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spk07: Greetings and welcome to the Ontario Midstream second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. The 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brendan Kruger, CFO of Ontario Midstream. Thank you. You may begin.
spk08: Thank you, operator. Thank you for joining us for Antero Midstream's second quarter 2021 investor conference call. We'll spend a few minutes going through the financial and operating 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, and Michael Kennedy, CFO of Antero Resources and the Director at Antero Midstream. With that, I'll turn the call over to Paul.
spk06: Thanks, Brendan. I'll start on slide number three, highlighting the continued improvement in the financial strength of Antero Midstream's primary customer, Antero Resources. Antero Resources, or AR, has paid down almost $600 million of debt year to date and has reduced its leverage by almost a turn and a half to 1.7 times achieving its leverage target of 2.0 times well ahead of schedule. This resulted in an undrawn revolving credit facility and $1.9 billion of liquidity as detailed on the right-hand side of the page. As we mentioned this morning on the Antero Resources call, AR is targeting over $750 million of free cash flow in each of 2021 and 2022, assuming current strip prices. This level of free cash flow, strong balance sheet, and flexible liquidity position collectively provide protection against a downside price scenario and further de-risks the long-term growth outlook for Antero Midstream. Now, let's turn to slide number four, which illustrates the benefits of AR's firm transportation portfolio on throughput certainty for AM. The green light on the chart illustrates AR's historical gas price differential to NYMEX, and the red line illustrates the Appalachian differentials. As you can see, AR's FT portfolio has generated a premium to NYMEX and significantly reduced realized pricing volatility over the last several years. This provides AM with consistent volume and cash flow assurance as AR does not need to shut in volumes when Appalachia basis blows out like many of its peers have to. This gives Antero Midstream an additional level of protection as we begin construction on additional infrastructure supporting AR and the drilling partnership. In addition, this competitive advantage resulted in AR generating price realizations that were $0.90 in MCF better than in-basin Appalachian pricing, which was $0.72 in MCF behind NYMEX. These attractive price realizations further support drilling economics that underpin the volume growth and returns at AM. I'll finish my comments by looking at slide number five to highlight AM's asset utilization rates and discuss future growth projects. As you can see on the left-hand side of the page, despite AR's transition to a maintenance capital program in 2019 and 2020, AM was able to maintain asset utilization rates greater than 90% across its assets. AM's joint venture processing capacity over the last year has been 100% utilized, and we recently commissioned the new SmithBerg One processing plant which added an additional 200 million cubic feet a day of processing capacity in the third quarter. This brings AM's total joint venture processing capacity to 1.6 BCF a day. SmithBerg 1 will support processing volume growth from the drilling partnership targeting Marcellus liquids-rich development over the next several years. Similarly, on the compression side, we are currently constructing two stations in the Marcellus liquids rich regimes that will add 480 million cubic feet a day of additional compression capacity. These two stations, along with the associated high pressure gathering projects, are expected to be placed online in 2022 to facilitate the development in Tyler and Wetzel counties in West Virginia. Importantly, AM has the visibility into AR and the Drilling Partnerships Development Plan that allows AM to maintain these high asset utilization rates as we transition back to a growth outlook. As depicted on the right-hand side of the page, we expect volume growth combined with high asset utilization rates to generate EBITDA growth and, more importantly, mid to high teens returns on invested capital on average through 2025. With that, I will turn it over to Brandon.
spk08: Thanks, Paul. I'll begin my comments with second quarter operational results at AM, beginning on slide six, titled Year-over-Year Midstream Throughput Growth. Starting in the top left portion of the page, low pressure gathering volumes were just under 2.9 BCF a day in the second quarter. which represents a 1% increase from the prior year quarter. As we look ahead to the third quarter, we expect AR to be slightly above the LP earn-out threshold of 2.9 BCF a day, driven by the continued outperformance of AR's wells. Compression volumes during the quarter averaged 2.7 BCF a day, a 1% increase compared to the prior year quarter. Our 50-50 joint venture gross processing volumes averaged just over 1.4 BCF a day, a 3% increase compared to the prior year quarter, and our gross fractionation volumes averaged 38,000 barrels a day, a 165% increase year over year. As you may have seen, we did experience a few days of downtime at Sherwood at the end of the second quarter and into the third quarter due to a shutdown downstream of the facility. We do not expect this to have a material impact on our volumetric or guidance outlook as we incorporate sufficient risking in our forecast. Freshwater delivery volumes average 104,000 barrels a day, a 2% increase from the prior year quarter. Adjusted EBITDA for the quarter was $225 million, a 12% increase year over year. Capital expenditures during the quarter were $71 million. Consistent with our comments on the first quarter call, we expect to invest roughly two-thirds of our 2021 capital budget of $240 to $260 million in the second and third quarter combined as we build out the infrastructure supporting the drilling partnership. This results in expected third quarter capital of approximately 90 to 100 million. And from there, we expect a decline in the fourth quarter to remain on budget for the full year. During the second quarter of 2021, we generated 111 million of free cash flow before dividends, a 3 million increase compared to last year. Importantly, for the third time in the last four quarters, we generated free cash flow after dividends, which totaled 3 million during the quarter. Year-to-date free cash flow after dividends has totaled $42 million, which has allowed us to reduce our leverage to 3.6 times. As we look to the back half of the year, we expect a modest outspend driven by increased capital expenditures as just discussed, which will result in a full year 2021 profile that is approximately free cash flow neutral after dividends. Moving on to the balance sheet, I wanted to highlight the debt maturity profiles at both AR and AM given the drastic improvements over the last 12 months, which we have outlined on slide number seven. At this time last year, AR had over two billion of senior note maturities within the next three years. Fast forward to today, as depicted on the top half of the page, AR does not have any senior note maturities until 2025. AR's successful refinancings and debt reduction efforts through asset sales and sustainable free cash flow generation have transformed it into one of the strongest producers in Appalachia. The bottom half of the page illustrates AM's senior note maturity schedule, which tells a similar story. During the second quarter, we refinanced the 2024 senior notes, extending the maturity to 2029 at the same coupon of 5 and 3 eighths. This resulted in our next senior note maturity not occurring until 2026. In addition, we had $514 million drawn on our 2.13 billion revolving credit facility, resulting in $1.6 billion of liquidity as of quarter end. As a reminder, we previously announced that we are targeting approximately $500 million of free cash flow after dividends from 2021 through 2025 and low to mid single-digit annual EBITDA growth as a result of the drilling partnership between AR and QL partners. This financial strength and free cash flow outlook at both entities positions us well as we expect to extend the credit facilities over the next year. In summary, we are incredibly proud of the improvements of the balance sheets of both AR and AM over the last year, both of which have never been stronger. Before I close, I'll finish my comments with slide number eight, titled Uniquely Positioned Midstream Sensitive. The last two years have been transformational for Antero Midstream, and we believe we are well positioned for the unique business model, not only in Appalachia, but in the overall U.S., In 2019, we converted to a C-Corp, significantly enhancing our corporate governance and shareholder rights, which facilitated AM's inclusion into equity indices like the S&P 400. As we look at the universe of investable securities in the U.S., AM checks all of the boxes as a C-Corp of scale, earnings growth driven by the drilling partnership, and an inflation-protected fee structure. Of the approximately 6,000 publicly traded securities in the U.S., About 900 companies are investable C-Corps with scale and enterprise value greater than $6 billion. Narrowing down those companies to those with earnings growth, which we measured as a three-year EBITDA CAGR greater than 3%, narrows it down to just over 650 companies. Additional filters for companies with de-risked business models that are self-financing with strong balance sheets, which we measured as leverage under four times, the population continues to shrink to just 421 companies. Of those companies, only one offers an attractive dividend over 7%, which is Antero Midstream. Today, at a 9% yield, AM presents a unique opportunity with an attractive return of capital profile, earnings growth, and declining total debt and leverage, which will further de-risk AM's business model going forward. With that, operator, we are ready to take questions.
spk07: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Brian Reynolds with UBS. Please proceed with your questions.
spk04: Hi. Good afternoon, everyone. Starting off with guidance, just wondering if you can provide some color around the drivers towards the upper and lower end of the EBITDA guidance range. It seems just annualizing the first half of 21, it seems we're at the high end of the range. I'm curious if you could share some thoughts around second half expectations. Thanks.
spk08: Yeah, Brian, I'll take that one. Overall, as we put the guidance range together, You know, it was a function of looking at the full year and potential fee rebates was one of the items that could go either way, as you saw in the second quarter. So, you know, the range provides a nice range in terms of where you could end up on that fee rebate perspective. The other components are, of course, you know, we risk for production. I think as I mentioned in my remarks, you know, AR's Wells continued to outperform So from a throughput perspective, we continue to see strong results at the AM side of things. As we look into the second half, I think we feel good about the range still. With water in particular, we put on about 41 wells in the first half of the year. Our guidance is 70 to be serviced throughout the year, so you have serviced more than half of that which leads to lower water volumes in the second half of the year as we look forward. So that's the big driver in terms of why we feel good about where we're at, even though we were ahead to start the year. We do expect some pullback from the water volumes just due to the cadence in the year.
spk04: Great. Thanks for the color. Lastly, are there any updates on the lawsuit against Viola Water Technologies? I know there's a pending court case in January, but is wondering if there's any signposts that we can be tracking or if this, you know, could ultimately be resolved outside of the court. Thanks.
spk08: Yeah, there's no material update at this time. I think as you saw disclosed in our 10Q, the trial is set to begin in early 2022, which is a slight pushback from the original scheduled date just due to some COVID delays in the courts, but otherwise no update there.
spk04: Fair enough. Thanks for taking my question and have a great day.
spk07: Thank you, Brad. Thank you. Our next questions come from the line of Jeremy Toney with JP Morgan. Please proceed with your questions.
spk00: Hey, good afternoon, guys. This is James on for Jeremy. Just going back to the rebate you guys mentioned, I think you guys mentioned in your prepared remarks that you expect to hit the threshold in 3Q. Just going forward, looking at 2022, especially with strong NGL prices, if Antara resources turns to growth, How have you guys budgeted that into your longer-term forecast that you guys laid out during fourth quarter of last year with your guidance through 2025?
spk08: Yeah, so as we looked ahead, I think we did provide some color there. With the drilling partnership, you know, AR is still on the maintenance capital plan, net to AR. The drilling partnership does add growth from a gross volume perspective. So as we look out to 2022, we'd expect, you know, to hit three or four of those fee rebates as currently planned. And then 2023, just given the growth, we'd expect to hit all four. And it'll depend on where that growth is in terms of whether you hit different thresholds of the rebate, but we'd expect to hit all four of those fee rebates in 2023.
spk00: Got it. That's very helpful. I appreciate the call earlier. And then last question for me, you mentioned the additional build-out, I think, of stations next year. I'm just wondering on the CapEx front if you guys can ballpark kind of a range for next year, especially, again, as it kind of pertains to kind of longer-term free cash flow guidance and how much those stations might cost.
spk08: Yeah, I think, you know, Mike mentioned, I think, on the first quarter call, but I think we're still in that $275 to $300 million for next year, and then you'd see I think as we talked about, you expect to be free cash flow neutral for the most part in 21 and 22, and that $500 million of free cash flow after dividends is really 23, 24, 25, and that's where you see capital come down from that $275 to $300, more to the $200 million and lower levels after that.
spk00: Got it. Thanks. I'll stop there.
spk07: Thank you. Our next questions come from the line of Kyle May with Capital One Securities. Please proceed with your questions.
spk09: Hi, Kyle. Hi, everyone. A couple questions on the water side. In the release, you mentioned OPEX was lower due to water blending operations. Just curious if you can talk more about what Anter is doing, if you've made any changes there, and if there's any further cost savings that you can realize.
spk08: Yeah, I think overall, just on the AR side, it's driven by just continued efficiencies on the water side, piping to our blending facilities, and overall timing and cadence of the development plan at the AR level. So continue to see lower costs on LOE at AR, which is driving down the OPEX on the AM side related to that water blending operations.
spk09: Okay, got it. That makes sense. And then also, have you made any changes to the amount of fresh water that's used in the wells, or do you anticipate any changes there?
spk08: No, so we're still at that 36 barrels a foot. You know, I think we were flat on volumes quarter over quarter, and we had less well service. I think some of the disconnect was just we had wells that were being serviced at the end of the first quarter that were counted in those well service in the first quarter, but most of that water showed up in the second quarter, so It was about 20 wells serviced in each corner if you think about the amount of water being used per well, but there's a little bit of disconnect in terms of timing there.
spk09: Got it. That's helpful.
spk07: That's all for me. Thank you. Thanks, Kyle. Thank you. Our next questions come from the line of John McKay with Goldman Sachs. Please proceed with your questions.
spk02: Hey, thanks a lot for the time. Just wanted to ask one quickly on the Sherwood outage. I know you said there was enough kind of flexibility in the guidance, which is why you didn't change numbers. But, you know, since AR called it out specifically, you know, could we think about a similar volume impact for you guys in the third quarter as AR called out?
spk08: Yeah, I think that's fair. So if you run the math on that volume impact, it would be about $6 million to $7 million. on an isolated basis. Again, I think with the risking that we provide and the outperformance we've seen, we still feel very good about the range we have of $840 million to $880 million for the EBITDA range.
spk02: Okay, great. Thanks. And then I guess you guys talked about it a little bit already, but just on the drilling partnership, I think we saw AR at a rigged back into the Utica. Just curious if, you know, if everything in terms of timing is in line there with, as you guys talked about, beginning of the year. And then just wanted to clarify, too, and I think you said it before, but on the two new compressor stations you talked about adding next year, those were included in the kind of long-term drilling program affiliated CapEx, you know, through 25, right?
spk08: Yeah, that's correct. So to your first question, overall, drilling partnership's going well as planned. Nothing to note on that front in line with what we've provided publicly. And then those compressor stations, we were just calling out more details around those, but those are in line with the long-term guidance that we called out earlier this year in our guidance and long-term targets.
spk02: That's it for me. Thank you.
spk08: Thanks, John. Thanks, John.
spk07: Thank you. Our next questions come from the line of Sunil Saval with Seaport Global Securities. Please proceed with your questions.
spk01: Yeah, hi. Good morning, guys, and thanks for all the clarity on the call. So just starting off on the SmithBerg startup, could you remind us if that plant is fully dedicated to Entero? Are there any third-party volumes in that plant?
spk08: Yeah, that's fully dedicated to Entero. Okay.
spk01: Okay. Then a little bit of a broader question on capital allocation or capital strategy. When you laid out the strategy at the end of last year, since then, it seems like the high yield markets have improved quite a bit. Obviously, you've kind of refinanced some debt. I was kind of curious, considering that the credit spreads are so much tighter now. Is there any rethink on your part in terms of the capital allocation strategy, whether it's just paying down debt versus any incremental cash being used towards other users? Obviously, you have the share buyback program open, too.
spk08: No, I think overall, it's certainly nice to see the improvement in the capital markets. From the AM perspective, we had just over $500 million drawn on the credit facility At the end of the quarter, you know, we expect to generate, as mentioned, $500 million in free cash flow, so it's nice to have some borrowings on the facility to be able to pay down over time. And as we get to that, you know, three times leverage target, we'll look at other potential return of capital, but still focused on continuing to get down to lower leverage levels at the AM side of things.
spk01: Okay. Got it. Thanks for all the clarity.
spk07: Thanks, Neil. Thank you. Our next questions come from the line of Craig Brody with Bank of America. Please proceed with your question.
spk05: Good morning or afternoon. Hey, guys. I know this is the AM calls, but this certainly slightly relates to AR. In the past, you've said AR, AM makes sense separate. And I think that's still the case. I'm curious what you've What you think about on the AR call, you asked about what you would do with all the free cash flow once you get your leverage target. Is it possible that AR would buy more of AM? Is the amount that AR owns of AM the right amount today? And could you also sort of weave that conversation into how you're thinking about M&A right now?
spk03: Yeah, no, there's no thoughts around increasing or decreasing our AR position in AM. AR owns 30% of AM and sees that as an appropriate level. As you heard on the AR call, really, we're just trying to de-lever AR with the free cash flow and then evaluate return of capital there. AM with its free cash flow will de-lever down to three times and then evaluate its return of capital there. From an M&A standpoint, really, it's hard for M&A to compete. You know, like we mentioned, we have growth at AM 3% to 4%. The return on invested capital is in the mid-teens. That's a risk-adjusted return on invested capital. We know exactly when the projects are coming on just in time. There's no speculative capital, so very hard for M&A to compete, and with AR's drilling partnership, we kind of viewed that as the M&A. You know, we are getting third-party volumes there and have that growth. I think we're only one of a handful of midstream companies with growth and highly visible growth at that, so no real need for M&A.
spk05: Great. I appreciate the insight and the time with us.
spk03: Thanks, Greg. Appreciate it. Thanks, Greg.
spk07: Thank you. There are no further questions at this time. I'd like to hand the call back over to Brendan Kruger for any closing comments.
spk08: Yes, thank you, everybody, for joining today's call, and please reach out with any further questions. Thanks.
spk07: Thank you. That does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.
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