7.2%-Yielding Antero Midstream Stock’s Price at Record-High Level in 2023
Why AM Stock Should Be on Investors’ Radar
Oil and natural gas prices have been getting a boost from high demand, geopolitical uncertainty, and the approaching winter heating season.
While oil and gas prices can be unpredictable over the long run, one way to beat the volatility is with midstream energy stocks like Antero Midstream Corp (NYSE:AM).
Midstream companies are like tollkeepers to the upstream energy companies that explore for, drill for, and extract oil and gas. Upstream companies need to access the infrastructure of midstream companies in order to move their product to market. This helps companies like Antero Midstream generate reliable, predictable cash flow with built-in “toll” escalators.
Antero Midstream owns and operates assets that serve the gas production industry in two of the lowest-cost natural gas and natural gas liquid (NGL) basins in North America: the Marcellus Shale and the Utica Shale, both of which are in the Appalachia regions of Pennsylvania, Ohio, and West Virginia. (Source: “Corporate Presentation: August 2023,” Antero Midstream Corp, last accessed October 23, 2023.)
The Marcellus Shale is an unconventional reservoir that produces natural gas, NGL, and oil. It’s the largest and most prolific unconventional natural gas reservoir in the U.S., producing nearly 35% of the total U.S. natural gas supply in 2021. Its current “premium core drilling inventory” is expected to last in excess of 20 years.
Antero Midstream provides services to Antero Resources Corp (NYSE:AR)—the second-largest NGL producer in the U.S.—under long-term fixed-fee service agreements. It also provides processing and fractionation services through its 50/50 joint venture with MPLX LP (NYSE:MPLX).
Antero operates through two segments: 1) Gathering and Processing and 2) Water Handling. (Source: “Operations,” Antero Midstream Corp, last accessed October 23, 2023.)
The Gathering and Processing segment has a network of pipelines and compressor stations that gathers and processes gas from Antero Resources’ wells in West Virginia and Ohio.
The Water Handling segment has freshwater pipelines and storage facilities that support Antero Resources’ operations in the Marcellus Shale and the Utica Shale.
Thanks to Antero Midstream Corp’s long-term fixed service fee agreements, it has a steady and reliable revenue stream and predictable cash flow. This allows the company to provide Antero Midstream stockholders with safe, ultra-high-yield dividends and allows management to expand the company’s operations.
4th Straight Quarter of Positive Free Cash Flow After Dividends
In July, Antero Midstream announced another strong quarter of results, which included its revenues increasing by 27.7% year-over-year to $258.0 million. Its net income went up in the second quarter by six percent year-over-year to $87.0 million, or $0.18 per share. (Source: “Antero Midstream Announces Second Quarter 2023 Financial and Operational Results,” Antero Midstream Corp, July 26, 2023.)
The company’s adjusted net income went up in the quarter by 10% year-over-year to $105.0 million, or $0.22 per share. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also advanced 10%, to $243.0 million.
Antero Midstream Corp’s free cash flow (FCF) before dividends grew in the second quarter by 31% to $139.0 million. Meanwhile, its FCF after dividends was $31.0 million, compared to a $2.0-million loss in the same period last year. This was the fourth straight quarter in which Antero has reported positive FCF after dividends.
Commenting on the results, Paul Rady, Antero Midstream Corp’s chairman and CEO, said, “Antero Midstream delivered another strong quarter operationally and financially, driven by double-digit year-over-year throughput growth. This resulted in 10% year-over-year Adjusted EBITDA growth, and more importantly, our fourth straight quarter of generating Free Cash Flow after dividends.” (Source: Ibid.)
Brendan Krueger, the company’s CFO, said the second-quarter results positioned Antero Midstream “well to achieve [its] 2023 guidance and continue [its] progress towards [its] leverage target of 3.0x or less in 2024.”
2023 Guidance for Antero Midstream Corp
In April, Antero Midstream Corp announced that it had raised its full-year guidance. It currently expects to report:
- Net income of $355.0–$395.0 million, which is $15.0 million higher than the midpoint of management’s previous guidance
- Adjusted net income of $410.0–$450.0 million, which is $15.0 million higher than the midpoint of the previous guidance
- Adjusted EBITDA of $950.0–$990 million, which is $20.0 million higher than the midpoint of the previous guidance
- FCF before dividends of $550.0–$590.0 million, which is $35.0 million higher than the midpoint of the previous guidance
- FCF after dividends of $125.0–$155.0 million, which is $35.0 million higher than the midpoint of the previous guidance
(Source: “Antero Midstream Announces First Quarter 2023 Financial and Operational Results,” Antero Midstream Corp, April 26, 2023.)
Q2 Distribution of $0.225/Share
Thanks to its high cash flow generation, Antero Midstream Corp is able to provide one of the most reliable and frothiest dividends in its industry. In October, the company’s board declared a quarterly cash dividend of $0.225 per share, for a yield of 7.22%. That’s almost double the current inflation rate of 3.7%.
The company’s high-yield dividend isn’t a fluke or a result of a tanking share price; its payout has been high even when its stock has been trading at record-high levels. Antero Midstream Corp has a long history of paying high-yield dividends. Its trailing annual dividend yield is 7.13% and its five-year average dividend yield is 12.58%.
As you can see by the red line in the chart below, AM stock’s payout fluctuates. But thanks to its high cash generation, Antero Midstream Corp is well positioned to increase its dividends over the coming quarters. Since going public in 2017, the company has transitioned from outspending to consistently generating positive FCF.
Management has a leverage target of less than 3.0x, and starting in 2024, it will take another look at increasing the dividend.
Again, Antero Midstream stock’s dividend isn’t high because of a low share price. On October 17, the stock hit a new intraday record high of $12.74. As of this writing, shares of Antero Midstream Corp are trading up by:
- 7.7% over the last month
- 25% year-to-date
- 35% year-over-year
- 19.8% since I last wrote about AM stock in May
Chart courtesy of StockCharts.com
The Lowdown on Antero Midstream Stock
Antero Midstream is an oil and gas company that’s been firing on all cylinders.
It has a multi-decade underlying inventory, a solid balance sheet, and an organic growth strategy that enables it to generate consistent and repeatable positive FCF. This also helps support its peer-leading returns on invested capital and supports its increasing returns of capital to shareholders.
The outlook for Antero Midstream Corp is robust. Management increased their guidance after the first quarter, saying the company is well on its way to achieving its 2023 goals. All this bodes well for AM stockholders.