 distribution payable in the May 2015. Furthermore, and as a result of the anticipated consistent growth of the Partnership, management intends to recommend to the Partnership’s Board of Directors an increase of approximately 8% to 10% to the annual distribution beginning in 2015.

Adapted from press release by Hannah Priestley-Eaton

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