Antero Midstream GP LP (NYSE: AMGP) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is for Antero Midstream GP LP, the entity that owns Antero Midstream Partners LP’s general partner and incentive distribution rights (IDRs), rather than for Antero Midstream Partners itself. AMGP completed its IPO on May 9, 2017; pre- and post-IPO results are therefore not fully comparable.
Business and key financial metrics
AMGP’s sole source of income is distributions earned on Antero Midstream’s IDRs. It receives at least 94% of cash distributions paid on those rights. Antero Midstream’s operations primarily serve Antero Resources in the Marcellus and Utica regions.
| AMGP metric | Q2 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Equity in earnings from Antero Midstream | $15.3 million | $26.9 million |
| General and administrative expense | $3.2 million | $5.3 million |
| Equity-based compensation expense | $9.6 million | $18.0 million |
| Net income (loss) | $(3.3) million | $(6.6) million |
| Operating cash flow | Not separately presented | $1.8 million |
At June 30, AMGP reported cash of $11.4 million, related-party receivables of $0.4 million, current liabilities of $5.4 million, and total liabilities of $8.1 million. Partners’ capital was $18.9 million. No borrowings or off-balance-sheet arrangements were reported for AMGP. Investing and financing cash flows were zero for the six-month period. Cash provided by operations was down from $2.4 million in the prior-year period.
AMGP does not report conventional operating revenue or an operating margin; its reported income is IDR-related equity earnings. For context, summarized results for investee Antero Midstream show Q2 revenue of $193.8 million, operating income of $92.6 million, and net income of $87.2 million, versus $136.8 million, $53.3 million, and $49.9 million, respectively, in Q2 2016. Its operating margin was approximately 47.8% versus 39.0%. These are investee figures, not AMGP’s revenue or margins. Antero Midstream’s summarized balance sheet included non-current liabilities of $1.148 billion; the filing excerpt does not identify that amount as debt.
Changes versus prior comparable period
- AMGP’s Q2 IDR-related equity earnings rose to $15.3 million from $2.7 million; the six-month amount rose to $26.9 million from $4.6 million. Management attributed the increase to Antero Midstream’s higher per-unit distribution: $0.32 for Q2 2017 versus $0.25 for Q2 2016.
- Despite higher equity earnings, AMGP moved from net income of $1.6 million in Q2 2016 to a $3.3 million net loss in Q2 2017, and from six-month net income of $2.7 million to a $6.6 million loss. IPO-related costs, equity compensation, and associated taxes were key factors.
- AMGP declared a prorated distribution of $0.027 per share for the period from the May 9 IPO through June 30, payable August 23, 2017 to holders of record August 3.
Outlook, risks, and unusual items
- Management expected IDR distributions to cover working capital needs and expected quarterly shareholder distributions for at least the next 12 months. No numeric earnings or distribution guidance was provided.
- AMGP’s results depend on Antero Midstream’s performance and distributions, which in turn depend substantially on Antero Resources’ production and development activity. The filing identifies commodity-price volatility, operating and environmental risks, regulation, capital access, and uncertainty in production and cash flow as relevant risks.
- Series B incentive awards generated $18.0 million of six-month compensation expense; $89.8 million remained unamortized, expected to be recognized over 2.5 years. The awards’ estimated value depends on significant unobservable assumptions.
- Management reported no material litigation and no material changes to previously disclosed risk factors. It also identified potential conflicts of interest arising from sponsors’ investments and governance roles across AMGP, Antero Midstream, and Antero Resources.
- Cash operating activities were affected by increased distributions, higher IPO-related administrative costs, and $13.3 million of cash taxes paid for 2016 and 2017. The filing’s statements reflect material IPO-related transition effects and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Review Antero Midstream’s separately filed Q2 2017 results and debt disclosures, incorporated by reference, since its performance is AMGP’s sole source of income.
- Check the subsequent payment of the declared $0.027-per-share distribution and the cash available after taxes, expenses, and Series B reserves.
- Assess the assumptions and future expense effects underlying Series B award valuations, including the $89.8 million unamortized compensation balance.
- Consider IPO-related comparability, sponsor and affiliate conflicts, and AMGP’s dependence on Antero Resources’ production and Antero Midstream’s distributions.