Credit Suisse expands on its thoughts of a possible rate cut that AM might give AR:
Potential AM gathering rate cut is beneficial to AR, but only to a point that doesn’t jeopardize AM. On the 3Q calls, AR/AM management left the door open for a potential gathering and compression rate cut by AM to provide relief to AR. Accordingly, our midstream team preemptively cut their AM rate assumption by ~15% to $0.62/Mcf starting mid-2020 (see today’s note, “Factoring in Potential Rate Cut”), which reflects their view of current “market” levels. On dollar terms, we estimate this could potentially result in a ~$100MM annualized cash flow benefit to AR (at 2020 production level) and reduce AR’s GP&T line by ~$0.08/Mcfe. Importantly, our midstream team believes AM can accommodate this without cutting distribution, which remains a critical ~20% of AR’s 2020 cash flow ($196MM net). While any rate cut should provide much needed cost relief for AR, the symbiotic relationship between the two entities means any benefit should be weighed against risk of lower distribution and pressure on AM shares, both of which are supportive of AR’s borrowing base. We now assume flat AM distributions from 2020+, vs. +10% prior, partly offset by ~$0.02/Mcfe cut in GP&T cost.
This is all conjecture, of course.