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Credit Suisse on AM/AR (different from my last post) Now, from the AM perspective: AM just announced two transactions with Antero Resources (AR), including a rate cut (the “Growth Incentive Program”) and a $100mm share repurchase. Here are our four takeaways. 1. Rate Cut Sooner But Smaller Than Expected. The cut is about half of the amount we estimated but arrives 6 months earlier than we thought. As we noted in our recently published note, Factoring in Potential Rate Cut, we expected AM to cut rates in order to support AR. Today’s announcement results in a $45-$50mm reduction in low pressure gathering revenues in 2020. The cut is effective between Jan 1, 2020 – Dec 31, 2023 and only applies to low pressure rates (per AM, the returns here are higher vs. HP and compression). The program does have an escalation feature as AR grows. The top rate reduction threshold (+25% in volume from here) implies an annual rate reduction of ~$76mm. 2. Buyback Seems to Imply Large Premium Paid. We estimate an implied repurchase price of ~$6/share. AM agreed to repurchase $100mm of its own shares from AR. Per the release, the repurchase is expected to save AM $20mm in dividends based on the targeted $1.23/share payout. The implied 16mm share repurchase results in an over 30% premium paid for these shares based on the last close. Relative to the 30-day average, the premium falls to roughly 9%. (Me - I couldn't believe AM would pay over market for the shares, so I assumed the $ 20 MM savings was net of the interest expense on the debt it will incur to buy back the shares. Apparently, "assume" is still a bad word.) 3. Capex Cut Boosts FCF Again; But Overall Cash Coming Down. AM cut capex by $75-$100mm in 2020; which more than offsets the $45-$50mm hit from the fee reduction. The $20mm in dividend savings is also supportive. That said, the net effect when considering the $100mm repurchase would put AM in red by roughly $40mm assuming the midpoints of the ranges. 4. Mixed Signals. We see some positives and negatives in this release. First, AM appears to be agreeing to a growth incentive program fee reduction based on growth that was already guided/expected – it’s not clear why pre-guided growth needed an incentive. In return though, AM did extend the gathering and compression contract term by 4 years. Furthermore, the health of AR does appear to improve as a result of this transaction and other asset sales/rate cuts announced this morning. Second, AM appears to be paying a premium to repurchase these shares. Under most scenarios, a secondary offering would normally carry a discount – AM is being accommodative and trading off its own liquidity for the benefit of AR. To counter that, the $20mm is dividend savings is substantial given the stock is yielding over 25%. AM was also likely to repurchase $40-$50mm of shares in 2020 anyway based on its capital allocation framework. Stock Reaction. Pre-market trading seems to indicate up. We’d point to a short squeeze as one factor but also the improved health of AR as another critical driver. Furthermore, cutting $75-$100mm in capex should be accretive, especially if it’s to repurchase shares yielding over 25%. The rate cut was also lower than we expected; it’s unclear where market consensus was on a cut. As a potential negative offset, we’d point to AM’s accommodation – a common theme in midstream when dealing with sponsor companies. |
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