I recently discussed GasLog Partners (GLOP, Financial) as one LP unit that is worth holding for the long term for unit price appreciation as well as strong growth in cash distribution, but there is another quality LP from the energy sector that looks appealing for the long term and can deliver stellar returns.
Antero Midstream Partners LP (AM, Financial) operates and develops midstream energy assets. Its assets include high and low pressure gathering pipelines and compressor stations that collect natural gas and oil and condensate from wells in the Marcellus Shale in West Virginia and the Utica Shale in Ohio. The LP unit also has water handling and treatment assets.
In the last 12 months, the unit price has surged by 65% and the partnership unit offers cash distribution of $1.12 per unit (distribution yield of 3.3%), but there is more upside in the rally.
Antero Resources will grow fast
Before talking about Antero Midstream, it is important to discuss the parent company, Antero Resources (AR, Financial). The parent company is the most active operator in Appalachia, and the company has delivered robust production growth in the past that has supported growth for Antero Midstream through 100% fixed-fee contracts.
Antero Resources expects 20% to 25% production growth in fiscal 2017 with the company having a capital expenditure plan of $1.5 billion for the year. With strong liquidity buffer of $4.1 billion and long-term hedged contracts for natural gas, Antero Resources will deliver strong numbers in fiscal 2017 with strong cash flows.
Even beyond fiscal 2017, Antero Resources has set for itself an ambitious target of 20% to 22% production growth through 2020. This target is achievable considering the company’s strong financial muscles coupled with the deep asset inventory. Marcellus and Utica acreage will ensure growth for Antero Resources and Utica Shale dry gas will provide additional growth opportunities in the coming years.
Antero Resources is well positioned to grow at a strong pace; if the company delivers on the guidance numbers (very likely), the growth path for Antero Midstream is also clear.
So will Antero Midstream
Antero Midstream has not disappointed investors since the LP unit got listed in 2014. EBITDA has been growing at a decent pace and so has the distribution per unit. Just to put things into perspective, Antero Midstream announced fourth-quarter quarterly distribution of 28 cents per unit ($1.12 per unit annualized) and the distribution represents a 27% increase compared to the prior-year quarter and a 6% increase sequentially.
If one considers the last quarter (third-quarter 2016) reported numbers, growth has been the strongest in compression and fresh-water delivery. This is followed by robust growth in low pressure and high pressure gathering. All segments are delivering results and the acquisition of fresh-water business has been a game changer. I mention the fresh-water business as a game changer as it transforms Antero Midstream into an LP that caters to the full value chain.
Before talking about the guidance for 2017 and beyond, I must mention here that Antero Midstream has contracted with Veolia to build the largest advanced wastewater treatment complex in the world for oil- and gas-produced water. This facility will treat and recycle Antero Resources-produced and flow-back water. Further, there will an additional capacity for third-party business. The LP unit expects annual EBITDA in the range of $55 million to $65 million from this facility.
Coming to the guidance for fiscal 2017, Antero Midstream expects adjusted EBITDA to be in the range of $510 million to $550 million. Importantly, the LP unit expects 28% to 30% distribution growth in fiscal 2017 compared to fiscal 2016. Considering growth guidance of 28%, cash distribution is likely to be $1.43 for fiscal 2017 and forward cash distribution yield will be 4.2%.
At the same time Antero Midstream is targeting 28% to 30% cash distribution growth through 2020. I see this as achievable considering the point that Antero Resources plans production growth well in excess of 20% during this period, and Antero Midstream will be servicing third-party clients as well as the LP unit consolidates and expands its operations in the core areas.
Strong financial muscles
From a financial perspective, Antero Midstream is positioned to make investments as well as continue to shell out robust cash distribution. For LTM (September 2016) Antero Midstream reported EBITDA of $361 million and the LP expects EBITDA of $510 million to $550 million for fiscal 2017.
With robust EBITDA, I don’t see debt servicing as a concern and current leverage (net debt to LTM EBITDA) of 2.2 is not high for an LP unit that is growing at a stellar pace. I don’t see financial hurdles in the coming years.
Antero Midstream expects capital expenditure of $525 million in fiscal 2017 compared to $480 million in fiscal 2016. With $996 million in available liquidity as of September 2016, the LP unit is fully funded for fiscal 2017 and potentially for fiscal 2018 (also considering internal cash flows).
Antero Midstream is well positioned to make robust investments that will translate into strong growth for the LP unit and unit price upside.
Conclusion
Antero Midstream has witnessed a strong rally in the last few months, but there is more upside potential for the unit with a medium- to long-term investment horizon. Antero Resources and Antero Midstream have delivered on their targets in the past; if they can replicate that in the coming years, the unit will be a value creator.
I advise exposure at current levels and on any potential correction. I see limited downside potential from current levels but meaningful upside.
Disclosure: No positions in the stocks discussed.
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