Antero Midstream Partners (AM, Financial) owns and operates midstream assets that include high and low pressure gathering pipelines and compressor stations that collect natural gas, and oil and condensate. As it has been the case with every stock in the energy sector, Antero Midstream Partners has declined by 31% in the last six months. This article discusses why the unit is attractive at current levels and can create long-term value for investors.
Antero Midstream currently has per unit distribution of 82 cents and this translates into distribution yield of 4% with the current unit price of $19.1. Importantly, Antero Midstream expects 28% to 30% growth in annual distribution through 2017. This implies likely distribution per unit of $1.04 and $1.34 for 2016 and 2017 considering 28% distribution growth. Further, the current unit price implies 5.5% distribution yield for 2016, and this makes the unit attractive for high dividend/distribution seekers.
The point that mitigates commodity price risk is the fact that Antero Midstream has 100% fixed fee based contracts for gathering and compression activity at Marcellus (Dry), Marcellus (Rich), Utica (Dry) and Utica (Rich). With Antero Resources having a robust production growth pipeline, the midstream company is likely to continue generating robust EBITDA. I must add here that for 2015, Antero Midstream had earlier provided EBITDA guidance of $150 million to $160 million. The guidance has since been revised upwards to $180 million to $190 million.
Antero Resources is the parent company and the key growth driver for Antero Midstream. The former is the most active operator in Appalachia and the company’s production growth has been robust compared to peers. With large liquids rich position and high financial flexibility, Antero Resources will continue to grow and significant net acreage dedicated to Antero Midstream will imply strong growth for the latter. It is therefore not surprising to see Antero Midstream expect strong distribution growth. Investors can read my detailed analysis on Antero Resources in a recent article on GuruFocus.
In the current energy industry scenario, it is important to look at the company’s balance sheet and financial flexibility. As of September 2015, Antero Midstream had debt of just $525 million with $993 million available liquidity ($18 million cash and $975 million in undrawn credit facility). The sponsor company, Antero Resources, has $3 billion in liquidity as of September 2015 and this provides flexibility to maintain growth momentum for sponsor and the partnership units.
With depressed oil and gas prices, development activity in various resources will be slower than expected. From a long-term perspective, however, development of Utica Shale dry gas and Upper Devonian will provide further midstream infrastructure expansion opportunity to Antero Midstream. I see this happening in the next 24 to 36 months and should help Antero Midstream sustain high growth in unit distribution beyond 2017.
Antero Resources has operations in two of the lowest cost shale plays in North America. This allows the company to continue robust drilling even at current prices. However, if depression in oil and gas prices sustains through 2016 and into 2017, I expect meaningful moderation in investment activity and that will potentially impact Antero Midstream’s target distribution. For 2016, however, there is minimal risk to the target distribution.
Antero Midstream's sponsor is the most active operator in Appalachia and this makes the former an attractive investment to consider. Investors looking for high and sustainable distribution yield can consider exposure to Antero Midstream, as I see minimal downside from these levels for the unit. With a strong balance sheet for Antero Midstream and the sponsor, credit metrics are not a concern at least for the next 12 months.
Disclosure: No positions in the stock.
