Antero Midstream: Appalachia Rebounds

Apr. 28, 2020 6:16 AM ETAntero Midstream Corporation (AM)AR112 Comments

Summary

  • Antero Midstream plunged on assumed insolvency at Antero Resources, pretty much the sole source of its earnings.
  • In my view (and this was not always the case) Appalachian E&P bankruptcy fears are wildly overstated.
  • Even in a bankruptcy/reorganization, Antero Midstream's rates are in line with peers' and the acreage would be worked at roughly the same level post reorganization.
  • While always dependent on how parties negotiate, both Antero Resources and Antero Midstream need one another. I don't see materially lower rates in a second rate renegotiation.
  • This idea was discussed in more depth with members of my private investing community, Energy Income Authority. Get started today »

Antero Midstream (NYSE:AM) is a captive partnership, sourcing substantially all of its revenue and earnings from its corporate sponsor, Antero Resources (AR). Its position in Appalachia is built around gathering and processing (“G&P”) assets, compression, and water handling, business where it earns 100% fixed fees based on volumes served. Historically, Antero Midstream has earned top tier returns on invested capital; in fact, one of the strongest rates of return in the space. This strength has come about despite natural gas spot pricing having done nothing but trend down since the initial public offering (“IPO”) back in 2014. Much of this comes down to the condensed nature of the business, something that is true of Appalachian acreage as a whole: Antero Midstream is operating less than one thousand miles of pipe. The Marcellus is an incredibly rich play, with thousands of potential drilling locations in close proximity. Coupled with the contiguous acreage footprint of Antero Resources – more than half of the past two years of drilling activity has taken place in Tyler County, an area with a less than 250 square mile footprint - return on investment has been quite healthy and it has taken lower relative investment than other midstream entities to build out the infrastructure (something we will return to later).

Why the sell-off then? Antero Resources is one of the largest national producers of both dry gas and natural gas liquids (“NGLs”), however it has come into its own set of problems. Given significant implied insolvency risk at its partner and its overreliance on it for earnings, the market has carried over its bearishness onto this partnership. Today, only Oasis Midstream (OMP) and Noble Midstream (NBLX) trade at a lower multiple based on near-term EV/EBITDA, non-coincidentally also captive partnerships that have sponsors in even deeper

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This article was written by

Michael Boyd profile picture
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Compelling income and growth plays in the energy sector.

Author of Energy Investing Authority

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I have a decade of experience in both the investment advisory and investment banking spaces, with stints in portfolio management, residential mortgage-backed securities, derivatives, and internal audit at various firms. Today, I am a full-time investor and "independent analyst for hire" here on Seeking Alpha.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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