Wells Fargo--- Our take on a sponsored MLP situation. We look at a sponsor-MLP/ midstream situation and opine on the most likely outcome. We see OXY as most likely to take action in the near term to unlock more value for sponsor shareholders (via partial sales of midstream units).
AR-AM: Valuation Disconnect Not Tied to Midstream Investment; Expect Status Quo AR perspective: Since the simplification in March 2019, AR no longer consolidates AM, but maintains a ~29.1% ownership interest in the company, which gives it influence over operations.
Although AM shares were considered a candidate for monetization when AR needed to reduce leverage (AR did sell ~$100mm of units in December 2019), improving commodity prices and progress on other strategic initiatives have reduced the impetus for such action. Indeed, with Total Debt at $2.3bn (vs target of $2.0bn) and Net Debt/LTM EBITDA at 1.6x (vs target of 2.0x) after 3Q21, we don't expect AR to reduce its ownership in AM further. For now, the dividends from midstream assets are part of the FCF outlook for the upstream company that can be used for shareholder cash returns in 2022.
AM perspective: Following the simplification of legacy AM and AMGP, AM has significantly improved its governance. However, the company remains largely tied to AR's development plans and financial health, and also shares management/employee functions with its sponsor.
As noted above, a decision by AR to monetize AM shares is unlikely, given the close collaboration between the two entities and significantly improved balance sheet of the producer. Finally, assuming no value for AR's ownership interest in AM in our SOTP analysis still implies AR is undervalued relative to NAV. Consequently, we don't believe the valuation disconnect is related to AR's midstream ownership.