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Faisal Humayun
Faisal Humayun
Articles (681) 

Antero Midstream Attractive at Current Levels

Strong cash distribution growth makes this MLP worth owning

September 12, 2017 | About:

Investment overview

With broad markets trading at premium valuations, my focus is on stocks or MLPs that have not shown significant upside year to date, but have a bright long-term outlook. Further, I am also focusing on stocks that are attractive from a dividend perspective even if the stock moves sideways in the foreseeable future.

One MLP that is likely to show strong cash distribution growth in the next two to three years and has been sideways so far this year is Antero Midstream Partners LP (NYSE:AM). The stock currently trades at $31.5 and is just 1.9% higher year to date. At its current stock price, the MLP offers cash distributions of $1.28 and a distribution yield of 4.1%.

The main focus is the cash distribution growth triggers that make Antero Midstream attractive for the next 12 to 24 months. Besides cash distribution growth, stock price upside is also likely to be significant after prolonged sideways movement.

Projected cash distribution growth

For fiscal 2017, Antero Midstream expects cash distributions of $1.33 per share, which translates into a cash distribution yield of 4.2%. For 2018 to 2020, however, the MLP expects cash distribution growth in the range of 28% to 30%.

Considering a 29% compound annual growth rate for 2018 to 2020, the MLPs cash distribution yield (at current stock price) for 2018, 2019 and 2020 are projected to be 5.5%, 7.0% and 9.1% respectively.

While I expect significant stock price upside, this calculation puts into perspective the strong growth visibility for MLP holders.

Importantly, it is likely the MLP will achieve these steep cash distribution growth targets in the next two to three years.

Growth to remain robust

Antero Midstream's growth trajectory largely depends on how Antero Resources Corp. (NYSE:AR) performs over the next several years. Antero Resources has a liquids-rich acreage position and is the largest producer in the Appalachian Basin and the sixth-largest gas producer in the U.S.

It is important to note that between 2010 and 2017, Antero Resources has seen its net acreage swell at a CAGR of 25%. Over the same period, the company’s average net daily production has grown at a CAGR of 57%.

With strong proven, probable and possible (3P) reserves growth, low break-even prices, deep drilling inventory and high financial flexibility, Antero Resources is well positioned to deliver strong growth in the next two to three years.

To put things in perspective, Antero Resources has 16-year drilling inventory that generates a rate of return of 20% at $3 per one million British thrermal units or less. Therefore, even if gas prices trend higher gradually, Antero Resources is positioned to deliver strong drilling and production growth.

Growth trajectory reflected in numbers

Antero Resources is critical to discuss as Antero Midstream derives a majority of its revenue through fixed-fee contracts with it. With Antero Resources having strong growth visibility, the MLP is likely to deliver on its target of steep cash distribution growth.

The growth momentum for Antero Resources is reflected in the numbers for Antero Midstream.

The chart below shows gathering, compression and fresh water delivery volumes growth on a year-over-year basis. With fixed-fee contracts coupled with high growth, the cash flow visibility for Antero Midstream is firm.

It is important to note Antero Midstream has acreage dedication of 562,000 gross leasehold acres for gathering and compression. However, additional stack potential plays with dedication on 288,000 gross acres of Utica deep rights can also deliver growth over the next several years.

Revenue diversification

The MLP's EBITDA diversification strategy can be best explained using the chart below. It shows the key segments contributing to EBITDA for fiscal 2016 and fiscal 2020.

While the fresh water delivery business will remain the second-largest EBITDA contributor after gathering and compression, it is important to note the joint venture with MPLX LP (NYSE:MPLX) will also deliver healthy EBITDA by 2020.


Antero Midstream has seen strong growth in the past and is well positioned to continue delivering strong growth over the next several years.

The MLP's cash distribution growth is likely to remain the best in the industry. Through strong organic growth and its joint venture, Antero Midstream is likely to deliver stock price upside as well.

Disclosure: No positions in the stocks discussed.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with ten years of experience in equity research, credit research, economic research and financial modeling.

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