Published on January 11th, 2023 by Samuel Smith
Antero Midstream (AM) is currently offering a very attractive dividend yield of 8.1% while it is also trading at a forward price-to-distributable cash flow ratio of 7.3.
It is one of the high-yield stocks in our database.
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In this article, we will analyze the prospects of Antero Midstream.
Business Overview
Antero Midstream Corporation is a medium-sized midstream company providing gathering and compression services (65% by EBITDA), processing and fractionation services, and pipeline services on a captive basis to Antero Resources (AR). AR is the 5th largest natural gas producer and 2nd largest NGL producer in the country, operating fields primarily in West Virginia. AM has gone through several structural changes since it began operation in 2011.
As seems typical for these midstream businesses, the publicly traded entity is a pass-through shell for the profits from the underlying operating entity. It has traded LP units since 2014 but shares in its corporate format only since 2017. Then, in early 2019, the company underwent a simplification, in which the unit holders exchanged their units for newly issued shares and debt at the operating level was assumed by the remaining entity.
Antero Midstream is much smaller than many of its publicly traded midstream peers but does have a multi-decade production profile underpinning its assets which reduces some of the risks that come with its smaller size and primary dependence on AR for business.
On October 26th, 2022 Antero Midstream reported Q3 results. Non-GAAP earnings per share stood at $0.20. Revenue increased 2.8% to $231.03 million year-over-year. Net income remains the same year-over-year at $0.17 per share. Adjusted EBITDA stood at $223 million while capital expenditures stood at $37 million. Meanwhile, the company’s net cash provided by operating activities stood at $177 million. Antero Midstream also reported free cash flow before dividends of $138 million. Fresh water delivery volumes grew by 13% year-over-year.
Growth Prospects
Antero Midstream’s primary growth catalyst moving forward is paying down its debt, which it plans to do aggressively in the coming years. It has recently completed a fairly aggressive capital spending program and these projects are now coming online, generating increased EBITDA. Now, as it pays down the debt accrued to fund these projects, it will be reducing its interest expenses, thereby boosting its distributable cash flow.
It also may continue to opportunistically pursue small growth projects as they become available to it through its close partnership with Antero Resources.
Once it successfully reaches its leverage target within a few years, Antero Midstream will likely look at potentially investing in growth again if opportunistic. Otherwise, it will look to increase dividend per share payouts and/or buy back shares if they remain attractively priced. Buying back shares will serve as a growth catalyst by reducing the total share count, thereby increasing distributable cash flow per share over time.
Competitive Advantages
Antero Midstream’s primary competitive advantages are found in its multi-decade underlying inventory via its partnership with Antero Resources, its just-in-time approach to capital investments, and its peer leading returns on invested capital. It is the primary midstream service provider to Antero Resources, a company with a premium core drilling inventory that exceeds 20 years.
Its just-in-time and flexible capital investment philosophy helps it to minimize risks on its capital expenditures while also minimizing the time from spend to cash flow on its growth projects. As a result, it is able to generate consistent and repeatable organic growth along with peer-leading returns on invested capital (17% average return on invested capital from 2016 through 2021).
Dividend Analysis
Antero Midstream is very unlikely to grow its dividend for the next few years as management is laser focused on deleveraging the balance sheet right now. Once it achieves its leverage target of at or below 3.0x (expected by the end of 2024), it could very likely increase the dividend, depending on market and industry conditions at the time.
However, given the sky-high current dividend yield, there is no need for dividend growth to generate an attractive yield on cost and the dividend appears to be quite safe as well. Antero Midstream has no debt maturities prior to 2026, and its primary counterparty Antero Resources is rapidly deleveraging its balance sheet, and distributable cash flow is expected to cover the dividend by a hefty 1.69x in 2023.
Final Thoughts
Antero Midstream is one of the cheapest C-Corp midstream companies in the market today and also offers a very attractive dividend yield that appears safe for many years to come. It boasts a stable, commodity price resistant cash flow profile with a long demand timeline ahead of it. Furthermore, its main counterparty is rapidly deleveraging its balance sheet, further strengthening Antero Midstream’s safety profile.
While Antero Midstream is unlikely to be a rapid grower of its cash flow or its dividend in the coming few years, investors can count on a very stable high yield and long-term capital appreciation through a combination of some bottom-line growth and valuation multiple expansion.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them regularly:
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