IPO Report: CONE Midstream Partners LP (CNNX)

CONE Midstream Partners LP ($CNNX) is a fee-based, growth-oriented master limited partnership recently formed by CONSOL Energy Inc. (CNX) and Noble Energy, Inc. (NBL) , which have a combined market cap of $34 billion. It is headquartered in Canonsburg, PA,

Eight other companies are scheduled for the week of Sept. 22, 2014.  The full IPO calendar is available at IPOpremium.

Manager, Co-managers:  Wells Fargo Securities, BofA Merrill Lynch, Citigroup, J.P. Morgan, Baird, Barclays, Deutsche Bank Securities, Goldman Sachs, Morgan Stanley, Credit Suisse, RBC Capital Markets
Joint-managers: Mitsubishi UFJ Securities, NC Capital Markets, BB&T Capital Markets, BBVA, BNP Paribas, DNB Markets, Mizuho Securities, TD Securities

CNNX scheduled a $350 million IPO with a market capitalization of $1.18 billion at a price range midpoint of $20 for Thursday, Sept. 25, 2014 on NYSE.  SEC filings

CNNX IPO Overview

CNNX is a fee-based, growth-oriented master limited partnership recently formed by CONSOL Energy Inc. (NYSE: CNX) and Noble Energy, Inc. (NYSE: NBL), which have a combined market cap of $34 billion.

Valuation

Glossary

Conclusion

Buy, 4.2% payout
Substantial partners need the mid-stream assets
New master limited partnership

Business

CNNX is a fee-based, growth-oriented master limited partnership recently formed by CONSOL Energy Inc. (CNX) and Noble Energy, Inc. (NBL), whom CNNX refers to as its Sponsors, to own, operate, develop and acquire natural gas gathering and other midstream energy assets to service its Sponsors’ rapidly growing production in the Marcellus Shale in Pennsylvania and West Virginia.

CNNX’s initial assets include natural gas gathering pipelines and compression and dehydration facilities, as well as condensate gathering, collection, separation and stabilization facilities.

CNNX generates all of its revenues under long-term, fixed-fee gathering agreements that CNNX has entered into with each of its Sponsors that are intended to mitigate its direct commodity price exposure and enhance the stability of its cash flows.

CNNX’s gathering agreements also include substantial acreage dedications currently totaling approximately 496,000 net acres in the Marcellus Shale.

CNNX believes that its strategically located assets, its relationship with its Sponsors and its Sponsors’ intention to use CNNX as their primary midstream services company in the Marcellus Shale position CNNX to become a leading midstream energy company.

Each of CNNX’s Sponsors is a large, independent oil and natural gas exploration and production company with a substantial resource base and a history of growing production in its areas of operation.

Through an upstream joint venture formed in September 2011, CNNX’s Sponsors established a joint development plan for one of the largest aggregate acreage positions in the Marcellus Shale, which is widely viewed as a premier North American shale play due to its significant hydrocarbon resources in place, consistent and predictable geology, high well recoveries relative to drilling and completion costs and proximity to high-demand metropolitan markets in the northeastern United States.

CNNX’s Sponsors have achieved substantial production growth on its dedicated acreage since the formation of their upstream joint venture in September 2011 and have invested over $458 million in its midstream infrastructure over the same period.

CNNX’s Sponsors’ combined daily gross wellhead production for the six months ended June 30, 2014 averaged approximately 520 MMcfe/d on its dedicated acreage, representing a compound annual growth rate of approximately 100% since January 1, 2011, which includes production from certain wells drilled by CONSOL prior to the formation of the upstream joint venture.

On CNNX’s dedicated acreage, as of June 30, 2014, its Sponsors had over 5,700 potential drilling locations (based on 86-acre spacing, with approximately 38% in wet gas locations), were operating 10 drilling rigs and, since January 1, 2011, had drilled 356 gross horizontal wells.

In addition, CNNX’s Sponsors have long-term contracts for an aggregate of approximately 700 MMcf/d of gas processing capacity in the Marcellus Shale and have secured in excess of 1,000 MMcf/d of long-haul firm transportation capacity or firm sales commitments for their Marcellus Shale production.

CNNX’s Sponsors believe that their existing contractual commitments for Marcellus Shale processing capacity help minimize disruptions to their drilling and development plan that might otherwise exist as a result of insufficient outlets for growing production.

Dividend Policy

CNNX’s partnership agreement requires that it distributes all of its available cash quarterly. This requirement forms the basis of CNNX’s cash distribution policy and reflects a basic judgment that its unitholders will be better served by distributing its available cash rather than retaining it because, among other reasons, CNNX believes it will generally finance any expansion capital expenditures from external financing sources.

Under its current cash distribution policy, CNNX intends to make a minimum quarterly distribution to the holders of its common units and subordinated units of $0.2125 per unit, or $0.85 per unit on an annualized basis (4.25% annualized return a the price range mid-point of $20), to the extent CNNX has sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to its general partner.

However, other than the requirement in CNNX’s partnership agreement to distribute all of its available cash each quarter, CNNX has no legal obligation to make quarterly cash distributions in this or any other amount, and the board of directors of its general partner has considerable discretion to determine the amount of its available cash each quarter.

Use of proceeds

CNNX intends to use the $325 million in proceeds from its IPO as follows:

make a distribution of approximately $323.6 million to CONE and pay approximately $1.1 million of origination fees related to its new revolving credit facility.