Following my recent public Antero Resources report, I take a look at Antero Midstream.
The company is interdependent on Antero Resources, however, if you can get past that, or embrace that, there is a lot to like at AM.
For starters, leverage ratios are significantly below their peers, yields are higher, and projected growth rates are superior too.
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This evening, I was going through Energy Transfer's (ET) fourth quarter 2019 and full-year results, and going through the numbers, I could not help to compare this massive pipeline company to Antero Midstream (AM), a much smaller, regional peer, that is fresh on my mind after my recent deep-dive into Antero Resources (AR).
Antero Midstream shares are materially undervalued in their own right, comparing favorably on every metric to another leading, undervalued, much larger peer, Energy Transfer, further adding to the undervaluation narrative at Antero Resources.
Comparing AR To Energy Transfer
Specific to Energy Transfer, which I personally think is attractive as a yield-oriented investment and as a total return investment, I was satisfied with the Q4 2019 and full-year results. However, I think the 2020 outlook was underwhelming versus expectations, with the midpoint forecast for 2020 adjusted EBITDA, a range of position: absolute;1.0 billion to position: absolute;1.4 billion, essentially flat with 2019 adjusted EBITDA, which came in ahead of expectations at position: absolute;1.2 billion.
Looking out to 2020, on a net debt to trailing twelve months pro forma adjusted EBITDA ratio, Energy Transfer is going to come in closer to 5.0, than 4.5, IMO, as the following snapshots from their earnings report and financial statements illustrate.
(Source: Energy Transfer Fourth Quarter 2019 Results Press Release)
Looking at the above, long-term debt jumped to above $51 billion, increasing from $43.4 billion at the end of 2018, and from $46.8 billion at the end of September 30th, 2019.
The acquisition of SemGroup boosted debt, and it added important assets, however as the Q3 2019 10-Q shows above, ET's long-term debt was already on the rise throughout 2019. With this projected to continue in 2020, the net debt to trailing twelve months pro forma adjusted EBITDA ratio could easily approach 5, especially if ET's adjusted EBITDA comes in at the lower end of the projected range (position: absolute;1.0 billion to position: absolute;1.4 billion).
Conversely, Antero Midstream had a net debt to trailing twelve months pro forma adjusted EBITDA ratio of 3.5 at year-end 2019. For reference, Antero's 2019 adjusted EBITDA was $830 million, highlighting the much smaller size compared to Energy Transfer, and this is forecast to grow in 2020, with an estimated range of $850 to $900 million.
With long-term debt projected to grow by $250 million in 2020, from a starting point of roughly $2.9 billion (my calculations) year-end 2020 debt at AM should total somewhere around $3.15 billion.
(Source: Antero Midstream Q4 & Full Year Results Press Release)
With an adjusted EBITDA projected to range from $850 to $900 million (shown above), using the midpoint of the range, the projected 2020 net debt to trailing twelve months pro forma adjusted EBITDA ratio is 3.6 at year-end 2020. This is slightly higher than year-end 2019, however, it is still over a full turn below ET's projected ratio, even in a best case scenario for ET for 2020.
In short, material advantage to AM over ET on the net debt ratios.
AM's EV/EBITDA & Yield Ratios Are Attractive Too
In their February 2020 Company Presentation, AM had a slide on page 17 that illustrated their EV/EBITDA and dividend yield advantages over peer yield oriented investments.
Illustrated above, AM had a 5.7 EV/EBITDA ratio in their February 2020 company presentation.
For comparison, Energy Transfer has a current enterprise value of roughly $92.5 billion, so using the midpoint of the adjusted EBITDA range for 2020, ET's EV/EBITDA ratio is 8.3, significantly above AM's 5.7 ratio shown above.
Again, the advantage goes to AM over ET with regard to the EV/EBITDA ratio.
With dividend yield, it is not close, with AM having a yield over double ET's, because of AM's distressed equity price, which has fallen in tandem with parent Antero Resources, as fears about the growth and sustainability of EBITDA, and a potential restructuring of the parent company, have spiraled both AM and AR shares lower.
Circling back to the dividend, the coverage ratio at ET is much better, 1.9 to 1.1, however, overall, the dividend yield is strongly in-favor of AM over ET.
Thus, with regard to dividend yield, the advantage goes to AM over ET once again.
2020 Projected Performance
I have really grown to like East Daley Capital's work, and thus I wanted to take a look at their projected adjusted EBITDA versus consensus in 2020.
(Source: East Daley Capital)
Antero Midstream is on the far right of this table, with one of the most positive EBITDA surprise versus consensus expectations (keep in mind this is on top of Antero's already forecast 2020 EBITDA growth), surpassed only by NuStar Energy (NS) and Enable Midstream Partners (ENBL) in East Daley's projections.
How this plays out in 2020 is yet to be determined, however, the clear advantage in growth, remember ET's 2020 adjusted EBITDA forecast is flat versus 2019, while Antero's is 5.4% higher at the midpoint range ($850 to $900 million for 2020 adjusted EBITDA versus $830 million for 2019) and expected growth versus expectations, is AM over ET, which is projected to slightly disappoint versus expectations on a EBITDA surprise basis.
Closing Thoughts - AM Is Materially Undervalued In Its Own Right
Clearly Antero Midstream is dependent upon Antero Resources, and this symbiotic relationship has benefited, and weighed on Antero Midstream, the latter in effect right now, as Antero Resources shares have been blitzkrieged by short sellers looking to express their negative bets on natural gas, and hedging their long names like Cabot Oil & Gas (COG).
Taking a step back and looking at valuation ratios, particularly net debt, and EV/EBITDA ratios, it should be clear, that Antero Midstream trades at cheap valuations, even compared to what I think is a relatively cheap, albeit much larger, significantly more diversified energy pipeline peer, which is Energy Transfer.
Going further, on a dividend yield basis, the comparison is not even close. Then adding further still to the narrative, AM has had a better growth trajectory, including 5.4% adjusted EBITDA growth at the midpoint range in 2020 over 2019 (versus flat EBITDA year-over-year for ET) and projects to grow faster for 2021 & 2022.
Obviously, with these valuation discrepancies, and the distressed share price for AM, what should happen is that as the distressed share price situation resolves itself at Antero Resources, with a recovery, which I think is likely, as Antero Resources has multiple liquidity levers to pull, then the extreme valuation discount, that Antero Midstream shares currently trade at versus peers, should begin to dissipate.
(Source: Author, StockCharts.com)
Looking at the chart above, and taking into consideration the above valuation ratios, AM shares could easily double from today's prices, and potentially triple, if Antero Resources near-term restructuring worries abate, and depending how much concession AM ultimately makes to AR. Personally, I think this recovery path is the likely outcome.
Adding to the narrative, since AR still owns 28.7% of AM, or 139,022,408 shares by my calculations, after AR sold 19,377,592 shares, on December 16th, 2019 back to Antero Midstream for a price of $5.1606, which AM then retired, saving dividend payouts, this AR direct stake in AM, currently valued at $678 million at Wednesday's closing price of $4.88, could easily double in value, or more too.
Ultimately, AR & AM have moved in a disastrous self-impairing cycle on the way down, and the turnaround scenario would see create a virtuous cycle in AR & AM shares, instead of the aforementioned disastrous one.
Bottom-line, given my high conviction in AR, I think AM is the best income-oriented investment in the U.S. stock market today, though it does have considerable risks, specifically its dependency and reliance on AR.