Antero Midstream GP LP (NYSE: AMGP) — Form 10-Q summary
Reporting period: Quarter ended September 30, 2017; filed November 1, 2017. The filing is for Antero Midstream GP LP, not Antero Midstream Corp. AMGP converted from an LLC and completed its IPO in May 2017, so the 2017 results include pre- and post-IPO periods.
Business context
AMGP owns the general partner of Antero Midstream Partners LP (AM) and the interests in the entity holding AM’s incentive distribution rights (IDRs). Its only income and cash-generating asset is its share of IDR distributions. AM’s operations primarily serve Antero Resources’ Marcellus and Utica production in West Virginia and Ohio; Antero Resources owned about 53% of AM.
Financial performance and liquidity
- Third quarter: IDR-related equity earnings were $19.1 million, versus $4.8 million in Q3 2016. Total expenses were $8.9 million, including $8.3 million of equity-based compensation. Net income was $3.0 million, compared with $2.8 million; basic and diluted earnings per share were $0.02.
- Nine months: Equity earnings were $45.9 million, up from $9.4 million. Expenses totaled $32.2 million, including $26.3 million of equity-based compensation and $5.9 million of G&A. AMGP recorded a $3.6 million net loss, compared with $5.4 million net income in 2016. The filing reports $1.4 million of net income attributable to AMGP after the IPO and $0.01 per share.
- Cash flow: Operating cash flow was $13.5 million for the first nine months, versus $5.1 million a year earlier. Financing cash outflows were $20.7 million, primarily distributions of $15.7 million to Antero Investment and $5.0 million to shareholders. Cash declined from $9.6 million at year-end 2016 to $2.4 million at September 30, 2017. There was no investing cash flow.
- Balance sheet: Total assets were $21.5 million and total liabilities $12.9 million at September 30. Current liabilities were $9.5 million, including $8.9 million of income taxes payable; AMGP reported a working capital deficit. AMGP had no debt or off-balance-sheet arrangements reported.
- Distributions: AMGP declared $0.059 per share for Q3, payable November 23, 2017. AM declared $0.34 per unit for Q3, payable November 16. AMGP reported $10.9 million of distributable cash for the quarter after specified reserves and expenses.
- Underlying investee: AM reported Q3 revenue of $193.6 million, operating income of $83.2 million, and net income of $80.9 million. For the nine months, revenue was $562.2 million and net income $243.2 million. AM’s summarized balance sheet showed $1.27 billion of non-current liabilities; the supplied summary does not identify that amount as debt.
Changes, outlook, and risks
- AM’s unit distribution rose from $0.265 in Q3 2016 to $0.34 in Q3 2017, increasing IDR earnings to AMGP. For Q4 2017, AMGP said it expected IDR cash distributions to meet working-capital needs and planned shareholder distributions for at least the next 12 months. AM had declared a $19.1 million IDR distribution payable to IDR LLC in November.
- The nine-month loss reflects substantial new compensation expense, IPO costs, public-company expenses, and higher taxes, partly offset by increased IDR earnings. Equity compensation and IPO costs were not deductible for federal income tax purposes. Unamortized compensation expense was $78.6 million, expected to be recognized over 2.25 years.
- AMGP depends entirely on AM’s distributions. Risks include changes in Antero Resources’ drilling and production, commodity prices, operating costs, regulation, legal and environmental matters, and capital-market access. Management cautioned that historical trends may not predict future results as AM’s operations have grown rapidly.
- On October 26, 2017, AM amended and restated its revolving credit facility; detailed terms are incorporated from AM’s separate 10-Q and are not clear from the supplied filing text. AMGP reported no material litigation and no material changes to previously disclosed risk factors. Disclosure controls were judged effective.
Important facts for investors to verify
- Review AM’s separate Q3 10-Q and the amended credit agreement for debt balances, borrowing availability, covenants, and liquidity.
- Verify the timing and amounts of IDR distributions to AMGP and how Series B interests and tax reserves affect cash available for shareholder distributions.
- Assess the sustainability of AM’s distribution growth given its reliance on Antero Resources and its development plans.
- Monitor the $78.6 million of unamortized compensation expense and the related dilution and valuation assumptions.