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spk05: Greetings and welcome to the Ontario Midstream Third 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brendan Kruger, Chief Financial Officer at Ontario Midstream. Please proceed.
spk04: Thank you, Operator. Thank you for joining us for Antero Midstream's third 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. 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 Director at Antero Midstream. With that, I'll turn the call over to Paul. Thanks, Brendan.
spk01: I'll start on slide number three entitled Expansion Projects, Supporting the Drilling Partnership. which illustrates the progress on our midstream build-out supporting the AR and QL Partners drilling partnership. First, as shown on the bottom left portion of the page, we placed the SmithBerg 1 processing plant online in early July, adding 200 million cubic feet a day of incremental joint venture processing capacity. This brings the joint venture's total processing capacity to 1.6 BCF per day. Consistent with our just-in-time capital investment philosophy, the joint venture processing capacity was 96% utilized during the third quarter. As you can see on the right-hand side of the page, we continue to build out our compression infrastructure in Tyler and Wetzel counties in West Virginia. These stations, which will be placed online in early 2022, will support the incremental throughput growth from the drilling partnership over the next several years. Looking ahead to 2022, we will continue the Marcellus midstream build-out, constructing a high-pressure pipeline from Tyler and Wetzel counties down to the Sherwood and Smithburg processing complex. In addition, we will continue building out our low-pressure gathering infrastructure in this area, where AR's development is focused over the next several years. Importantly, we are encouraged by the well-performance in the core Marcellus, where our build-out is focused, which drives stronger economics for Antero Midstream. Slide number four, entitled AR's Peer-Leading Premium Core Drilling Inventory, provides a summary of AR's premium inventory that underpins the AM capital investment and throughput growth over the next several years. At AR, we regularly perform a technical review of peer acreage positions, undrilled acreage, and location potential based on BTU regimes and EURs. Based on these results, we subdivided the core of the Southwest Marcellus and Ohio Utica into premium and Tier 2 subareas. We have identified approximately 5,200 premium undeveloped locations for industry in the Southwest Marcellus, which are located within the red outlines on the map. Of that, we estimate AR holds 1,865 of these premium locations, or 36% of the total, which includes more than 1,000 liquids-rich locations. In the Ohio Utica, we estimate roughly 1,100 premium undeveloped locations for industry, of which AR holds 210 locations, or 19% of the total, You can see that much of the acreage is covered up with existing Marcellus and Utica horizontal wellbores, which are the red lines on the map. Ultimately, we believe the concept of inventory fatigue and the limited number of premium drilling locations will be a critical distinction between E&P operators in Appalachia. Importantly for AM, its primary producer, AR has over 15 years of liquids-rich drilling inventory and a highly contiguous acreage position, which results in efficient midstream build-outs and peer-leading return on invested capital for AM. With that, I'll turn the call over to Brendan.
spk04: Thanks, Paul. I'll begin my comments highlighting our recently published 2020 ESG report, As a leading midstream company and one of the lowest cost bases, Antero Midstream plays a vital role in transporting and processing low-emission hydrocarbons needed to power our economy and heat our communities. Our infrastructure links reliable energy supply in Appalachia with global demand and allows us to aid in the effort to eliminate energy poverty across the world. As depicted on slide number five, titled AM's Role in Supporting Global Energy Access, AM's integrated midstream services allowed AR to transport its LPG both domestically and internationally, including to many developing nations. Specifically, approximately one-third of AR's LPG exports went to developing nations in 2020, which included Nigeria, Peru, and India, to name a few. This trend continued through 2021, and importantly, we expect this trend to continue into the future. This delivery of LPG to these communities directly improves people's health, safety, and livelihood through the displacement of more expensive and carbon-intensive energy sources used for heating and cooking. We are very proud of our role in responsibly delivering the energy needed to drive a recovering global economy and a lower carbon future. Slide number six highlights our ongoing commitment to the communities in which we operate, safe operations, environmental excellence, and strong governance. Even through the COVID-19 pandemic, we remained active in our communities, supporting hunger relief efforts through the United Way and other community organizations. With a company-wide focus on safety, we had zero employee lost time incidences for the sixth consecutive year. We are also environmental leaders in the midstream industry. In 2020, we reduced our methane leak loss rate to 0.015%. significantly below the one future industry goal of 1% and more than 50% lower than the midstream industry peer average of 0.033%. Our integrated water system allowed us to recycle and reuse 84% of AR's total wastewater gathered. In addition, 100% of freshwater used in completions was transported by pipeline, eliminating 32 million truck traffic miles and avoiding 14,000 metric tons of CO2 equivalent. Lastly, we took our ESG focus further by aligning our executive compensation with ESG performance and established an ESG committee. We believe this core ESG focus and culture of continuous improvement ultimately benefits all of our stakeholders. Now let's move on to the third quarter operational results at AM, beginning on slide seven, titled Continued High Asset Utilization Rates. During the quarter, we maintained our high asset utilization rates with compression capacity averaging 86% utilization and processing and fractionation capacity averaging 96% and 93%, respectively. These impressive utilization rates include the $200 million a day of incremental JV processing capacity at Smithburg One, which was placed in service at the early part of the quarter. As detailed in the earnings release, throughput volumes were negatively impacted by approximately $100 million a day due to downtime at the Sherwood and Hopetail processing and fractionation facilities, resulting in AM not paying out the third quarter earn out of $12 million to AR. Looking ahead to the fourth quarter, we have brought all volumes back online and expect to pay the fourth quarter earn out to AR. Adjusted EBITDA for the quarter was $219 million. Capital expenditures during the quarter were $80 million. Capital expenditures were slightly lower than what we discussed on last quarter's call due to the deferral of capital into the fourth quarter as a result of weather impacts. For the full year, we still expect to be within our capital guidance range of $240 to $260 million. During the third quarter, we generated $94 million of free cash flow before dividends. Year to date, free cash flow after dividends has totaled $32 million. which has allowed us to reduce our leverage to 3.6 times. As we look to the fourth quarter, we expect a modest outspend after dividends, 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, in line with the guidance we put out there. Moving on to the balance sheet on slide number eight. As of September 30th, we had $521 million drawn on our bank credit facility. As you recall, in the second quarter, we refinanced the 2024 senior notes, extending the maturity to 2029 at the same coupon of five and three-eighths. In October, we extended our bank maturity by five years to 2026, resulting in no senior note or debt maturities until 2026. In addition, we elected to reduce our bank credit facility commitments from 2.13 billion to 1.25 billion. The reduction reduces our unutilized commitment fees is viewed favorably by the credit rating agencies and reflects our long-term plan focused on absolute debt and leverage reduction. As a reminder, we previously announced that we are targeting approximately $500 million of free cash flow after dividends from 2021 through 2025, which would result in a completely undrawn credit facility at the end of that time period, assuming the free cash flow is utilized to repay credit facility borrowings. Importantly, our integrated long-term planning with AR provides us with significant visibility into the next five years and beyond, which gives us confidence in delivering on that outlook. Lastly, I wanted to highlight AM's momentum on the credit front on the bottom half of the page. So far in 2021, AM has received multiple upgrades from both S&P and Moody's, bringing us to BB and BA2 ratings, respectively. The upgrades reflect AM's peer-leading leverage profile, strong liquidity position, significant improvement in AR's financial strength, and de-risked internally financed capital budgets and dividends. This has resulted in a much lower cost of capital for AM, which in turn helps drive value for the AM shareholders. With that, operator, we are ready to take questions.
spk05: At this time, we'll 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 questions. Your first question comes from the line of Jeremy Tonnet with JP Morgan. Please proceed with your question.
spk00: Hi, good morning. Good morning, Jeremy. Hi. Just wanted to touch base on completions, if we could. Just wanted to see what expectations or what color you can share for 4Q that you might expect to be serviced. Seems like AR still has 65 to 70 in the guide, and AM is serviced about 59, I think. So that 6 to 11 range is kind of a wide range for the quarter. So just wondering if you could provide any more color there.
spk04: Yeah, I think what we said on last quarter's call still holds. So, you know, we said mid to high teens. During the third quarter, we came out with 18, and we said low to mid-double digits for the fourth quarter on completions for well-serviced, and that still holds for the fourth quarter. So low to mid-double digits for completions in the fourth quarter.
spk00: Got it. That's helpful. Thanks. And just want to refresh on tax, I guess, at this point as far as cash tax, paying expectations, and if as a corporate minimum tax, how that might impact AM's outlook for cash flow?
spk04: Yeah, so based on what we know thus far in terms of what's being proposed out there, no change to our impact right now as we look out to the later part of the decade. I think we said last time, you know, we do not expect to be a cash taxpayer through the end of the 2020s. And then, you know, at that time, depending on what the situation looks like, taxes in the 2030s.
spk00: Got it. I'll leave it there. Thank you.
spk04: Nice.
spk00: Thank you.
spk05: Your next question comes from the line of Brian Reynolds with UBS. Please proceed with your question.
spk07: Hi. Thanks for taking my question. To start off on capital allocation and given Antero's pivot to free cash flow in 2022 and moderating CapEx, I know you guys talked about reducing the credit facility of $500 million, which is in line with your long-term free cash flow forecast. But is there kind of a leverage target where buybacks could become part of the conversation, just given the spread between equity and debt over time? Thanks.
spk04: Yes, I think we've been pretty public on the three-times target out there on leverage, which we expect to hit in that 2024, 2025 period. period, and after we hit that leverage, you know, we will evaluate what a further return of capital could look like at that time.
spk07: Fair enough. As a quick follow-up, just given, you know, where the NatGas and NGL macro stands right now within the Northeast and the rate relief program, you know, falling off in 4Q22, I believe, is there any opportunity to extend that rate relief program in exchange for a you know, more drilling activity from AR, or is that something that you would consider at a later time? Thanks.
spk04: Yeah, no, I think that, you know, it's important to keep in mind that that rate relief program was put in place in late 2019. You know, both entities did not really have access to capital markets, so it helped address some of the challenges on the balance sheet side of things. Just to clarify, it does run through the fourth quarter of 23, not the fourth quarter of 22, and currently there would be no plans to extend that. I think AM would be happy to take the incremental free cash flow in 2024 plus as a result of that, and no plans right now to consider a further extension there.
spk07: Great. Thanks for the color. Appreciate it. Thank you. Thanks.
spk05: Your next question comes from line of Colton Bean with Tudor Pickering Holt and Company. Please proceed with your question.
spk03: Good morning. So just one on my end. I think on the AR call, the team noted that you all were rejecting about 150,000 barrels a day of ethane. With the Falcon pipeline reaching commissioning this month and cracker startup expected next year, should we see a step up in extraction and, you know, a commensurate increase in JB frac volumes?
spk04: So just as a reminder, on the ethane side, AM, as through the JV, does not participate in the deethanization. It's only on the fractionation side on the C3+. So no impact from the ethane recovery. AR will recover more volumes as a result of its commitment to the shellcracker, but that will not have an impact to the processing JV.
spk03: Yeah, that sounds helpful.
spk05: Your next question comes from the line of John McKay with Goldman Sachs. Please proceed with your question.
spk02: Hey, good morning. Thanks for the time. Just one quick one from me. Don't think we talked about it yet. Just on 22 CapEx, you guys have kind of guided a couple times in the past on that, you know, $275 to $300 million level. Just curious, given where we've seen, you know, steel prices go and kind of inflation more generally, if you're looking at that range still holding right now. Thanks.
spk04: Thanks for the question, John. Appreciate it. Good question. I think overall, the 275 to 300 is still the range that we have out there. You certainly have seen some inflation on steel, but I think it's important to note for Antero, given the visibility that AM has into the development program with AR, we do have a luxury of being able to pre-order some of that steel, and so we are not going to see necessarily the impact that others may see out there that don't have the visibility. And then the second point I just mentioned is, you know, labor does make up about 75% of that capital cost, and so you're not seeing an impact commensurate to what you're seeing on the steel side with labor. So overall, I still expect to be within that $275 to $300 million for 2022. Great. Thank you.
spk05: Thank you. Your next question comes from the line of Michael Cusimano with Pickering Energy Partners. Please proceed with your question.
spk06: Hi. Thanks for taking my question. Could you talk about the capital required for AM if AR would elect to grow? I understand AR is expected to remain flat, but is the capital required at AM part of that decision process when I think of the whole enterprise?
spk04: Yeah, I mean, I think certainly as AR looks at its development plans and given it is a 30% owner of AM, I think AR certainly looks at the full picture when it makes its decisions. Overall, I think it's difficult to say whether incremental growth would require incremental capital. It depends on where the growth is relative to where the infrastructure is built out. So tough to give you any sort of direct answer today. But again, I just reiterate, I think, You know, right now AR still is planning for maintenance capital and no change on that front. And so as we look at the AM capital backlog, you know, we're still at that $1.1 billion at the midpoint for the five-year period. That's 2021 through 2025.
spk06: Okay. Could you, if possible, like help me understand where capacity might be available today?
spk04: Yeah, I mean, I think overall there's certainly availability in various areas of AR's operations. You know, not to get into specific areas, but I think it's diversified around AR's acreage position, both on the liquids-rich side and the dry gas side, there's availability. And then, you know, where AM is investing most of the capital going forward is certainly in the more liquids-rich areas, which is where AR is developing today, so a lot of the growth through the drilling partnership is planned into that liquids-rich areas, and that's where AM is investing capital today. But overall, to the extent there's excess capacity, it's diversified across the portfolio outside of where AR is developing today. Got it.
spk06: All right. Yeah, that's helpful. I'll leave it there. Appreciate it.
spk01: Thanks, Michael. Thank you, Michael.
spk05: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Brendan Krueger for closing remarks.
spk04: Yes, thanks, operator. Thank you for joining us for the call today. Please reach out if there's any further questions. We are available. Thank you.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.
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