Over the past day, investors on the Robinhood platform have been hot for a pipeline company called Antero Midstream (AM). In one day, according to Robintrack, the number of Robinhood accounts holding Antero Midstream has jumped more than any other stock, from 15,500 to 30,000.

Oil and gas analyst Paul Sankey noted the odd popularity in his morning email today, saying, “I’m being mystified.”

What could the Robinhooders like? The momentum maybe. At $ 6.83 a share at noon on Friday, Antero Midstream has nearly tripled in value since March. More fundamentally, they can appreciate Antero’s recent efforts to reduce expenses and increase distributable cash flow. Plus, given strong natural gas prices (if you can call $ 3 per strong mmBtu) and a deep slowdown in oil drilling, there’s good reason to believe that the Marcellus shale gas companies are having better days. to come up. Assuming AM manages to maintain its 30.8 cents quarterly dividend, its implied return would be 17.7%.

However, Sankey cautions, buying AM doesn’t really make sense – once you look at the value proposition offered by its parent company, Antero Resources (AR, $ 3.47). While Antero Midstream moves the gas and owns the pipelines, Antero Resources drills and fractionates the gas and owns the reserves.

Antero Resources also owns a 29% stake in Antero Midstream. This is where it gets interesting. Based on current stock valuations, Resources ‘stake in Midstream is worth $ 944 million, more than Resources’ entire current market capitalization of $ 926 million.

At first glance, it sounds like Antero Resources should be the stock that turns the Robinhooders on. The company is the third American producer of natural gas (after EQT and ExxonMobil

XOM
), making 3.5 billion cubic feet per day.

Be careful there too. AR shares have already quintupled since March, when they bottomed out over bankruptcy fears amid the initial collapse in energy demand caused by Covid. Global S&P Ratings put Antero Resources on negative credit watch fearing it could end up in “selective default” on some of its bonds. Antero is in the process of holding a Dutch auction for some of its tickets due in 2022 and 2023, in hopes that holders can receive as little as 72 cents on the dollar. Still, that’s far more than the 30 cents that Antero Resources bonds were trading at in March.

Antero Resources is not yet secure. Even after making $ 750 million in asset sales and $ 250 million in refinances, he still wear $ 3.25 billion in debt and over $ 2 billion in related lease obligations. It is a heavy burden of responsibility. But is it so important that its implied equity value (after removing its 29% from Antero Midstream) should be less than $ 0?

Sankey (ex-Deutsche Bank, new to Sankey Research) says the long-term economic case for natural gas remains strong. The combined blackout and wildfire crises in California “underscore the need for basic natural gas power generation to offset the growth in renewables. There is essentially a choice between nuclear and natural gas, and much less demand. Much less demand is not popular among consumers.

For years, straightforward natural gas producers like Antero have lagged behind their petroleum-focused competitors in the Permian and Bakken. But this paradigm has changed. As oil drillers cut back on new drilling to save money, this has resulted in a dramatic reduction in supplies of so-called associated gas – the natural gas that rises from the well with the more valuable oil. Decades ago, drillers simply burned this associated gas. Nowadays, it provides a large part of the national supply. Associated Gas from the Texas Permian Oil Basin is passed from 1 bcfd to 6 bcfd by 2019, before falling this year.

Thanks to the destruction of demand for Covid-19, gas production in the United States has grown from an all-time high of 94 billion cubic feet per year last November to around 86 billion cubic feet per day now, according to Global S&P Platts. The number of active platforms in the United States is down by 465, or 74%, since the Covid-19 pandemic.

Naturally, this frees up potential market share for Antero Resources, which believes it can keep production at a stable level by drilling 65 new wells per year – for around $ 600 million in investment per year, less than half of its rate. operating a few years ago, but at a pace modest enough to ensure sufficient free cash flow for the company to live within its means and its debt.

If buying AR is a good way to get exposure to AR, do you really want to own AR? Given that Antero Resources is by far Antero Midstream’s largest gas supplier, slow growth on the resource side could make it difficult for Midstream to develop its own business. However, the company, in its recent presentation to investors, explains that little or no growth could be acceptable, due to the way it has eliminated its capital expenditure. Antero Midstream spent billions of dollars building 430-mile pipelines and processing plants from 2012 to 2017 (it went from an MLP to a C-Corp in 2019). Now these are up and running, and there are no other long term plans on the board. Midstream expects its capital spending to decline 68% this year from 2019, to around $ 200 million. Distributable cash flow is up 600% this year to $ 600 million. Is that enough to defend this 17% dividend (30.8 cents per shift)?

Analysts at Tudor, Pickering & Holt, in their research note this morning, said the AM is overvalued and growth is challenged:

“The recently updated investor platform gave a first look at 2021 capital budget expectations, with 175-200mm shown representing a 10% year-on-year (mid-term) decline
FCF yield is still below a high dividend (17.6%). While the incremental improvements in the cash flow and liquidity profile of sponsors show up positively, the lack of tracking of activities upstream of a rising natural gas strip results in little benefit to the AM profit profile.
Further rise in equities likely to be limited as the 2021 EV / EBITDA valuation of about 8.0x screens toward the upper bound of G&P peers while FCF yield trends down the group, reducing the viability of material deleveraging in a low growth environment. ”

As for Sankey, he suggests that a better option is pipeline giant Enterprise Product Partners.

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, a more diversified company, with a return of only 10%. “I’ve always maintained that retail buyers are smart. I just don’t know why they don’t take responsibility for enterprise product partners right now. Maybe 10% yield is not enough. This is more than enough for me.