How Antero Midstream Is Protected from Commodity Price Volatility
Antero Midstream’s commodity price exposure
Antero Midstream Partners (AM) currently has no direct commodity price exposure. However, its commodity price exposure is expected to rise slightly after its entry into the natural gas processing and fractionation business.
The correlation coefficient between Antero Midstream Partners and crude oil (USO) was 0.48 as of August 22, 2017, for the past one year. Between natural gas (UNG) and AM, it was 0.12 for the same period. A correlation coefficient close to 1.0 indicates a strong relationship between two variables. AM’s low correlation with natural gas reflects its 100% fee-based cash flows.
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Antero Midstream Partners’ indirect commodity exposure
Upstream producers generally cut production following a substantial fall in crude oil and natural gas prices since it becomes uneconomical to drill at certain levels. However, Antero Resources (AR), AM’s sponsor and a major source of its throughput volumes, has a strong drilling inventory even at ultra-low prices.
According to the above graph, ~25.0% of Antero Resources’ locations can generate a return of at least 20.0% at natural gas prices below $2 per MMBtu (million British thermal unit). Chances of natural gas going below $2 per MMBtu seems very unlikely given the huge surge in US LNG (liquefied natural gas) exports and the rise in domestic demand. According to a recent investor presentation, Antero Resources has “a 15-year drilling inventory that generates a 20% rate of return at $3.00/MMbtu NYMEX or less, assuming the 2017 development pace (170 completions).”
AM is also protected to some extent from these declines through MVC (minimum volume commitments) or take-or-pay contracts.