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Top Picks 2019: Antero Midstream (AMGP)
01/23/2019 5:00 am EST
The company came to market with a May 2017 IPO. The assets at that time were general partner incentive distribution rights — IDRs — for an ownership interest in high growth, midstream MLP, Antero Midstream Partners (AM).
The MLP was sponsored and controlled by Marcellus natural gas producer Antero Resources (NAR). Complicated, multi-publicly traded entity structures were the vogue in the energy sector until energy commodity prices and energy sector stock prices crashed in 2015-2016.
Over the last two years (2017-2018) the MLP sector, related infrastructure stocks, and their sponsor companies have announced simplification events to hopefully make the resulting business structures and forecast results more appealing to investors.
On October 10, 2018 the Antero companies announced a simplification transaction that will close in the first quarter or 2019. The transaction involves AMGP acquiring all the AM units, and then changing its name to Antero Midstream and using the AM stock symbol.
For now, call the resulting company new AM. The effect of the transaction will be to turn the current Antero Midstream Partners into a C-Corp and the elimination of the IDRs paid to the general manager. This means starting in 2019, the current AMGP, which derives its revenue from the IDR payments will change into a high dividend growth midstream services provider. This discussion is about the soon-to-be Antero Midstream Corporation — new AM.
Antero Midstream will be a roughly $10 billion market cap energy midstream company focused on natural gas gathering and compression for Antero Resources in the Marcellus and Utica Shale plays. The company also provides wellhead water services (fresh water delivery and waste water takeaway) and owns one take away natural gas pipeline. Currently about 65% of EBITDA is from gathering and compression, with the remaining 35% from water services.
The growth of AM revenues depends on production growth from Antero Resources. Antero is the largest natural gas liquids — NGLs — producer in the U.S., across all energy production areas. The exploration and production company hold the largest core, liquids rich inventory of production sites in Appalachia.
Of the undrilled locations in the region, Antero has rights to 40% of the total. Production growth from Antero Resources is forecast to generate 50% compounding annual gathering and processing volume growth through 2021.
This growth in throughput will fuel cash flow and distribution growth for Antero Midstream. The company projects 27% annual distribution growth through 2021. The midpoint of dividend guidance for new AM in 2019 is $1.24 per share. The AMGP Q3 dividend annualized is $0.576 per share.
With a mid-teen share price at the end of 2018 the market isn’t close to factoring in the higher dividends for 2019 and the future dividend growth prospects. AMGP evolving into the new AM is one of my highest conviction total return prospects for the next three years. To keep the yield at the current 4%, AMGP at the end of 2018 must double in 2019.
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