2023-04-27 09:45:01 ET
Summary
- Antero Midstream Corporation's first-quarter results showed considerable growth compared to the prior-year quarter.
- This was mostly driven by natural gas volumes, which were up considerably YOY.
- The company is likely to deliver growth going forward as its largest customer is positioned to be a major supplier of natural gas to the LNG industry.
- Antero Midstream boasts a very strong balance sheet and a leverage ratio that compares well to the best companies in the industry.
- The company boasts a 9.18% dividend yield that appears sustainable.
On Wednesday, April 26, 2023, Appalachian-based midstream company Antero Midstream Corporation ( AM ) announced its first-quarter 2023 earnings results. At first glance, these results were quite solid as the company beat the expectations of its analysts in terms of both earnings and revenue. However, as I have pointed out in various previous articles, neither one of these figures is the best measure to use to evaluate the performance of a midstream company. The most important thing is cash flow, and fortunately, Antero Midstream did quite well here too as it posted year-over-year cash flow growth.
This was largely in line with the growth thesis that I presented in my last article on this company, and it is likely to be something that continues going forward as the global demand for natural gas is likely to grow. Antero Midstream also offers a very impressive 9.18% yield at the current price, so investors are not sacrificing yield for growth in this case. This company thus appears to have the makings of a fantastic investment opportunity.
Earnings Results Analysis
As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Antero Midstream’s first-quarter 2023 earnings results :
- Antero Midstream reported total revenue of $259.475 million in the first quarter of 2023. This represents an 18.76% increase over the $218.491 million that the company reported in the prior-year quarter.
- The company reported an operating income of $148.345 million in the most recent quarter. This compares quite favorably to the $129.154 million that the company reported in the year-ago quarter.
- Antero Midstream’s low-pressure natural gas gathering system achieved total transported volumes of 285.423 billion cubic feet of natural gas during the reporting period. That represents an 8.23% increase over the 263.727 billion cubic feet of natural gas that the company’s system handled in the equivalent quarter of last year.
- The company reported an adjusted EBITDA of $241.781 million in the current quarter. That represents a marked improvement over the $209.030 million that the company reported at this time last year.
- Antero Midstream reported a net income of $86.507 million during the first quarter of 2023. This represents an 8.08% increase over the $80.040 million that the company reported in the first quarter of 2022.
It seems essentially certain that the first thing that anyone reviewing these highlights will notice is that essentially every measure of financial performance showed improvement compared to the prior-year quarter. One of the reasons for this is that Antero Midstream’s gathering and processing pipeline network transported more resources than in the year-ago quarter. We can see that here:
Q1 2022 | Q1 2023 | |
Low-Pressure Gathering (MMcf) | 263,727 | 285,423 |
High-Pressure Gathering (MMcf) | 259,042 | 252,129 |
The reason why this would result in higher revenue for the company should be fairly obvious given its business model. Antero Midstream enters into long-term contracts with its customers under which the company agrees to transport the customer’s resources from the wells in which they are extracted from the ground to various destinations. The customer then compensates Antero Midstream based on the volume of resources that are transported, not on their value. The fact that this business model provides a significant amount of insulation against resource price fluctuations is something that is very good to see, considering that natural gas prices were significantly lower in the first quarter of 2023 than they were in the year-ago quarter:
As Antero Midstream transported higher volumes than it did a year ago, the company’s revenue went up. This means that more money was available to cover the company’s expenses and make its way down to the bottom-line profit and cash flow.
This growth is likely to continue going forward, which is evident in the fact that the company has guided for 5% adjusted EBITDA growth over the 2022 to 2024 period. There is reason to believe that this growth will actually play out, too. This is because the company’s customers generally share their drilling and production plans with Antero Midstream. This is necessary because the midstream firm needs to ensure that it has the gathering infrastructure in place to support these new wells. As it is usually fairly easy to estimate the amount of natural gas that will be produced by any given well, Antero Midstream can make approximate estimates as to the volume of resources that will be traveling through its infrastructure. Thus, we can assume that this growth rate is likely to be somewhat accurate. During the first quarter, Antero Midstream managed to increase its adjusted EBITDA by 15.67% year-over-year so it has so far exceeded these expectations.
The company is well-positioned to continue this growth beyond 2024. As I have mentioned in various previous articles (see here and here ), the American liquefied natural gas industry is well-positioned to grow over the coming years. This is primarily driven by Asia, which is expected to increase its liquefied natural gas imports by 40% by 2030. The European Union has also been aggressively increasing its imports of the compound too in an effort to reduce its dependence on Russian-supplied natural gas. This has resulted in a number of American companies planning to construct liquefied natural gas export facilities. As we can see here, the U.S. Energy Information Administration projects that the consumption of natural gas by these facilities will double or triple in the near future:
U.S. Energy Information Administration
Obviously, natural gas will need to be transported to these facilities in order to meet this demand. Antero Midstream is one of the best-positioned companies to perform this task, as Antero Resources Corporation ( AR ), the company’s main customer, has 2.3 billion cubic feet of natural gas per day transport capacity to the liquefied natural gas fairways, which are the main trunklines supporting these liquefaction plants and export terminals. This is more capacity than any other natural gas producer possesses:
Antero Resources
Admittedly, not all of this transit capacity belongs to Antero Midstream. In fact, Antero Midstream does not have any long-haul capacity. However, the company does have direct connections to the long-haul pipelines that provide Antero Resources’ capacity. It stands to reason that Antero Resources will want to take advantage of its strong position and increase its production to feed the rising demand for natural gas coming from these new liquefaction plants. This will result in rising natural gas production in Antero Midstream’s service footprint and a growing volume of resources moving through the company’s gathering network, which correlates to cash flow growth going forward. Overall, this is an excellent position for Antero Midstream to be in and it should allow the company to continue the cash flow growth that we saw in this quarter.
Financial Considerations
It is always important that we examine how a company finances its operations before making an investment in it. This is because debt is a riskier way to finance a company than equity because debt must be repaid at maturity. This is normally accomplished by issuing new debt and using the proceeds to repay the existing debt, which can cause a company’s interest expenses to increase in certain market conditions. As of the time of writing, interest rates are at the highest level that we have seen in more than fifteen years, so this is a major concern today. In addition to this risk, a company must make regular payments on its debt if it is to remain solvent. As such, an event that causes a company’s cash flows to decline could push it into financial distress if it has too much debt. Although midstream companies like Antero Midstream tend to have remarkably stable cash flows, this is still a concern that we should not ignore as midstream companies have fallen into distress before.
The usual metric that we use to evaluate a midstream company’s debt load is the leverage ratio, which is also known as the net debt-to-adjusted EBITDA ratio. This ratio basically tells us how many years it would take the company to completely pay off its debt if it were to devote all of its pre-tax cash flow to that task. At the end of the first quarter, Antero Midstream had a net debt of $3.3511 billion and a trailing twelve-month adjusted EBITDA of $916.977 million. That gives the company a leverage ratio of 3.65 today. That is a very reasonable ratio that is well below the 5.0x that Wall Street analysts typically consider acceptable for a midstream company. However, as most readers know, I tend to be somewhat more conservative and like to see this ratio below 4.0x in order to add a margin of safety to the investment. A 4.0x ratio is a maximum that many companies in this industry are willing to run following the events of 2020, for good reason as the market is no longer as welcoming to capital-raising efforts on the part of traditional energy companies as it once was. The fact that Antero Midstream appears to be reasonably financed is therefore a very appealing situation.
Dividend Analysis
One of the biggest reasons why many investors purchase shares of midstream companies is because of the remarkably high dividend yields that many of these companies possess. Antero Midstream is certainly no exception to this as the company’s 9.18% current yield is well above the 7.96% yield of the Alerian MLP Index ( AMLP ), not to mention the 1.60% current yield of the S&P 500 Index (SP500). Unfortunately, Antero Midstream has not always been particularly reliable with respect to its dividend. The company was generally growing it prior to the pandemic, but it cut in early 2021:
Fortunately, the post-COVID dividend cut was not nearly as severe as some other companies delivered. However, many investors are cautious when it comes to companies that have cut their dividends in the past, as there is a fear that it will have to do so again. As was the case with most midstream companies though, the dividend cut was intended to free up cash flow that could be used to strengthen the company’s balance sheet and make it less dependent on the capital markets. This is something that is very important in the current environment as numerous asset management firms have become reluctant to invest in fossil fuels or any companies related to the industry. Regardless, the company’s ability to maintain its current dividend is the most important thing. After all, any investor purchasing the shares today will receive the current dividend at the current yield and is not affected by the company’s past. Thus, the important thing is to investigate the company’s ability to maintain the current dividend.
The usual way that we analyze a midstream company’s ability to maintain its dividend is by looking at its distributable cash flow. Unfortunately, Antero Midstream does not report its distributable cash flow. It does not have to as distributable cash flow is a non-GAAP metric so this is nothing that should be concerning. We can look at the company’s free cash flow, though. The free cash flow is the amount of money that was generated by the company’s ordinary operations and is left over after it pays all of its bills and makes all necessary capital expenditures. This is therefore the money that is available to do things that benefit the shareholders, such as buying back stock, reducing debt, or paying a dividend. During the first quarter of 2023, Antero Midstream had a free cash flow of $153.554 million but the dividend only costs $107.923 million. Thus, the company’s operations generated sufficient cash to cover the dividend with $45.631 million left over. As the company’s cash flow tends to be fairly stable due to its business model, it should be able to maintain the current dividend going forward.
Conclusion
In conclusion, Antero Midstream Corporation’s first-quarter results were quite strong and show the growth that we expected from this company. The company is likely to continue this growth going forward as various liquefied natural gas producers bring their new facilities online and Antero Resources boosts its production to take advantage of this situation. Antero Midstream maintains a very solid balance sheet and has managed to improve its free cash flow sufficiently to cover the dividend, which represents a respectable improvement over the deficit that it had last year. Overall, Antero Midstream Corporation might be a good way to obtain a 9.18% yield today.
For further details see:
Antero Midstream: Very Solid Q1 Results Point To Growth Going Forward