Antero: A Favorite in Frac Water Services

07/11/2018 5:00 am EST

Focus: ENERGY

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

My top pick for high quality among infrastructure MLPs is Antero Midstream Partners (AM). The frac water business, I believe, ensures they’re going to be able to continue growing much faster than the average MLP, explains Roger Conrad, editor of Energy and Income Advisor.

Developing big wells takes a lot of water. Up to now the default in this business is to frac with onsite water and supplement any other needs with water that’s trucked or piped in. The wastewater is then hauled away in trucks and taken to disposal sites.

Companies can save a lot of money and limit environmental liability by recycling their frac water. This business requires building infrastructure, chiefly processing facilities and pipelines. But once it’s available, users save on water supply costs, avoid paying for disposal and can theoretically actually improve water reactivity and therefore well productivity.

Antero is already one of the fastest growing MLPs, increasing its distribution by 30 percent over the last 12 months. Water at 34% of EBITDA is already a key piece of that. But it’s about to become even more important when the company opens its Clearwater facility this summer.

Up to now, Antero has been providing its water services exclusively for its ultimate parent Antero Resources (AR). Clearwater, which runs on technology developed by French water giant Veolia Environnement (VEOEY), gives them the ability to offer water recycling services to third parties. And it’s reproducible technology, so once one is up and running management can put them in elsewhere.

In Appalachia where Antero Resources operates, frac water disposal is a very big challenge, mainly because reaching a disposal site requires many miles of running very heavy trucks on narrow winding roads. The bigger challenge in west Texas, in contrast, is ultimately going to be fresh water supplies as activity outstrips local wells and groundwater.

Either way, recycling facilities cut costs and ensure reliable supplies. The cash flows are reliable and scalable, perfect for an MLP. And they’re among the very few in this sector that can still issue new equity at a high enough price to ensure accretion with enterprise value at 15 times EBITDA. I’m sticking with the buy up to $43 recommendation. This is one I believe you can buy and lock away.

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