For Antero Midstream Partners (AM, Financial), year to date 2016 has been good from a unit upside perspective, with unit price having moved higher by 16.7%. However, considering a time horizon of 2-3 years, Antero Midstream remains an attractive investment to consider at current levels and this article discusses the key factors to be bullish on the partnership unit.
At the onset, I would like to mention that growth for Antero Midstream largely depends on the growth trajectory for Antero Resources (AR, Financial). Antero Midstream is in the business of providing low pressure gathering, high pressure gathering, compression and fresh water supply to Antero Resources. Therefore, if Antero Resources witnessed strong growth, the partnership unit is also likely to deliver robust numbers.
Coming to the first reason to be bullish on Antero Midstream, the parent company (Antero Resources) is one of the fastest growing players in the Marcellus and the parent company is likely to deliver 17% production growth in fiscal year 2016.
Further, with the acquisition (June 9, 2016) of 66,500 net acres in Southwestern Marcellus Shale, the parent company now expects FY17 production growth in the range of 20% to 25%. With this growth trajectory, it is very likely that strong growth will sustain for Antero Midstream in the next 12-18 months. Even beyond that, I remain bullish on growth expectations.
The key point to note here is that Antero Midstream has a steep target of 28% to 30% distribution growth. This target is likely to be met in FY16 and with the recent acquisition, the distribution growth target is on track to be met in FY17 as well.
Currently, Antero Midstream provides cash distribution of $1 per share, translating into distribution yield of 3.69%. Not just for FY17, I expect the cash distribution to increase meaningfully over the next 2-3 years. The reason for being bullish on the cash distribution growth in FY17 and beyond is as follows.
First, Antero Resources has $3.9 billion in consolidated liquidity coupled with stable leverage. Strong financial muscles allow the company to continue robust growth even in challenging times.
Second, Antero Resources has 94% of forecasted production hedged through 2018. This allows the comfort of strong production growth even if energy prices remain largely sideways or trend marginally higher.
Third, Antero Resources has a deep drilling inventory that has further expanded with the recent acquisition of new acreage. This will allow strong production growth even beyond 2018 and Antero Midstream will remain as the key beneficiary of this growth.
I must add that Antero Midstream acquired the fresh water business from Antero Resources and the business has witnessed stable water delivery volumes. In the coming years, the unit plans to expand the water business service to third party besides servicing the needs of Antero Resources. I see strong growth potential in the coming years for the water business and this is another valuation upside trigger for the partnership unit.
For Antero Midstream, another important point to note from a cash flow visibility perspective is that the partnership has 100% fixed fee contracts. While the growth trajectory for Antero Resources ensures that the unit will continue to see strong growth, the fixed fee contract factor does add to the positives.
From a liquidity perspective, Antero Midstream has undrawn credit facility of $750 million and provides sufficient liquidity buffer for the foreseeable future. In addition, with the sponsor company having credit rating of Ba2/BB, I don’t see any concerns from financing perspective for the sponsor or the partnership unit.
In conclusion, Antero Midstream is likely to deliver 30% cash distribution growth in FY16 and another 28% to 30% cash distribution growth in FY17. This makes the partnership unit worth considering for the medium-term. In addition, with the sponsor having a deep drilling inventory, good hedges and strong financial position, cash distribution growth is likely to remain healthy beyond FY17.
Disclosure: No positions in the stocks discussed.
Start a free 7-day trial of Premium Membership to GuruFocus.
