What: Units of Antero Midstream Partners (AM -2.74%) plunged more than 12% by 11:00 a.m. EST on Thursday. Fueling the plunge was the pricing of a secondary offering by top shareholder Antero Resources (AR -4.04%), which priced the offering at a steep discount to the MLP's recent trading price.
So what: Antero Resources priced the sale of 8 million units it held of Antero Midstream Partners at just $22.40 per unit. That's well below its prior trading price above $25 per unit. It did so in order to raise roughly $180 million in cash to bolster its own balance sheet. That said, it was a small portion of Antero Resources' stake, with the company still owning about 62% of Antero Midstream Partners' outstanding units after the offering closes.
Antero Resources needed the cash to help repay borrowings under its credit facility as well as fund a portion of its 2016 capex program. Unlike a lot of oil and gas companies, Antero Resources isn't completely pulling back the reins on spending this year to match capex with cash flow. Instead, it continues to pursue production growth, with the company planning to increase its production by 15% this year, after delivering 18% exit-to-exit production growth last year. In order to deliver on that growth, it plans to use internally generated cash flow and the availability under its credit facility, with this offering keeping the borrowings under that credit facility from growing too large.
While the offering helps Antero Resources by closing the funding gap, it isn't doing much to help Antero Midstream Partners because it's not only seeing its unit price take a hit, but it won't directly see a dime of that cash infusion. Still, it will see the benefits of Antero Resources' resulting production growth flowing through its system.
Now what: Antero Resources is one of the few drillers that plans to aggressively grow its production this year despite the fact that the natural gas market is well supplied, which is keeping a lid on gas prices. It is able to do so because it has access to capital given that it can continue to pare down its stake in Antero Midstream Partners. That said, pursuing growth for the sake of growth could backfire for both companies, especially if commodity prices remain weak, forcing it to keep selling off units of Antero Midstream Partners at below market prices to offset weakness in its cash flow.