Midstream Investments - C Corps with 15-17% yield

[BG2008]

Antero Midstream is yielding 17%

Equitran is yield 14.5%

 

Both are C Corps - Someone who is smarter in the E&P business than me, please tell me why this makes sense.  I refuse to buy upstream companies trading at deep discounts to NAV because I don't believe that one will ever get that.  But when you actually receives dividends, it's a different story.  This is a sector that no longer has any investor interest. 

 

 

[Spekulatius]

I am avoiding gathering midstream companies like a plague. My largest position is WMB, which I recently build up. They have gathering exposure too, but it’s only~30% if EBITDA. I bought it for the Transco assets mainly, one of the best perhaps the best regulated pipeline assets in N.A.

[BG2008]

Yeah gathering isn't the same quality as long haul pipeline and something like a Transco.  At a certain yield, I think there is a cheap price for everything.  Gathering is certainly a much better business than the E&P business.

[kab60]

AM apparently has a ROIC almost twice the norm (like 17-18 pct), so there is a fear fees will have to be cut if AR files

. Perhaps that is already more than reflected, but I think some scenarios are difficult to handicap (stranded assets) which makes me more attracted to WMB (transco, management taking advantage of public/private discrepancies). There's a write up on AM on VIC with some bearish posts that are helpful to understand the bear case.

[Spekulatius]

I believe that AM’s contracts with AR ( which fee indeed very favorable to AM) will be revised, even without an AR bankruptcy. Same happened with the gathering assets WMB acquired from CHK a while ago.

[BG2008]

I believe that AM’s contracts with AR ( which fee indeed very favorable to AM) will be revised, even without an AR bankruptcy. Same happened with the gathering assets WMB acquired from CHK a while ago.

 

Spekulatius,

 

Do you remember what the degree of the revision is?  This is a very healthy  discussion of the risk factor.  My theory on AM is that at a certain yield, 17%, a lot of this is actually priced in.  AR is supposed to grow their production.  AM is saying that they will grow coverage ratio and grow distribution in the next few years.  The fact that they may be producing natural gas as an unintended byproduct is alarming.  Again, this goes back to price vs value and I like that fact that you're getting 17% out every year.  It is a bit like a bond investment.  What is interesting is that AM is trading at 12x GAAP earnings.  So this actually takes into consideration depreciation of these assets.  As an investor of AM, we're receiving the non-cash depreciation as distribution while it acts as a tax shield. 

 

Maybe AM winds up being the equivalent of the B Mall mistakes that I will make.  Look at the threads of CBL, Washington Prime, etc where I have been saying to stay away back in 2015/2016.  But I think AM warrants another look. 

[Spekulatius]

I believe the B- mall comparison if WMB vs AM is a very good one. No doubt money can be made from these junk yield plays, I just decided for myself to never go there again, because the baseline success rate is not good and errors will be severely punished.

 

I don’t have numbers on  WMB contract adjustments , it was a bit of a give and take as CHK extended the gathering contract length and the guaranteed area for G&P services in exchange for lower fees, if I remember correctly.

[Packer16]

The B-mall comparison may be misleading as B-mall properties are in decline and AM and ETRN producers are not in decline but in a severe downturn.  IMO both AR and EQT are viable growing firms that may have too much debt but the underlying business are fine.  If businesses are in trouble long-term IMO, the interstate pipelines will also not be a good place to be.  One way to manage the risk here is position sizing.  We will see.

 

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