Business context and reporting period
Antero Midstream GP LP (NYSE: AMGP) filed this unaudited Form 10-Q for the quarter ended March 31, 2018. The filing describes AMGP as the owner of Antero Midstream’s general partner and incentive distribution rights (IDRs); its only revenue source is distributions on those IDRs. Antero Midstream serves primarily Antero Resources’ Appalachian Basin operations. The filing’s registrant is Antero Midstream GP LP, not Antero Midstream Corp.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2018 |
|---|---|---|
| AMGP equity earnings from Antero Midstream | $11.6 million | $28.5 million |
| General and administrative expense | $2.1 million | $0.9 million |
| Equity-based compensation expense | $8.3 million | $8.6 million |
| Income before taxes | $1.1 million | $18.9 million |
| Income tax expense | $4.4 million | $6.1 million |
| Net income (loss) | $(3.3) million | $12.8 million |
| Operating cash flow | $7.1 million | $23.2 million |
AMGP’s Q1 2018 net income attributable to common shareholders was $12.4 million, or $0.07 per share. Cash distributions received from Antero Midstream were $23.8 million. AMGP paid $14.0 million in distributions to common shareholders and $0.8 million to Series B unitholders; cash increased by $8.5 million to $14.5 million.
At March 31, 2018, AMGP reported total assets of $43.1 million, including a $28.5 million investment in Antero Midstream. Total liabilities were $21.6 million, including $19.9 million of income taxes payable and $0.9 million of equity-compensation liability. The filing reports a working-capital deficit, largely due to tax payable timing. No AMGP debt balance is presented; the filing does not provide a clear debt figure for AMGP. AMGP margins are not presented because its income is principally IDR distributions rather than operating revenue.
Separately, summarized Antero Midstream results show Q1 revenue of $229.6 million, operating income of $111.5 million, and net income of $108.1 million, versus $174.8 million, $81.7 million, and $75.1 million, respectively, in Q1 2017. These are investee figures, not AMGP consolidated revenue or profit.
Material changes versus the prior comparable period
- AMGP moved from a $3.3 million net loss in Q1 2017 to $12.8 million net income in Q1 2018, primarily because IDR earnings rose 146% as Antero Midstream’s distributions per unit increased.
- G&A fell 56%, mainly because Q1 2017 included IPO-related costs. Equity-based compensation remained broadly stable.
- Operating cash flow rose to $23.2 million, reflecting increased cash distributions received from Antero Midstream.
- Comparability is affected by AMGP’s IPO in May 2017, the growth in Antero Midstream’s operations and IDR distributions, and the reduction in the U.S. federal corporate tax rate from 35% to 21% effective January 2018.
Outlook, commentary, risks and unusual items
Management expected IDR income to cover working-capital needs and planned quarterly distributions for at least the next 12 months. AMGP declared a Q1 2018 distribution of $0.108 per share, payable May 23, 2018. Antero Midstream declared a Q1 distribution of $0.39 per unit, including $28.5 million attributable to IDRs payable to IDR LLC.
On February 26, 2018, AMGP formed an independent special committee to evaluate potential transactions that could involve AMGP amid Antero Resources’ review of measures related to its valuation. No specific alternative or transaction had been selected as of the filing date, and completion was not assured. Q1 included $0.5 million of special-committee legal and advisory costs in G&A. AMGP also reported $59.3 million of unamortized compensation expense related to nonvested Series B units, expected to be recognized over 1.75 years.
Key risks include AMGP’s dependence on IDR distributions, which in turn depend on Antero Midstream’s performance and Antero Resources’ production and development activity; commodity-price volatility, operating and regulatory risks, access to capital, and potential transaction uncertainty. The filing reports no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of March 31, 2018.
Important facts for investors to verify
- Whether the special committee’s review results in a transaction, and any related costs or terms.
- Whether Antero Midstream’s distributions and IDR cash receipts support AMGP’s distribution and tax obligations, particularly given the working-capital deficit.
- Antero Resources’ production and development plans, which underpin Antero Midstream’s activity and AMGP’s sole income stream.
- The valuation assumptions, vesting, dilution potential, and future expense recognition for Series B and other equity awards.
- Antero Midstream’s debt, liquidity, and operating performance in its separately filed Q1 2018 Form 10-Q; AMGP’s summarized investee data here do not provide a clear debt figure.