Antero Midstream: Distribution Increase Could Be Next Catalyst

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AM, a midstream company, operates a network of low-pressure and high-pressure gathering pipelines. Its major customer is Antero Resources (AR), which holds a 29% stake in AM. The company’s contracts are primarily fee-based or service-based with inflation escalators. Additionally, it has a 50% equity interest in a joint venture with MarkWest, a subsidiary of MPLX, focused on processing and fractionation assets in Marcellus and Utica. AM also has a freshwater delivery business, contributing approximately 15% to its EBITDA.

Dependence on AR’s Drilling Activity

AM’s financial performance is intricately linked to the drilling activity of Antero Resources. In Q3, AR experienced a notable 9% YoY increase in volumes, showcasing an acceleration from the previous quarters. Natural gas volumes grew by 4%, while liquids volumes surged by 18%, reflecting AR’s emphasis on liquids-rich areas. AR’s operational momentum, with improved completion stages and pumping hours, contributed to a 25 MMcfe/d increase in its full-year production growth projection.

AM primarily operates as a volume play on AR, having no direct exposure to natural gas or liquid prices.

Q3 Results and Growth Indicators

AM reported robust Q3 results, with a 12% YoY increase in adjusted EBITDA, reaching $250.9 million. While free cash flow edged up slightly to $138.4 million, higher interest expense and capital expenditures impacted the figure.

AR’s drilling activity, combined with acquisitions by AM, led to growth in low-pressure gathering, compression, high-pressure gathering, and freshwater delivery. The joint venture processing and fractionation volumes also posted significant increases.

The company ended Q3 with leverage reduced to 3.4x, targeting a further decrease to 3.0x by the end of 2024.

Guidance and Future Prospects

AM raised the lower end of its full-year adjusted EBITDA guidance to $970-990 million, with projected capex between $180-200 million. Free cash flow is expected to range from $565-585 million, with an anticipated dividend payout of approximately $430 million. Post-dividends, free cash flow is predicted to be between $135-155 million.

Looking ahead to 2024, AM anticipates growth driven by fee rebates rolling off, a CPI-based increase, and AR’s continued improvement in performance and production.

Valuation and Conclusion

AM currently trades at 9.0x the 2023 EBITDA consensus of $980.6 million, and at 8.2x based on the 2024 EBITDA consensus of $1.07 billion. The stock offers a free cash flow yield of around 9.4% and a dividend yield of approximately 6.9%.

With a strong operational performance, low leverage, and growth prospects, AM is positioned well for 2024. The stock’s valuation, though relatively cheap, has seen an upward trend. A target increase from $13.50 to $14.50 is suggested, reflecting a 9x EBITDA multiple on the 2024 consensus.

In conclusion, AM remains a “Buy” with around 18% return potential based on the adjusted price target, and a potential catalyst for increased investor interest could be a distribution increase, which has not occurred since 2019. The company’s visibility into AR’s production plans and the robust natural gas demand further support its positive outlook.