Why American Midstream Could Have Even More Upside After A +47% Day

In a report published Wednesday, Barclays analyst Richard Gross upgraded the rating on American Midstream Partners LP AMID from Equal Weight to Overweight, while maintaining the price target at $20. Even after the stock rising more than 47 percent on Tuesday, the analyst believes that there could be another 39 percent upside to the stock. Following the 25 percent drop down in ArciLight's stake in the Delta House, American Midstream Partners has pointed to 5 percent distribution growth in 2016, which the analyst believes is achievable. "The $162 mm drop down will be done at 5x multiple coming with a front-end loaded cash flow, resulting in an immediate accretion. While funding cost is unknown, management indicated either ArcLight or a third party investor will take units at a significantly lower cost compared to AMID's equity yield," Gross stated. Even at 15 percent of cost, the drop down could support 5 percent distribution growth. American Midstream Partners will also have the option to buy 75 percent of ArcLight's interest in Delta House. "In total, management indicated $1 billion of fee-based investment opportunities for AMID. A vast majority of this opportunity has been identified and is under development," according to the Barclays report. The analyst believes that there also is high growth visibility, especially with the units regaining their currency value. The company, however, reported its Q2 EBITDA below the estimates and the consensus. Gross margin rose 45.4 percent, year on year, driven by the acquistions of Costar and Lavaca. Capex stood at $40.8 million, driven by investments in the Bakken and Lavaca systems, the Harvey terminal and the Longview facility. FY EBITDA guidance was reduced to $75-$80 mm vs $85-$95 mm, which includes timing delays in Bakken and weather/PVA drilling slowdowns at Lavaca and Republic, partially offset by full quarter effect of Delta House acquisition assumed in Q4," Gross added.