Apache Corp.'s creation of a publicly traded midstream company with Kayne Anderson Acquisition Corp. not only provides a funding vehicle for the building of infrastructure for the budding Alpine High shale play but also serves as an explicit rejection of the master limited partnership model.
Altus Midstream LP will include Apache's gathering, processing and transportation infrastructure in the Alpine High, a region of the West Texas Permian Basin that Apache is developing. Apache and Kayne Anderson said its market capitalization is likely to be about $3.5 billion initially.
During a call detailing the agreement, company officials said Altus will be the only publicly traded Permian Basin pure-play midstream company with full connectivity to gas, NGL and crude oil markets on the Texas Gulf Coast. Apache will need the ability to transport all three product classes, with production in the Alpine High recently passing 50,000 barrels of oil equivalent per day.
"Apache's primary objective for this transaction was to fund future midstream capital requirements while retaining as much ownership in the assets as possible, thereby benefiting from a long-term value uplift as we execute on our upstream plans at Alpine High," Apache CEO John Christmann IV said Aug. 8. "This transaction is about long-term value, not near-term cash."
Analysts at Mizuho Securities USA LLC led by Paul Sankey highlighted that long-term view in an Aug. 9 note. "[I]t likely would not have found a suitable valuation in an outright takeout of the assets by a larger public operator — near-term valuation would simply not be justifiable nor would the lack of dividend payouts until 2021." They added that the startup "enables [Apache] to own a piece of this off-take without taking the capital commitment on its balance sheet, which is a positive."
The creation of Altus Midstream frees up $170 million Apache had allotted to Alpine High midstream development for the remainder of 2018 and $250 million for 2019 and 2020. "It puts us in the spot we want to be, and we're going to have a lot more flexibility now. … It's going to let us do some other things, and it's exciting," Christmann said.
Apache will have full control of Altus' board of directors and be the company's primary customer, but executives said conversations are already underway with third parties about the possibility of shipping their production out of the Permian, as well.
Unlike the majority of midstream spinoffs, Altus shunned the MLP model in favor of a C corporation structure. Officials from both Apache and Kayne Anderson said the C-corp structure would be more appealing to markets.
"I can assure you, as an MLP investor, MLPs are no longer getting a premium valuation compared to C-corps," Kayne Anderson Chairman Kevin McCarthy said. "There's been a lot of C-corp conversions in the space. And we think for this type of asset, the market will place a premium on something that's a C-corp rather than something that's paying out all this cash flow and having to come to the market to fund growth."
Credit Suisse pointed out that the Altus deal could preclude a share repurchase. "From the Apache perspective, many investors expected a deal to be structured that would provide enough cash to kick-start a share repurchase program, and this deal does not do that," analysts led by William Featherston wrote Aug. 9.
Apache shares took a significant hit in morning trading Aug. 9. The company's stock was down more than 7.7%, to $42.58 per share, a little before noon ET.