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Antero Midstream Partners Will Continue to Excel

- By Faisal Humayun

Antero Midstream Partners (AM) has seen a sustained rally in the last year with the partnership unit trending higher by 52%. From recent highs of $35.5, the partnership unit has corrected marginally to current levels of $33.4.

Antero announced an increase in quarterly distribution on April 10. This sets the likely trend for fiscal year 2017 and can potentially translate into stock upside in the foreseeable future.


The Distribution Increase

Antero announced the partnership unit will increase first quarter cash distribution to 30 cents per share ($1.2 annualized cash distribution). The distribution represents a 28% increase compared to the prior-year quarter and a 7% increase sequentially.

It is important to note the company has guided for a 28% to 30% increase in annual distribution and the first quarter numbers suggest the guidance is on target.

Further, considering annualized cash distribution of $1.2 per unit, the LP unit is currently providing a healthy distribution yield of 3.6%. With a quarterly increase in distribution likely, I expect the unit price to move higher, in sync with the increase in distribution.

The company expects a 28% to 30% increase in cash distribution for 2018 as well. This will ensure positive momentum sustains for the LP unit.

Joint venture with MPLX

Antero Midstream and MPLX LP (MPLX) formed a 50-50 joint venture for processing and fractionation infrastructure in the core of the liquids-rich Marcellus and Utica Shale. The deal is likely to construct up to 11 new 200 million cubic feet equivalent processing plants at both Sherwood and a new location in Tyler, Wetzel or Doddridge County to meet Antero Resources Corp.'s (AR) liquids-rich gas production growth profile.

The joint venture will be working on a 100% fixed-fee contract with Antero Resources, which implies steady cash flow in the coming years. The deal secures up to $800 million in organic project inventory for Antero Midstream from 2017 until 2020.

Besides the fact Antero Midstream will continue to benefit from its operations with Antero Resources, this joint venture will provide further growth momentum. Therefore, the LP unit has set a robust distribution growth target of 28% to 30% for 2017 to 2020, which is very likely.

Healthy fundamentals

Strong fundamentals for Antero Midstream is another reason to be bullish on the LP unit for the medium to long term. As of December 2016, Antero Midstream had $1.2 billion in liquidity that mostly consisted of its undrawn credit facility.

Further, with a corporate debt rating of Ba2/BB, I believe financing is not a concern for the partnership unit. It is also important to note the sponsor company (Antero Resources) also has strong fundamentals and commands the same corporate debt rating. This will ensure the backing remains strong and that Antero Resources can smoothly implement its growth plans without any financing concerns.

Conclusion

For investors who are seeking high cash distribution, Antero Midstream is a good investment option at current levels. The LP unit has met its distribution growth targets in the past and is likely to continue meeting them over the next several years.

Antero Midstream is a buy with an investment horizon of two to three years. During this period, the LP unit will continue to witness strong growth.

Disclosure: No positions in the stock.

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This article first appeared on GuruFocus.