American Midstream And Southcross Energy Divorce: The Fallout
Jul. 30, 2018
Michael Boyd
Southcross Energy has terminated the merger agreement with American Midstream.
I viewed the initial positive move upwards of SXE after this hit the news wire, as an illogical one. The market realized this, SXE being down yesterday is a reflection of a company with very limited options and a bitter GP with players who got played. With that said, I think this is probably better for American Midstream than many might give it credit for. The company has an awful track record on deal integration (see JP Energy), and despite prior management pontification on how great the combined entity would be, I think they are better off moving away from this deal and trying to fix the assets that they do have.
Today, American Midstream has one of the highest implied distributable cash flow (“DCF”) yields of any midstream firm that I follow. It deserves it. I’d challenge any investor to go back and look at nearly any other MLP that cut the distribution and went to a self-funding model. Substantially all of these presented the bad news to investors alongside a multi-year plan - NuStar Energy (NS) and Plains All American (PAA) did a great job of this. They held conference calls and communicated as best they could. While this type of news is never received well, setting a game plan helped minimize the fallout. Now come back to American Midstream. The silence out of management and the Investor Relations team is deafening. I’ve tried contacting them several times over the past few days with no response. I'm very reticent to buy any company that just will not take the time to address its investor base.
One of the many investing ideologies I subscribe to is that tops and bottoms are a process, not an event. I’d challenge any investor to count all the opportunities that they missed by being patient, and then count all the times that they bought too soon. I don’t know very many market participants that would say the first count outnumbered the second. A little patience is in order here to allow the market to digest all of this news and wait for a turn in sentiment. American Midstream is not rallying back 100% tomorrow, next month, next quarter, or next year. Management needs to prove they are competent operators that can nip and tuck their existing portfolio base (non-core asset sales, add-on project opportunities on existing infrastructure) before the market will begin to give them more credit. In my opinion, there will be an opportunity to buy American Midstream at a great price when future outlook looks much less cloudy.
