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spk04: Hello, and welcome to the Antero Midstream fourth quarter 2022 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Justin Agnew. Please go ahead, Justin.
spk02: Good morning, and thank you for joining us for Antero Midstream's fourth quarter 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.anteramidstream.com, where we've provided a separate earnings call presentation that will be reviewed during today's call. 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 gap financial measures. Joining me on the call today are Paul Rady, Chairman and CEO of Antero Resources and Antero Midstream, Brendan Krueger, CFO of Antero Midstream, and Michael Kennedy, CFO of Antero Resources and Director of Antero Midstream. With that, I'll turn the call over to Paul.
spk05: Thanks, Justin. 2022 was an exceptional year for Antero Midstream. Despite the inflationary environment, we delivered capital expenditures below guidance and EBITDA at the high end of guidance. We completed two bolt-on free cash flow accretive strategic acquisitions that extended our dedicated underlying inventory to over two decades. With these achievements, Antero Midstream is in the strongest financial position since its IPO with a very attractive five-year outlook. I'll begin my formal remarks on slide number three, titled Delivering Consistent Returns on Invested Capital. In our 2022 capital expenditures, we were at $265 million, below our guidance range of $275 to $300 million. and approximately flat year over year. This is a tremendous achievement by our midstream planning and procurement teams to deliver these results in the inflationary environment that we're in today. I'd also like to highlight the midstream operations team that maintained asset uptime availability of over 99% in 2022. This exemplary performance contributed to our strong financial results for the year and allowed us to return to deliver a return on invested capital of 17% in 2022. The consistency of our operations and returns on our invested capital support our dividend and balance sheet strength. Now let's move to slide number four titled capital declining in 2023. The chart on the left hand side of the page illustrates the decline in the high pressure trunkline capital depicted in orange that drives much of our capital reduction in 2023. Of our 2023 capital budget, approximately 90% will be invested in the Marcellus shale in the liquids rich midstream corridor. We expect this declining capital trend to continue beyond 2023 while still delivering EBITDA growth. Lastly, I want to finish my comments on the strength of AR and the stability of its development program on slide five titled Premier Customer in Appalachia. As shown on the left-hand side of the page, AR has paid down over $2.6 billion of debt over the past three years. This has resulted in leverage at year-end 2022 of just 0.4 times. This conservative debt reduction strategy as opposed to initiating a dividend policy or adding absolute debt through acquisitions, positions AR to maintain low leverage throughout commodity cycles. Importantly, while other E&Ps have seen their leverage and debt reduction targets extend due to the decline in commodity prices, AR has already achieved its initial debt reduction target. As a result, AR does not expect a change in its development plan that drives growth at AM. This is driven by a number of strategic and competitive advantages that AR has. First, AR sells 100% of its gas production out of basin and approximately 75% of its gas to the LNG fairway. This results in premium pricing relative to NYMEX and more importantly for AM, the ability to avoid volatile local basis in Appalachia that could result in shut-in volumes at certain times. Second, AR is one of the largest NGL producers in North America, with exposure to the liquid's pricing uplift and tailwinds from China reopening. Based on consensus estimates for 2023, AR's liquids revenue as a percent of total revenue is approximately 45%, versus the peer average of just 22%. Lastly, AR only needs two to three rigs and one to two completion crews to deliver gross volume growth on AM's assets. In inflationary environments like today, it's a competitive advantage to operate in Appalachia, where development costs are roughly half of what you see in other gas basins. Steeper decline rates, geologic complexity, and increased competition for rigs and completion crews all contribute to the higher development costs outside of Appalachia. This will likely lead to reductions activity in these other basins and impact midstream providers that are active in these areas. In summary, AM is well positioned to deliver on its five-year targets, supporting a premier customer with low debt in a competitively advantaged basin. With that, I will turn the call over to Brendan.
spk03: Thanks, Paul. I'll start my comments by briefly highlighting the fourth quarter results and then move on to our 2023 guidance and updated five-year outlook through 2027. Starting on slide number six, titled Year Over Year Midstream Throughput Growth, AM's low pressure gathering volumes were 3.1 BCF a day, over 3% of all natural gas volumes gathered in the U.S. Compression volumes during the fourth quarter were 2.9 BCF a day, a 4% increase year-over-year. The year-over-year volume growth was driven by the gross production growth from the QL Capital Partners drilling partnership and approximately two months of contribution from the acquired Crestwood assets. Moving on to the water side of the business, fresh water delivery volumes in the fourth quarter averaged 111,000 barrels per day with 22 wells serviced. For the year, AM serviced 76 well completions in line with our guidance. Slide 7, titled EBITDA Growth and Declining Capital, illustrates our 2023 outlook, which is a truly pivotal year for Antero Midstream. Before we get into the outlook, I would like to note that our 2023 guidance and long-term outlook does not include any impact from the damages awarded to Antero Midstream relating to the Clearwater Treatment Facility. As noted in our 10-K, in January of this year, the District Court found that AM prevailed in its claims for breach of contract and fraud. Including the pre-judgment interest, these damages totaled approximately $309 million. Given that this process is still ongoing and the damages award is subject to appeal, we will be unable to answer any questions regarding that specific matter. Now onto the guidance. For 2023, we are budgeting 7% annual EBITDA growth and a 23% decline in capital at the midpoint of guidance. The EBITDA growth is both a function of organic growth from the QL Capital Partners drilling partnership and a full-year contribution of our recent acquisitions. As Paul discussed, this capital is highly visible, non-speculative capital investment supporting production operated by Antero Resources. These investments tend to have superior project economics and lower risk compared to projects in higher growth, higher competition, and higher risk shale plays. In addition, the ability to generate EBITDA growth with declining capital is truly unique in the midstream space and illustrates the significant operational leverage our assets have. This plan allows us to generate over $500 million of free cash flow before dividends, over $100 million of free cash flow after dividends, and reduce our leverage to three and a half times or less by year end 2023. Slide number eight titled expanding free cash flow and lower debt illustrates just how far we have come as a company over 10 years. After outspending cash flow during the high growth era of the shale revolution, we transitioned to a more sustainable business model that has been approximately free cash flow break even after dividends for the last two years. This transition to internally finance both our capital investments and return of capital to shareholders significantly de-risked our business model allowed us to maintain a flat leveraged position while successfully integrating bolt-on organic acquisitions looking ahead we expect our free cash flow after dividends to more than double in 2024 driven by organic growth expiration of the fee rebate program and a further decline in capital this allows us to continue to pay down absolute debt and achieve our leverage target of three times or less by year-end 2024. Importantly, over the five-year period from 2023 through 2027, we are now targeting 3.15 to 3.45 billion of free cash flow before dividends and 1 to 1.3 billion of free cash flow after dividends, assuming a flat 90-cent dividend on an annual basis. This substantial amount of expected free cash flow after dividends will be used for continued debt reduction, and once our leverage target of three times is achieved, an increased return of capital to shareholders. I will finish my comments in slide number nine. This slide illustrates how truly unique AM is, not only in the midstream industry, but in the broader S&P 400 universe. Of those 400 companies in the S&P 400, only approximately 250 generate free cash flow after dividends, and only 200 have less than four times leverage and generate free cash flow after dividends. Of that subset, 11 are forecasted to generate EBITDA growth greater than 5%, with capital declining more than 10% over the next two years. The only company in the S&P 400 with all of those attributes that also pays an attractive dividend greater than 6% is Antero Midstream, which again highlights how truly unique our business model is. In summary, I would like to echo Paul's remarks that 2022 was an exceptional year both operationally and financially. Our de-risked organic growth model along with highly strategic bolt-on acquisitions, position us to deliver this expanding free cash flow story, making AM one of the most unique investments in the midstream industry. With that, operator, we are ready to take questions.
spk04: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question is coming from Jeremy Tonnet from J.P. Morgan. Your line is now live.
spk01: Hey, guys. This is Rothman Radion for Jeremy. Just to start off with AR kind of transitioning to a maintenance plus return of capital model. I'm curious around your guys' thoughts around metrics we should watch for when thinking about Antara midstream. reaching a return of capital positive inflection point?
spk03: Yeah, so I think, you know, I think we tried to cover that in the prepared remarks, but, you know, overall, we were at a free cash flow break even the last two years with the build out of the infrastructure. And as we get into 2023, do expect to generate nice free cash flow before dividends of over $500 million and after dividends of over $100 million. As we move forward through the years, do continue to expect capital to decline and further EBITDA growth. So should you see that free cash flow after dividends expanding nicely, as we noted, you know, double, over double what we'd expect in 2023 on free cash flow after dividends. So nice trajectory for AM as the capital continues to come down and we have nice growth with the drilling partnership plus the fee rebate expiring in 2024.
spk01: Got it. Makes sense. And then wanted to pivot a bit with Shell's Cracker in the Northeast. Wanted to get your guys' thoughts on competitive landscape for NGLs and processing within the region.
spk03: Yeah, I think overall, you know, we've got a dedicated processing facility with largest in North America with Sherwood and Smithburg complexes. So, We've got plenty of capacity for AR to develop, and that'll flow through to AM, of course, with the joint venture with MPLX. So very well positioned as it relates to liquids, both on the processing side and then also on the takeaway side. You noted the shell cracker. That really does not have an effect from an AM perspective. The AM is not a participant in that facility. and there's no incremental volumes in terms of fee related from AM's perspective as a result of that facility. So no impact there.
spk01: Got it. Thanks for the color. I'll leave it there. Thanks.
spk05: Jeremy.
spk04: Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from John McKay from Goldman Sachs. Your line is now live.
spk00: Hey, thanks for the time. I wanted to maybe start on just the – This small bolt on from NLINK looks like a lot of capacity and a decent amount of kind of current throughput versus what you paid for it. So maybe you could just kind of frame up for us maybe what the eventual kind of capex savings versus your initial plan could be and if there's any upside potential on these assets you acquired.
spk03: Yeah, no, it was a smaller acquisition, $10 million overall, but certainly very strategic. We had the Crestwood deal earlier in the year. This is another asset that really fit the mold. It was compression activity, servicing ARs, production over in the Utica. AR does have a couple of pads that it'll continue to feather in over the Utica over time, so From an investment standpoint, most midstream assets typically take six to seven years from a payout. This will be two to three years from a payout perspective just with the development we have planned. So great asset over there. And on top of that, you do have the unutilized compression capacity that certainly could be deployed to other areas as we've shown thus far in 2023 with the first reuse of compressor stations. So we're excited about that. Despite it being small, it's a It was a great transaction for AM and just built on top of the Crestwood transaction as well.
spk00: That makes sense. Maybe on that last piece, just, you know, you've talked through a couple different opportunities you've had to save CapEx so far on the compression side. You know, you talked about a little bit of that on the Crestwood deal. You have this one. You found some of your own kind of opportunities internally. Whenever you can just kind of frame all of that up for us and maybe talk about what that means for, you know, either 23 or maybe 24 capex versus what your original plan would have been, let's say, you know, two years ago. Maybe just altogether kind of putting together the magnitude of that in terms of overall capital savings.
spk03: Yeah, and I would say that, you know, the comments I'll give, some of this, you know, we continue to evaluate, and so you do – We'd like to think there will be additional opportunities, but in terms of what we've identified already, we'll have about $50 million of capital savings over the five years as a result of reuse. Near term, call it $23 and $24 is about $20 million of that $50. But again, we'll continue to evaluate and look for opportunities. You're able to buy these assets that attract the values to us, and the unutilized piece kind of comes with that. So we're always looking to just redeploy and invest capital in the most efficient manner we can.
spk00: Understood. Thanks for the time.
spk03: Thanks, John. Thanks, Joe.
spk04: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.
spk03: Joe, thank you for the time today. Please reach out if there's any further questions. Thank you.
spk04: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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