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Antero waiting to restructure even after bow to investor pressure, analysts say

While the Antero corporate group's decision to examine transactions for its energy pipeline assets represents a concession to activist investors, equity analysts said the Appalachian shale gas conglomerate feels no pressure to speed up its reorganization timeline.

Gas producer Antero Resources Corp., along with pipeline master limited partnership Antero Midstream Partners LP and general partner Antero Midstream GP LP, on Feb. 26 established special board committees to evaluate options for Antero Midstream Partners, just weeks after executives told investors that the company would not address options for simplification until the next decade.

However, CBRE Clarion Securities analyst Hinds Howard, who specializes in energy master limited partnerships, said Antero Resources plans to fully realize the benefits from a scheduled ramp-up of mandatory cash payments from the MLP before responding to investors' concerns, namely that executives' conflicts of interest are dragging down stock prices in a glutted Northeast market.

"I think they are certainly responding to activist pressure, and it will be a tough negotiation given the differences in ownership among the three public entities that makes the situation a bit different than it normally would be," Howard said in an email. "I believe [Antero Resources] would like to see IDRs ramp up more before selling out or collapsing the structure."

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Incentive distribution rights, or IDRs, can total 50% of a partnership's incremental quarterly cash distributions and curtail its ability to reinvest in the business by raising capital costs. While Antero Midstream Partners' IDR burden represents 26% of its distribution flow, the contribution is slated to rise to about 40% by 2020 and slightly higher in 2021 or 2022.

Analysts and hedge fund managers have expressed hesitation about the master limited partnership's complex structure and IDR obligations. At the same time, SailingStone Capital Partners LLC, which owns 11% of Antero Resources' stock, recently emphasized concerns that Antero CEO Paul Rady and CFO Glen Warren's combined 19%-plus ownership of Antero Midstream's general partner incentivizes more production growth than the Appalachian market can handle.

But MUFG Securities Americas Inc.'s Barrett Blaschke said he does not expect Antero to consolidate or spin off its midstream business before 2020. "I don't this is a situation where they feel pressured that they have to do something," he noted in an interview. "I would say this is a great way for them to sort of deflect a little bit by at least saying something and putting [committees] together."

Still, Blaschke emphasized that Antero has felt some pressure after Appalachian gas production giant EQT Corp.'s recently announced plans to separate its midstream and upstream businesses.

Despite the benefits that some driller-sponsored pipeline MLPs continue to reap from their relationships with their parent oil and gas producers, SunTrust Robinson Humphrey upstream analyst Welles Fitzpatrick anticipates that Antero will follow in EQT's footsteps. "It's simply the fact that when you bundle two very dissimilar types of assets, they will always sell below the [sum of the parts]," he said in an email. "I think the entire Northeast will move in this direction. ... Once these assets are unbundled, you're left with some of the cheapest [exploration and production companies] out there."