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Yet Another MLP Is Disappearing (but That's Excellent News for Dividend Investors)

By Matthew DiLallo - Oct 9, 2018 at 2:35PM

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While the field continues to shrink, the options for income investors are getting better.

It wasn't all that long ago that energy companies were forming master limited partnerships (MLPs) as fast as they could. From 2011 through 2014, the industry created an average of 16 new MLPs each year to take advantage of investor demand for these income-producing vehicles.

However, this once rapidly expanding segment of the energy sector has been contracting over the past couple of years due to changes in investor sentiment. Because of that, energy companies are either gobbling up the MLPs they created or transforming them into a traditional corporate structure that's more broadly appealing to investors.

Two people shaking hands with an energy facility in the background.

Image source: Getty Images.

That's the case for natural gas giant Antero Resources' (AR 0.31%) MLPs, Antero Midstream GP (NYSE: AMGP) and Antero Midstream Partners (AM 1.29%), which are not only joining forces, but converting to a corporation. It's a move that makes sense, especially for dividend-seeking investors, which will have the opportunity to invest in an even better opportunity going forward. 

Drilling down into the transaction

In the latest shakeup of the MLP sector, Antero Midstream GP will acquire Antero Midstream Partners in a cash-and-stock deal. The combined company will go by the name of Antero Midstream upon completion of the transaction, which will convert from an MLP to traditional C-Corp for tax purposes. The deal will simplify the company's structure while broadening its appeal to investors since they can hold the new company in a retirement account, whereas the current MLPs cannot go into IRAs.

The transaction follows a similar blueprint of other recent ones in the sector. One of the most successful has been ONEOK's (OKE 0.40%) acquisition of its MLP last year. Shares of the midstream giant have surged more than 27% since the company announced that transaction. One of the drivers has been ONEOK's broad appeal to investors because it not only offers them yield -- in this case nearly 5% -- but a lot of growth given its view that it can increase its dividend 9% to 11% annually through 2021. Those dual value creators put the company in a class of its own.

A person holding out their hand with the word dividends above and an arrow sloping upward.

Image source: Getty Images.

A look at the new Antero Midstream

The new Antero Midstream will be joining that elite class since it too will offer investors a compelling yield and top-tier growth prospects within a more appealing corporate structure. Going forward, investors in the new Antero Midstream would collect a 4.4%-yielding dividend that the company expects to grow at a 27% compound annual growth rate through 2021. That's by far the fastest published dividend growth forecast in the sector, with most of its top rivals targeting to increase their payouts at a 10% yearly pace over that timeframe.

Fueling Antero Midstream's rapidly expanding dividend will be the $2.7 billion of growth projects it expects to build in supporting the growth of Antero Resources over the next four years. What's noteworthy about the company's expansion plans is that it can fully fund them without selling any more stock. Instead, it will finance its growth with excess cash flow and debt. 

However, even with those incremental borrowings, Antero Midstream's leverage ratio will fall from slightly more than 3.0 times when the deal closes to around 2.0 times by 2022 (which is well below the more than 4.0 times leverage ratio of most midstream companies). Another impressive number from the new Antero Midstream is its projected dividend coverage ratio, which should average between 1.2 to 1.3 times over the next four years, leaving it with enough excess cash to fund those expansions even as it grows its dividend at a high rate.

This new dividend growth stock is worth serious consideration

Antero Midstream's transaction to simplify and convert to a corporation makes it an even more compelling option for income-seeking investors. Not only can they own the new company in their retirement accounts, it offers an unparalleled combination of yield and growth backed by top-tier financials. Because of that, it has the potential to generate significant total returns in the coming years, making it a stock income-seeking investors won't want to miss.

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Stocks Mentioned

Antero Midstream Corporation Stock Quote
Antero Midstream Corporation
AM
$10.22 (1.29%) $0.13
ONEOK, Inc. Stock Quote
ONEOK, Inc.
OKE
$63.54 (0.40%) $0.25
Antero Resources Corporation Stock Quote
Antero Resources Corporation
AR
$35.28 (0.31%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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