Atlas Has a Direct Pipeline to Nat-Gas Growth

Currently the dividend rate is 96 cents a quarter, giving the stock a current yield of 17%. The company recently guided upward for the dividend next year, estimating that total dividends for 2009 should be between $4.25 and $4.50 a share. That equates to a yield on the current share price of 19% to 20%. The company has increased shareholder payouts by about 11% a year since 2003. The dividend is covered by total cash flows after interest and expense and capital expenditures by a margin of 1.2.

EBITDA has grown by over 30% annually over the same time period, and the company is well positioned in its key market to continue increasing cash flow and distributions for the foreseeable future.

The company will benefit from having long-term contracts in place in all of its key markets. In Appalachia most of the gas throughput comes from Atlas Energy. In Oklahoma it has long-term contracts for gathering and processing natural gas with the two largest producers operating in the system. In the Permian Basin of Texas, its contract with the largest producer in the region, Pioneer, runs through 2022.

Atlas should also be a beneficiary of rising demand for natural gas in the U.S. in the years ahead. Gas is one of the few energy resources in plentiful supply in the U.S. According to the Department of Energy, natural gas currently accounts for 24% of energy demand. That percentage is expected to grow as natural gas usage increases in transportation, Industrial and electrical production markets.

The transportation market in particular should be a key driver of demand growth. Many municipalities currently use natural gas to run their automobile fleets as well as buses and other mass-transit vehicles. Several measures are currently before Congress to expand the usage of natural gas for cars and trucks, including tax credits and research grants.

Atlas' shares have been hammered in the commodity-related selloff. Falling energy prices combined with losses from removing certain hedging contracts in the second quarter have pushed the shares down almost 50% this year.

The price decline is attracting buyers. The chairman and CEO purchased shares in August at prices almost 50% higher than current levels. In addition to Omega, several noted value investors have positions in the stock. Seth Klarman at Baupost was said to be adding to his position. Jim Simons' Renaissance Technologies has also been a buyer of Atlas.

At today's price, Atlas Pipeline Partners represents a chance to own a business that has strong growth potential and to enjoy an outsized dividend at the same time. Not only do the shares yield 17% at current prices, the dividend is expected to grow going forward. Bear markets can create exceptional buying opportunities, and that appears to be the case here.

This was originally published on RealMoney on Oct. 23, 2008. For more information about subscribing to RealMoney, please click here.