Here's Why Hold Strategy is Apt for Antero Midstream (AM) Stock

Antero Midstream Corporation AM has witnessed upward earnings estimate revisions for 2024 in the past 60 days.

The company, currently carrying a Zacks Rank #3 (Hold), beat the Zacks Consensus Estimate for earnings in the trailing four quarters, delivering a surprise of 11.1% on average.

Sustained Earnings Growth

Antero Midstream has shown consistent earnings growth, with an 18% compound annual growth rate in EBITDA from 2014 to 2023, and is guiding to a mid-point of $1.04 billion of EBITDA for 2024. The company's steady performance and positive earnings outlook indicate robust operational efficiency and financial health.

Capital Efficiency and Reduction

Antero Midstream has cut its capital expenditure guidance, indicating a 14% year-over-year reduction in 2024, aligning with a lower gas price environment and operational optimization. This strategy is supported by just-in-time investments that generate consistent free cash flow, contributing to a peer-leading leverage of 3.3X at the end of 2023. The company's ability to adapt capital spending to market conditions, while maintaining operational effectiveness demonstrates prudent financial management and potential for enhanced shareholder value.

Strong Return on Invested Capital

AM has maintained a high ROIC, averaging 17% from 2020 to 2023, underscoring its effective use of capital in generating profits. A high ROIC indicates that AM is generating more profit per dollar of capital, which is a key indicator of financial health and operational efficiency.

Debt Management and Leverage Improvement

AM reduced its total debt by approximately $150 million in 2023, achieving a leverage ratio of 3.3X, and has no near-term debt maturities, providing financial stability. Effective debt management and a strong balance sheet position AM to withstand market volatility and pursue growth opportunities.

Dividend Reliability and Share Repurchase Program

AM has a record of returning capital to shareholders, with a stable dividend yielding around 7% and a $500-million share repurchase program. The company's commitment to returning capital to shareholders through dividends and share buybacks can provide a steady income stream and support stock price appreciation.

Strategic Operational Advantages

Antero Midstream benefits from more than 20 years of dedicated inventory in low-cost natural gas and NGL basins, supported by 100% fixed-fee revenues with no direct commodity price exposure. The company's just-in-time investment strategy generates a consistent free cash flow, further enhancing its operational efficiency and capital flexibility.

ESG Leadership

Antero Midstream is an industry leader in Environmental, Social, and Governance (ESG) performance, ranking #1 in the Wells Fargo ESG Scorecard for U.S. Midstream G&P's and 36th out of 197 in the Pipeline and Refining Industry Companies ranked by Sustainalytics. This strong ESG performance not only reduces operational risks but also aligns with increasing investor demand for responsible and sustainable investment opportunities.

Risks

Antero Midstream is significantly dependent on Antero Resources Corporation AR, earning a large portion of its revenues by servicing this upstream company. This dependency makes AM susceptible to risks associated with any negative developments in Antero Resources' production operations, given its lack of diversification in its customer base across different upstream firms.

Stocks to Consider

Investors interested in the energy sector may take a look at the following company that presently sports a Zacks Rank #1 (Strong Buy).

SM Energy Company SM is an independent oil and gas company engaged in the exploration, exploitation, development, acquisition, and production of oil and gas in North America. SM currently has a Momentum Score of A and a Value Score of B.

The Zacks Consensus Estimate for SM's 2024 and 2025 EPS is pegged at $5.99 and $6.44, respectively. The stock has witnessed upward earnings estimate revisions for 2024 and 2025 in the past seven days.

Enerplus Corporation ERF is an independent oil and gas production company with resources across Western Canada and the United States.

Enerplus has witnessed upward earnings estimate revisions for 2024 and 2025 in the past seven days. The consensus estimate for ERF's 2024 and 2025 earnings per share is pegged at $1.95 and $2.25, respectively.

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