Where Fundamentals Meet Technicals: Antero Midstream - Yield 10%
- Demand for natural gas is increasing.
- AM's parent company Antero Resources' business is growing, creating new revenue for AM.
- Recent dividend reduction puts them in an advantageous position to self fund investment necessary to pursue new revenue.
- Looking for more investing ideas like this one? Get them exclusively at Stock Waves. Learn More »
Produced by Jason Appel of StockWaves, along with Rida Morwa of High Dividend Opportunities
This series of articles is intended to provide Elliott Wave and Fibonacci Pinball Analysis as an accompaniment to Rida Morwa’s High Dividend Opportunities (HDO) Service. Our goal is to provide greater context as to where price is within the trend for the opportunities being presented by Rida Morwa’s group. This will include support regions for potential entries and target regions for the bigger trend.
Demand for natural gas for use in power generation is increasing in the US. As a natural gas driller and provider, Antero Midstream’s (AM) Parent Company Antero Resources (AR) is set to benefit directly.
“Recent developments are set to bode very well for this stock. Antero Midstream operates pipelines that transport natural gas and natural gas liquids from its parent company Antero Resources extraction sites to long-haul pipelines. All of AM’s revenues originate with AR. To dissect a prospective investment in Antero Midstream (hereafter referred to as AM), you must first understand Antero Resources.” - Rida Morwa from his April 26 Trade Alert article on Antero Midstream
Antero Resources formed a drilling partnership with Quantum resources to increase the drilling of 60 wells. All of this new output will need to be transported to customers, which means increased business for Antero Midstream. Also, AR is contracted to supply the new Royal Dutch Shell (RDS.A) (RDS.B) plant with ethane, and AM will earn new revenues separating the ethane from the natural gas.
“In addition to the partnership, Antero Resources has a contract for the new Shell “cracker plant” currently under construction. That plant is expected to be a major customer for ethane when operational. Antero Midstream will earn additional processing fees by separating that ethane from the natural gas stream as orders come in. The expected impact has not been projected by management at the current time but is expected to be significant.” - Rida Morwa from his April 26th Trade Alert article on Antero Midstream
The increased drilling is expected to boost AM’s revenues in their water handling division, providing support for the increased drilling.
Also, the additional output will increase fees paid to AM for transporting the additional output. The bottom line is that AM has forecasted an increase of 200m in free cash flow between 2021 - 2025.
What about the recent drop in dividend?
Although there was a short-lived panic spike on AM reducing the dividend, share prices have recovered. Long term, this decision by management will allow them to self-fund the investment toward the new aforementioned revenues, and both the quarterly distributions and debt repayment will also be fully covered until 2025.
AM is still paying a high yield, at a 10% current dividend.
“AM has been a very fast-growing company. In 2019, AM generated $62 million in FCF before dividends. That was followed in 2020 with $498 million in FCF prior to dividend payouts, a 703% increase. However, new growth opportunities arose as explained above.” - Morwa from the aforementioned article
From a technical perspective, Antero Midstream has a very bullish structure off the 2020 low. In Elliott Wave terms, price has formed a (1)-(2), 1-2 setup to the upside. This means that AM has formed two impulsive rallies, with subsequent corrective pullbacks that have merely digested the upwards momentum in such a way as to favor long-term continuation higher. In Elliott Wave, an impulse is a form of motive structure, meaning it’s a wave structure that demonstrates strong directional sentiment, one in which price forms a five wave move within which each of the odd numbered waves - 1, 3, 5 - extend the rally above the previous heights. In the case of wave 3, the extension is far beyond that seen in wave 1. Additionally, within impulses after the third wave extension, price is unable to form overlap between waves 1 and 4.
Notice in the accompanying chart the structure of the rally from the March 2020 lows to the June 2020 highs which strongly exemplifies the description provided in the previous paragraph. In this rally, AM gained a whopping 281% inside of three months. The subsequent pullback into the October low occurred with a higher high in a form we refer to as a running flat. From the October low, price advanced another 90%.
With waves (1), (2) and 1 of (3) complete, the stage is set for a massive upside breakout in what is expected to be the strongest portion of the move, i.e., the heart of the third wave. Currently, price is within wave 2 of (3) and once this portion of the structure completes, the rally is expected to continue and to do so in strong form. The (1)-(2), 1-2 setup is really the best base identified by Elliott Wave Analysis; it is the setup that yields the highest likelihood of follow-through for a sustained trending move.
Current support is approximately $6.50-$7.60. So long as price maintains without a sustained break below this region, a minimum of $19.40 is expected as the highest likelihood portion of the expected rally. To be clear, the structure off the March lows portends that much higher levels are reasonably likely and that ideally, price will ultimately reach $50+ in the wave (5) of the move which began last March.
Though a move below $6.50 would reduce the probability of price reaching the upside targets, so long as the price remains above the October 2020 low, $5.09, technically the setup is valid. From current levels, the invalidation point is quite ways down in percent terms but a smaller near term entry is supported by such a favorable risk-to-reward ratio. Should price dip into the Fibonacci support level, $6.50-$7.60, positions initiated in that region are subject to massively favorable risk-to-reward. Also, keep in mind that AM carries an approximate 10% dividend at current levels.
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This article was written by
Over the years, as a service at ElliottWaveTrader.net, Stock Waves has been guiding members with analysis of individual stocks with the expertise of three industry-leading technical analysts.
In January 2020, Stock Waves rolled out a service within Seeking Alpha’s Marketplace. In addition to our team of Zac Mannes, Garrett Patten, and Harry Dunn, we added Lyn Alden Schwartzer as a Stock Waves analyst to provide her fundamental analysis on individual stock opportunities we see in the coming years.
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Analyst’s Disclosure: I am/we are long AM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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