The new corporate tax laws that took effect at the beginning of 2018 erased most of the tax benefits for master limited partnerships (MLPs). That has led to 13 of the 20 largest midstream MLPs consolidating with their parent companies or general partners in "simplification transactions," while eight of those have converted into traditional C-Corps for additional financial benefits. Overall, that should be great news for investors, who can now hold these businesses in retirement accounts without other tax penalties. It'll be much easier to understand and analyze the businesses, too.
One simplification transaction that should be on the radar of individual investors is that between Antero Midstream Partners (NYSE: AM) and Antero Midstream GP (NYSE: AMGP). It will combine the midstream businesses of Antero Resources (NYSE: AR), which is quietly building one of the most-integrated natural gas and natural gas liquids (NGLs) operations in American shale. Antero may not be a household name, but long-term investors might regret overlooking the opportunity emerging in early 2019.
Merger, conversion, growth
The merger includes three steps. First, Antero Midstream GP will acquire Antero Midstream Partners. Second, the new company will convert from a partnership to a C-Corp. Third, the combined company will change its name to Antero Midstream to reflect its new tax and governance structure as a C-Corp (dropping the "GP," which stands for "general partner").
As far as current unitholders of Antero Midstream Partners are concerned, for every unit of the MLP they own, the merger will provide $3.415 in cash and 1.635 shares in the new Antero Midstream. That works out to a total value of about $31.41 per unit based on closing prices the day before the simplification transaction was announced.
For all other individual investors, the merger and conversion open the door to own the new Antero Midstream in traditional retirement accounts. That's one heck of an opportunity for income investors considering the combined company would sport a dividend yield of 5.4% at $23 per share (the value used by the company in current presentations). Furthermore, management expects to grow the annual dividend payout from $1.24 per share in 2019 to a whopping $2.34 per share in 2022. That would be equivalent to a dividend yield of 10.2% at the $23-per-share estimate for the new company.
That would translate to dividend growth of 27% per year through 2022 for the new Antero Midstream. By comparison, the average annual growth target in that span among its 19 closest peers is 7.4%. That's definitely ambitious, but it actually might be possible.
The new Antero Midstream will still support the natural gas and NGL operations of its parent, Antero Resources, which will own about 31% of the new company. More important, it also owns some of the most valuable acreage in the highly coveted Marcellus Shale, which has created tremendous value for Antero Midstream Partners. From the beginning of 2014 through the third quarter of 2018, the partnership grew low-pressure gas gathering volumes at an annual clip of 49%, compression volumes 126% per year, and water delivery volumes 32% per year.
That's expected to continue. The new Antero Midstream will not only be able to increase its dividend at a healthy clip through 2022, but also do so comfortably with at least 120% coverage. It will pour $2.7 billion into growth projects, all while lowering its leverage ratio to the low 2-times range by the end of 2022 -- at least half that of most peers. It may not be obvious today, but that could be a crucial advantage in the next few years to fund new growth projects at a time when interest rates are on the rise.
Big growth potential makes this oil stock a buy
There was a lot to like about the Antero Resources family of companies prior to the merger, and that will be the case after the merger closes, as the ambitious vision for growth remains intact.
That said, anticipation for the merger might result in some sideways trading between now and when the transaction closes in the first quarter of 2019. There are sure to be more details handed down during the company's annual analyst day in January 2019. Therefore, while I think investors with a long-term mindset can feel comfortable buying Antero Midstream GP or Antero Midstream Partners now, it certainly would be simpler to wait until the dust settles early next year.
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