Finding Value in Altas America (ATLS)

Atlas America, Inc is a fascinating energy company that can be found over on the NASDAQ with the ticker ATLS.  Atlas America is a rather complex company that holds a variety of assets through large ownership stakes in publicly traded subsidiary companies.  Despite its complexities it is will forth the time required to gain an understanding of it as it has considerable value to it as it trades at a sharp discount to its future value.  The two direct subsidiaries in which Atlas America has stakes are Atlas Energy Resources (NYSE:ATN) and Atlas Pipeline Holdings (AHD).  Atlas Energy is engaged in the exploration and production of natural gas in the Antrim Shale of Michigan and the Marcellus Shale of Pennsylvania.  Atlas Energy uses investment partnerships to fund a good deal of its drilling, giving it a significant cost advantage over its peers.  While Atlas Pipeline Holdings is a holding company of sorts that holds a significant number of share of Atlas Pipeline Partners (NYSE:APL) as well as the general partnership interest of Atlas Pipeline Partners and various incentive distribution rights associated with it that give Atlas Pipeline Holdings a share in the earnings of Atlas Pipeline Partners. 

Although you would never know it from Atlas America’s balance sheet, which is consolidated with its partially owned subsidiary companies, Atlas America sole assets are the following:

• 135 million in cash and short-term investments
• 29,352,996 common units of Atlas Energy
• 1,238,986 Class A units of Atlas Energy
• Incentive distribution rights related to the future growth of the distributions to shareholders from Atlas Energy
• 17,500,000 common units of Atlas Pipeline Holdings 
• 18% interest in Lightfoot Capital Partners

In addition to these assets, Atlas America has no significant debt.  The liabilities that appear on its balance sheet are a result of the requirement that it consolidate its subsidiaries (Atlas Energy & Atlas Pipeline Holdings) onto its own balance sheet.  Using today’s closing price (4/21/08) for ATLS of 71.58, ATN’s closing price of 39.66 and AHD’s closing price of 30.43 we can attempt to figure out a proper valuation for Atlas America.  Here are the assets we have so far:

o    Cash and short-term investments on hand of 135 million

o    A stake in Atlas Energy worth $1,164,139,821

o    A stake in Atlas Pipeline Holdings worth $532,525,000

This gives a total value of 1.83 Billion to Atlas America, slightly below its current market capitalization.  Assigning values to the remainder of Atlas America’s assets is difficult but I will now make some guesses as to what I think can be done.  The Class A units of ATN held by ATLS receive 2% of all the distributions made by ATN.  Over the last four quarters these distributions amounted to 119 million bring in 2.4 million for Atlas America.  Another way to look at this is that each preferred share held by Atlas America brought in nearly 2 dollars in dividends.  If you give them a 5% yield these shares are worth somewhere around 50 million dollars.

This brings total assets of Atlas America to slightly above 1.88 billion dollars, nearly even with the current market capitalization.  Trying to value the incentive distribution rights held by ATLS for ATN are difficult as they are not yet throwing off significant amounts of cash but as ATN expands its top and bottom lines ATLS will eventually collect 25% of all distributions by ATN with these rights.   In the next 2 to 3 years, this will occur as the partnership agreement calls for sustained earnings, at the rate currently achieved by ATN, for 3 years before the 25% distribution rate kicks into high gear, covering all earnings above the current amount.  

If ATN were to add 100 million to free cashflow available for distribution within the next 3 years ATLS would stand to receive an additional 25 million dollars on top of the corresponding increase in the normal dividend payment.  If you give a 5% yield to this 25 million dollars you can come to a market value of 500 million for these incentive distribution rights should they come to pass as I believe they will. The final asset left to examine is Atlas America’s holdings in Lightfoot Capital Partners.  This private equity firm which invests in MLPs is extremely hard to value but I would place its equity at about 200 million and its assets under management at less then a billion dollars, giving Atlas America’s stake a value of around 50 million dollars. 

Even without taking into account any increases in the value of ATN and AHD it is clear to me that Atlas America is worth in excess of 2.5 billion dollars.  Please feel free to plug in your own share price projections for ATN and AHD to come up with your own value for Atlas America.  I personally believe that within the next 3 to 5 years you will find that Atlas America, once you include the future appreciation of price in ATN and AHD will be worth somewhere between 3.5 and 4 billion dollars.  This would give you a share price that is nearly double what it is today.

Please take a look at this incredibly interesting but complex company.  Atlas America might just be a prudent speculation.   

For Further Review:

Atlas America 10-K