With three accretive acquisitions during the last 18 months, plus three others that closed during July and August, American Midstream Partners LP’s (AMID) second-quarter earnings call on Aug. 12 came on the heels of rapid expansion for the company.

AMID’s recent growth includes:

  • The acquisition of DCP Midstream Partners LP’s interest in the Main Pass Oil Gathering System (MPOG) for $13.5 million;
  • The execution of an option agreement with ArcLight Capital to acquire 50% of Republic Midstream for about $200 million; and
  • The exercise of AMID’s right-of-first-offer to acquire the Gonzales County full well stream gathering system in the Eagle Ford for total consideration not to exceed $110 million.

The acquisitions are a part of AMID’s strategic, “multipronged” growth strategy where the company focuses on acquiring assets that supplement its existing assets, said Stephen W. Bergstrom, AMID’s executive chairman, president and CEO. Other prongs include development of new assets, organic growth of existing assets and dropdowns from its general partner.

“The MPOG transaction is consistent with our growth strategy of pursuing bolt on acquisitions that leverage our existing midstream assets,” Bergstrom said. “The assets are complementary to our existing High Point System in southeast Louisiana and further position us to compete for increased deep water production from new drilling in the eastern Gulf of Mexico. Further, the system was acquired at an attractive adjusted EBITDA multiple of approximately five to six times. We will continue to identify bolt-on opportunities, such as MPOG, to add to our portfolio in line with our growth strategy.”

The company is also focusing on acquisitions to enhance its current position in the Eagle Ford, which AMID expects to be a core focus area for the company. The Gonzales System dropdown will include salt water disposal capabilities, full well stream gathering and treating infrastructure to manage oil, gas and water production. AMID expects area producers to ramp up production in the area and for production to peak during 2017 or 2018 according to Bergstrom, who told an analyst during the call that AMID’s Eagle Ford producer customers are “waiting on our pipeline system, if you will, to be able to handle a bit larger volumes of both [crude oil and water].”

Funding the growth

With so many transactions taking place, AMID’s senior vice president and CFO Daniel C. Campbell explained how the company was funding all that growth.

The company recently amended the partnership agreement in relation to its Series A units, Campbell said. Series A distributions from second-quarter 2014 and for three subsequent quarters will be made via payment-in-kind (PIK) units, cash or a combination of the two at the discretion of the board of directors. Before the amendment, distributions were half cash and half PIK units. The change “provides additional flexibility as the partnership grows allowing us to reinvest and grow the business as well as maintain a strong coverage ratio, particularly as we elect to finance growth through equity issuances,” Campbell said.

When questioned on the decision to issue more PIK units, Bergstrom stressed the company’s need to preserve capital. He said AMID has “pretty significant projects that are underway now that will not deliver cash flow for a while, and we just felt like it would give us more flexibility to be able to do that at our option.”

AMID also used its revolving credit facility for a recent acquisition, Campbell said. The $13.5 million transaction with DCP midstream was funded through the facility, which as of June 30 had about $141 million of outstanding borrowings and about $59 million of available capacity.

Bergstrom also focused on the company’s need to preserve capital when questioned about its Republic Midstream deal and why AMID acquired 50% of the company with ArcLight Capital instead of 100% interest in the company.

“How it ended up being 50:50 is that it ended up being a $400 million deal—quite a bit larger than what we had originally thought as they’ve continued to expand,” he said. “The reason why we did half of it instead of all of it was because I felt like we were already going to have $150 million to $170 million of capital invested on the gas deal that we did in January. To add another $400 million in one area with one large driller in the area, I just thought it was too much capital, frankly, concentration in one area for the size of our company that we are today.”

Though the expansions left Bergstrom cautious about putting all of AMID’s eggs in one basket, he was confident that the company’s approach to growth will pay off.

“Based on the acquisitions … including MPOG, the Republic Midstream Crude Oil System [and] Gonzales County Full Well Stream Deal … we expect 2015 adjusted EBITDA to more than double compared to 2014,” he said.

The conference call transcript was provided by Seeking Alpha.