Natural Gas MLPs:
We are optimistic on the future for natural gas due to its environmentally friendly profile. Additionally, recent drilling rig shut-ins have curtailed the availability of natural gas. This presents a scenario for higher natural gas prices which bolsters our optimism on natural gas MLPs.Antero Resources (AR) and Antero Midstream (AM) are two MLPs with a significant upside if natural gas prices remain constructive. Antero Resources and Antero Midstream combined are the largest exporters and second largest natural gas producers in the US. Both are highly leveraged, but due to improving natural gas prices are experiencing a significantly improved operating outlook. In the first quarter, Antero Resources repurchased 27 million of their own shares at $1.57 and spent $120 million repurchasing their own debt at a discount to par value. Rarely do we see such stock and bond repurchases by corporations, but in such a stressful market environment, the message is unequivocal.
Antero Midstream has a $0.3075 quarterly dividend, which implies $1.23 in annual distributions and a 28.6% yield on its $4.3/share closing price. AM has 1.1 distribution coverage and lower leverage than its comparables.
Antero Resources has a hidden asset. AR will be selling a portion of its net well interests (NWI). AR has 84% NWI. Range Resources (RRC) has 79.4% NWI. Range Resources RRC is 79.4%NWI. The Permian Basin NWI average is 75%. According to analyst Travis Koldus, AR can sell 1% of their net well interest NWI for $300-450mm and that they will close on this in the coming months. This Net Well Interest (NWI) sale will alleviate a bankruptcy risk that the market has feared. This transaction will change the risk perception associated with AM’s 28% yield and drive it toward 15%. We believe that AM’s yield will drop to 10% resulting in a triple in AM’s stock. AR could reach $20/share from $3.22/share. The appeal of a triple in AM with a 28% dividend or six-fold move in AR is a compelling reallocation.
With the COVID-19 and the oil market crash, the Alerian MLP index dropped 67% and levered KYN declined from $12/ to $1/share in a massive margin call selloff experienced by many closed-end MLP funds and leveraged players. We have been adding and recommending KYN position at large discounts to NAV for the last nine weeks and since the market bottom. KYN is still attractive and can trade to $9/share and possibly $12/share in one year. However, reallocating some capital from KYN or KMF could make sense.
Below are charts of Antero Resources Corporation (AR), Antero Midstream Corporation (AM), Kayne Anderson MLP/Investment Company (KYN) and Kayne Anderson Midstream/Energy Fund (KMF).
|