Antero Midstream Corporation

Greetings and welcome to the Antero Midstream First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn this conference over to our host, Brendan Kruger, Vice President of Finance. Thank you. You may begin.

Thank you for joining us for Antero Midstream's first quarter 2021 investor conference call. We'll spend a few minutes going through the financial and operational highlights, and then we'll open it up for Q&A. I would also like to direct you to the homepage of our website at www.anteromidstream.com, where we have provided a separate earnings call presentation that will be reviewed during today's call. Before we start our comments, I would first like to remind you that during this call, Antero management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Antero resources and Antero midstream and are subject to a number of risks and uncertainties, many of which are beyond Antero's control. Actual outcomes and results could materially differ from what is expressed, implied, or forecast in such statements. Today's call may also contain certain non-GAAP financial measures. Please refer to our earnings press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. Joining me on the call today are Paul Rady, Chairman and CEO of Antero Resources and Antero Midstream, Glenn Warren, President and CFO of Antero Resources and President of Antero Midstream, and Michael Kennedy, CFO of Antero Midstream. With that, I'll turn the call over to Paul.

Thanks, Brendan. I'd like to start on slide number three, highlighting the step change improvement to AR, that's Antero Resources balance sheet. During the first quarter of 2021, AR generated over $400 million of free cash flow. As depicted on the top left portion of the slide, AR used this free cash flow to reduce total debt from $3.0 billion to $2.6 billion during the first quarter. The top right quadrant of the slide illustrates the LTM EBITDA improvement from $1.0 billion to $1.3 billion. This improvement was a direct result of AR's liquids focus and scale, which allowed it to take advantage of the improvement in C3 plus NGO and oil prices. This total debt reduction, combined with an improvement in AR's LTM EBITDA debts, decreased AR's leverage by over a turn to 2.0 times. Lastly, during the spring redetermination period, AR's borrowing base was reaffirmed at $2.85 billion, supported by the deep drilling inventory of liquids-rich locations in AR's portfolio. This reaffirmation, along with the $700 million senior note issuance and debt reduction during the quarter, resulted in AR's liquidity doubling to $1.8 billion. Looking ahead, we expect AR to continue generating free cash flow and reducing total debt, which is expected to result in a completely undrawn credit facility balance over the next few quarters. This significant improvement in the financial strength of AM's primary customer, AR, continues to strengthen the outlook at AM. To put AR's first quarter financial results into perspective, let's turn to slide number four. Since we are early in the reporting cycle, most of these figures are based on consensus estimates. The top of the slide highlights AR's balance sheet positioning compared to its E&P peers in Appalachia. On the top left, you can see AR's $2.6 billion of total debt ranks third amongst its peers. However, the chart on the top right-hand side of the page shows that AR's net debt to EBITDAX of 2.0 times ranks second. The bottom of the page focuses on financial performance and scale. AR's $519 million of EBITDAX in the first quarter ranks second in Appalachia and is substantially above the remaining peers. Looking at free cash flow, AR's $419 million of free cash flow during the first quarter ranks is dramatically above the Appalachian peers and highlights the significant scale and liquids-rich exposure that AR has in a rising commodity price environment. In summary, AR is one of the strongest customers in Appalachia today, and a strong AR results in a strong AM. Now let's turn to slide number five to discuss the recent NGL hedging done at AR. that protects their free cash flow profile and results in further debt and leverage reduction throughout 2021. While the fundamentals remain strong for C3 Plus NGLs, we view this hedging program as an insurance policy to protect AR against any seasonal weakness or risk associated with the change in the COVID-19 pandemic recovery. Before getting into NGL hedging on the slide, I want to remind everyone that AR is also over 90% hedged in natural gas in Cal 21 at $2.76 per mm BTU. During the first quarter, AR hedged 36,000 barrels a day and 35,000 barrels a day of C3 plus NGLs for the second quarter one, respectively. This represents approximately one-third of AR's C3 plus NGL production during the summer months, which can be seasonally the weakest pricing months for NGLs. Importantly, we are hedging at incredibly attractive prices during the summer, around $36 a barrel, which is approximately double the price that AR realized at this same time last year. Hedging has always been a core principle at AR, and we plan to continue prudently layering on additional hedges across all commodity products to support AR's consistent development program. Before turning the call over to Mike, I want to congratulate Glenn on his upcoming retirement and thank him for all of his contributions to the Antero entities over the years. Glenn and I have been partners for over 20 years, dating back to coal bed methane exploration and production in the Powder River Basin. Since then, we became early shale pioneers, adopting horizontal drilling and multi-stage completions in the Barnett Shale, and have built Antero into one of the largest and most integrated NGL and natural gas producers in the U.S. Over this last year, Glenn was... instrumental in successfully executing the series of strategic transactions and capital market activities which allowed us to navigate the challenging environment and put us in the position that we are today. As we look ahead, AR and AM are in the strongest financial positions that we've been in since inception, both generating significant free cash flow with strong balance sheets and leverage profiles. While one will be missed, I'm very excited about internally backfilling his positions with Mike Kennedy and Brendan Kruger, which highlights the deep bench we have here at Antero. With that, I'll turn it over to Mike.

Thanks, Paul. I'll begin my AM comments of first quarter operational results beginning on slide number six, titled Year-over-Year Midstream Throughput. Starting in the top left portion of the page, low pressure gathering volumes were 2.9 BCF per day in the first quarter, which represents a 5% increase from the prior year quarter. Compression volumes during the quarter averaged 2.7 BCF per day, an 8% increase compared to the prior year quarter. Our 50-50 joint venture gross processing volumes averaged 1.4 BCF per day, an 8% increase compared to the prior year quarter. Processing capacity was 100% utilized during the first quarter. JV gross fractionation volumes averaged 38,000 barrels per day, a 15% increase from the prior year quarter. Freshwater delivery volumes averaged 104,000 barrels per day, a 43% decrease from the prior year quarter, driven by lower completion activity by entire resources as it transitioned to a maintenance capital development program. Jeff, the EBITDA for the quarter was $219 million, a 1% increase year over year. Capital expenditures were $30 million, a 64% decrease year over year. Looking ahead, we expect an increase in our quarterly capital expenditures as we begin construction on infrastructure supporting the drilling partnership that we expect to drive throughput growth over the next several years. Specifically, we expect to invest roughly two-thirds of our 2021 budget of $240 to $260 million in the second and third quarter combined as we take advantage of better weather during the summer months. Importantly, a third drilling rig has already arrived in Utica to commence development by the drilling partnership, utilizing midstream infrastructure that is largely in place. We expect completion activities using AM's freshwater delivery system to begin on those two pads in the back half of the year and expect to turn in line those wells by year end to drive throughput growth heading into 2022. During the first quarter of 2021, we generated $146 million of free cash flow before dividends, a $50 million increase compared to last year. Importantly, for the second time in the last three quarters, we generated free cash flow after dividends, which totaled $39 million during the quarter. I'll finish my comments with slide number seven titled, Uniquely Positioned Midstream Entity. We're very excited for the future of Intero Midstream following the announcement of the drilling partnership. We believe AM is uniquely positioned in the midstream space with its C-corp structure and one of the very few companies with expected throughput and EBITDA growth over the next several years. Importantly, AM has significant visibility into this throughput growth, which supports our confidence in generating attractive rates of return on the incremental investment supporting the drilling partnership. As a reminder, we expect the incremental $175 million of capital investment supporting the drilling partnership over the next five years to generate $200 million of incremental free cash flow net of that capital. So these are highly economic and attractive opportunities for AM. While it does result in a near-term increase in capital for AM, As a midstream company, we're in this business to evaluate and invest in projects that generate attractive rates of return and deliver value to our shareholders. We have a strong track record generating a 14% ROIC on average over the last six years, well in excess of our cost of capital. Importantly, our new financial policy allows us to internally finance both our capital investments and the return of capital to shareholders internally. which we believe is the prudent decision to result in leverage trending toward below three times range. With that operator, we're ready to take questions.

Thank you. We will now begin the question and answer session. To join the session queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question is from Brian Reynolds with UBS. Please go ahead.

Hi. Thanks for taking my question. Michael and Brendan, first, congrats to you both. To start out, I was wondering how we should think about gathering rate relief expiration with AR in 2023. Just wondering if we could see a share buyback from AR in exchange for continued rate relief as it appears AR may, you know, look to potentially increase production beyond 2025. Thanks.

Yeah, no, we talked in the other call, the first order of business for AR is to pay down debt below $2 billion, and then we'll assess at that time whether further debt pay down or return of capital or what form of return of capital, combination of both. We do have a slide out there on AR's website that walks through all the reductions in the firm transport volumes over that period. So it does step down between now and 24 and 25, and it's more right-side to what our actual production at this maintenance capital level is at in 24 and 25. But for the next three to four years, I would say AR's in the maintenance capital mode.

Great. Thanks. And lastly, just given the long-term drilling expectations for AR seem pretty fixed at this point, are there any unique opportunities for AM to pursue, you know, further downstream or around Marcus Hook that could provide incremental value to the entire family as a whole? Any cover would be helpful. Thanks.

When we look at the drilling baby is that, I mean, that's really third-party volumes and third-party business. So that was terrific for AM. As I mentioned in my comments, AM to have 2%, 3%, 4% throughput growth over the next three years is somewhat unique in the midstream for a midstream company. So I think AM is well positioned from a growth standpoint with the capital being very efficient and having just-in-time visibility into that that will deliver that pre-cash flow growth of $200 million net of that $175 million of capital. So AM is in good shape from that and without the The system being almost fully built out has very low capital over the next couple of years as well. So generating free cash flow after dividends in the $500 million plus range and generating free cash flow, I'm sorry, for dividends in the $500 million plus range. And then after dividends this year and next, you know, kind of flat to $25 million positive. But then after that, about $100 million a year. So very attractive profile for Ontario midstream.

Great. Thank you guys for answering my questions. Have a great day.

Thanks, Brad. Our next question is from Jeremy Toney with JP Morgan. Please go ahead.

Hey, good morning, guys. This is James on for Jeremy. Just two quick ones for me. I guess just starting on the gathering at OPEC seemed to pick up this quarter just looking past the run rate from last year. Maybe just looking forward, is that a run rate to use or how are you guys thinking about that?

No, it should come down. Always in the winter. The first quarter is always a little bit higher. Just drop operating in winter weather. Once the weather improves, which it has, it comes back down to its normal run rate.

Got it. And then just on the free cash flow front, starting the year off with the strong kind of 1Q with the $40 million after dividends, you know, you guys messaged that 2Q and 3Q will be more capital intensive. But just in the cadence of the year, do you see kind of 4Q as returning to positive for cash flow post-dividends or just any call you can share there in terms of what you guys are budgeting there?

Yeah, right now Q4 is about neutral. There is a step down in the water activity in Q4. So you're correct, Q2, Q3. Three, there is a bit of a negative just because the capital steps up in that $80 to $90 million range for those two quarters. Capital does step down a bit in Q4, but with a little bit less water, you have a little bit less EBITDA in that quarter, so it's about flat. So, you know, very positive this quarter, $39 million. A little bit negative in second and third quarter, and then neutral in the fourth. That's the cadence.

Got it. Thanks. And sorry, just one more if I could. I noticed the asset sales. recorded in the quarter. Anything to share there, and if there's potential down the road for similar sales?

Yeah, that was just some sales, some excess pipe that we did not need anymore. You know, we had some gains on some sales pipes that showed up in 4Q20, and so a little loss here, so it was net break-even, but it was just selling some excess pipe, so nothing permanent.

Got it. Thanks. Appreciate the questions.

Thanks, James.

Our next question is from John McKay with Goldman Sachs. Please go ahead.

Hey, good morning. Thanks for the time. Just wanted to circle back. I know this came up earlier on this call and came up a little bit on the AR call. But again, just with AR getting closer to that two times level, I know you're talking more about shareholder returns up there, but it sounds like growth is in theory still on the table. Just wondering if you could unpack a little bit maybe what would drive that decision? Is it, is it NGL prices? Is it base and takeaway? Just anything that we can kind of frame the argument.

Thanks. Yeah. I think in our car, I didn't hear growth was on the table, but you know, maybe after like three to four years growth, just depending on what kind of environment we're in. Cause, but the amount of free cash flow generation we have at AR over that timeframe, you know, it's just, It's somewhat astounding how much it is. So after three or four years, maybe you'd think about it. But, you know, until then, it's very focused on paying down debt and returning capital to shareholders.

Okay. That's great. Thank you, man.

Yeah, the growth is really coming from the drilling partnership. I think that's a key takeaway of this for AM is AM does have growth. Its volume is through, but it's growing. The gross volumes from this, from Intero's field is growing. It's just from a net perspective, Intero's that maintenance capital.

Right. Absolutely. All right. Thank you for that. Maybe just one more in the weeds. Looks like Stonewall picked up a little bit this quarter. Just wondering, is that a timing thing or is something new going on on that asset? I know it's small, but.

Yeah, that was essentially a catch-up payment from the, you know, there was some deferred capital in 2020 because of COVID. That capital has kind of been pushed in the 21 and they held a reserve for that. And so they kind of released that reserve. to us in the first quarter. We still do expect those annual distributions being the $10 to $12 million this year, so nothing changed there. We just had a cash-out payment in the first quarter.

Great. All right, and then maybe I'll just squeeze one more in since we're on the JVS. Just any update on Smithburg timing? And it also looks like, you know, maybe the Sherwood margin stepped up a little bit, or at least the processing margin overall. So maybe just anything else going on there would be helpful.

Nothing there, but on Smithburg, it's July 1st. Great.

Thank you.

Yep. Thanks, John.

Our next question is from Kyle May with Capital One Securities. Please go ahead.

Hi. Good morning, everyone. Just wondering if you could talk more about the construction and development of infrastructure for the drilling partnership and just curious about more details on the assets that you're developing and maybe longer term, if we should expect kind of a lumpiness of spend similar to this year?

I wouldn't really say it was a lumpiness of spend this year. I mean, they have 80 to 90 million in the second and third quarter and call it 60 million in the fourth, you know, and those are the quarters post the drilling JV. I mean, that's not terribly lumpy. I think it's fairly consistent. There's always a little less in the winter because it's a little harder to build in the winter. The projects, it's not really any more processing. There's one processing plant like we just mentioned in the last question with Smithburg. Really, it's just building out the low pressure, high pressure, and compression to serve the increased drilling pace that occurs because of the drilling JV. It's about 60 more wells over the next four years, so just gathering those kind of our bread and butter and then also providing freshwater distribution to those wells for completions. So right within our existing system, really just building it out a little bit more in an accelerated time fashion to meet the accelerated volumes.

Got it. And in the water segment, it looks like you serviced 24 wells in the first quarter, which is kind of similar to what you did in the second and third quarter of last year. Should we think about this as the high water mark for the year, or is this a more normalized run rate?

Yeah, no, it's gonna be the high watermark. It was 24 completions, but you've got to remember that some of those were simulfracs of those volumes. We count it as when it's spud, but it was completing kind of work in progress over that March 31 timeframe. So volumes slip into Q2. But then the actual wells that are spud in those quarters, about 15 to 20 in Q2 and Q3 and then drops off around 10 wells in Q4. Scott, it's very similar to last year. Yeah.

Okay. Got it. That's helpful. Thank you.

Thanks, Scott.

Our next question is from Tim Schneider with Citi. Please go ahead.

Hey, just a really quick one for me. Just confirming that you're not a cash taxpayer through 25 still. That is correct.

Yep, that's correct.

Got it. That was quick and easy. Thank you.

All right.

Thanks, Tim.

Our next question is from Sunil Sival with CPAR Global Securities. Please go ahead.

Hi. Good morning, guys. So just a couple of follow-ups, actually. So first, it seems like, you know, as the activity picks up, could you give us a sense of cadence of volumes on your gas systems, you know, for the remainder of the year?

Yeah, they're flat. They pick up a bit in the, they're relatively flat throughout the year. Okay. Really, those volumes start coming on at the end of the year. So, you really don't see the pickup in the volumes until 2022 from that, from the drilling joint venture.

So, basically, then we should think about 2022 is a little bit of a step change in volumes.

Yes, up 2% to 3%, and that's the same case for every year, 22%, 23%, and 24%.

Okay, got it. And then on a different subject, it seems like the shell cracker in the Northeast is expected to start up in the next year or so. I realize that it helps kind of in-basin pricing, but I was curious. you know, in terms of any impact on Intero midstream from the startup of that cracker?

Yeah, there's no impact. It'll just, for Intero resources, it'll help our realizations. We'll get, you know, 9x gas plus pricing on that, so it'll just improve our margins at Intero resources. But since we're at maintenance capital at AR, it'll just be added to the free cash flow profile.

Okay, got it. Thanks for the talk.

Yep.

Our next question is a follow-up from Brian Reynolds with UBS. Please go ahead.

Hey, thanks for taking my question again. Just a quick question around the water treatment litigation. Was any of, you know, the potential You know, part of the litigation, was any of that included in your long-term guidance with regards to free cash flow? And just any commentary around that would be helpful with the, you know, case coming up.

Yeah, no. No, it was not. Okay.

Thanks.

Yep. There are no further questions registered at this time. I would like to turn the conference back over to management for any closing remarks.

Yes, thank you for joining us on today's call, and please follow up with any questions. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.