Antero Midstream Corporation

Greetings. Welcome to the Ontario Midstream second quarter 2024 earnings call. At this time all participants are in listen only mode. The question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time we'll now turn the conference over to Justin Agnew, Vice President of Finance. Justin, you may now begin your presentation.

Thanks, Operator, and good morning. Thank you for joining us for Antero Midstream's second 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.anteromidstream.com, where we have 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 GAAP financial measures. Joining me on the call today are Paul Rady, Chairman, CEO, and President 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.

Thanks, Justin. Good morning, everyone. In my comments, I will discuss our bolt-on acquisition and peer-leading break-evens at AR. I'm referring to Antero Resources. Brendan will then walk through our quarterly results and recent credit improvements. Let's start on slide number three, titled Marcellus bolt-on acquisition highlights. During the second quarter, we closed on a $70 million acquisition from Summit Midstream. The acquisition included two compressor stations with 100 million cubic feet a day of capacity and approximately 50 miles of high pressure pipelines in the Marcellus shale, highlighted in purple on the map. These highly strategic assets are already connected to Antero Midstream's infrastructure, and support the future development by Antero Resources, which is now an investment-grade counterparty. In line with our previous bolt-on acquisitions, all of the throughput volume on these assets is from Antero Resources production. Most importantly, this transaction was immediately accretive to free cash flow and keeps us on track to achieve our leverage target of 3.0 times in the back half of this year. Now let's move on to slide number four, titled AR Has the Lowest Free Cash Flow Breakevens. The left-hand side of the page illustrates AR's free cash flow breakeven gas price of $2.20 per MCF. This peer-leading breakeven is due to several factors, including strong well performance, low maintenance capital requirements, and high exposure to liquids prices. In particular, AR's exposure to international prices and widening ARBs have resulted in strong C3-plus NGL pricing, which provided a $1.10 per mcfe uplift to the equivalent price realizations in the first half of 2024. These low break-even prices led to a peer-leading unhedged free cash flow profile, which is shown on the right-hand side of the page. Despite NYMEX gas prices of only $2.07 in the first half of 2024, AR's unhedged outspend has only been $59 million, well below the rest of the natural gas peer group. These results, combined with AR's balance sheet strength, were the primary drivers of the upgrade to investment grade for AR. In summary, we continue to expand our asset base at AM to support the strongest producer with the lowest gas, natural gas break-even prices in the U.S. And with that, I will turn the call over to Brendan.

Thanks, Paul. I will begin my comments on slide number five, titled Second Quarter 2024 Highlights. Adopted EBITDA for the second quarter was $255 million, which was a 5% increase year over year. Free cash flow after dividends during the quarter was $43 million, a 41% increase compared to the second quarter of last year. Both of these metrics are quite notable given AR is only running two rigs and one completion crew today. Importantly, our leverage remained flat quarter over quarter at 3.1 times despite the $70 million cash-funded acquisition during the quarter. This highlights the attractive purchase price and immediate accretion to AM's free cash flow from the bolt-on acquisitions. Next, let's move on to slide six, titled Improved Balance Sheet Flexibility. This slide highlights the successful refinancings in 2024 that provides us with the financial flexibility to execute on our attractive organic capital program and acquisition opportunities. In January, we issued 600 million of senior notes due in 2032, which was upsized due to oversubscribed demand. Proceeds from the offering were used to call our highest coupon notes in May. This was an NPV-positive refinancing, which lowers our go-forward interest expense and expands our free cash flow. In July, we extended the maturity of our revolving credit facility to 2029 and maintained our $1.25 billion of commitments, providing additional near-term balance sheet flexibility. As of June 30th, we had $556 million borrowed under our credit facility, resulting in almost $700 million of liquidity. I'll finish my comments on slide seven, citing consistent free cash flow and credit momentum. This slide illustrates Antero Midstream's leverage in credit ratings since we transitioned to a business model that generates consistent free cash flow after dividends in 2020. In May of this year, we received an upgrade from S&P to BB plus on our corporate credit rating. This is the fourth ratings increase from S&P since the end of 2020 and validates the significant progress we have made towards our debt and leverage targets. Over the same timeframe, annual EBITDA has increased by over 25%. We have generated over 280 million of cumulative free cash flow after dividends, and we have reduced our leverage to 3.1 times. All of this was accomplished while acquiring almost 300 million of bolt-on assets without any equity issuance. This is a testament to our patience and strict return thresholds on our acquisition opportunities, our ability to quickly integrate assets and drive synergies, and our execution on our base organic growth business model. In summary, we continue to execute on our business plan of delivering organic growth supplemented by attractive bolt-on asset acquisitions. We have taken a proactive approach towards debt reduction and extending debt maturities, which provides us with tremendous balance sheet strength and flexibility. As we approach our three times leverage target, we are well positioned to return additional capital to shareholders in the near term. With that, operator, we are ready to take questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants that may be 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. Thank you. Thank you. Our first question is from the line of Ned Barimov with Wells Fargo. Please proceed with your questions.

Hi, and thanks for taking the questions. Starting with the deferred pad at AR, was this potential delay in when AM begins to gather and compress volumes from these five wells reflected in your most recent guidance update from May?

Yes, that's currently in the guidance update overall. To the extent that gets deferred further, that would also fall within our guidance range that we've provided. So no change to what we've provided out there as a result of that deferral to the end of the year.

Understood. And then my second question, can you maybe shed some light on your water results in the second quarter? It seems overall volumes declined to about 81,000 barrels a day from 113,000 barrels a day in the first quarter. But at the same time, the number of serviced wells increased from 17 wells in the first quarter to 19. So I guess taken together, this implies much less water per well in the second quarter. So I guess I presume this is related to the timing of well servicing, but any color you can provide would be helpful.

Yeah, no, it's a good question, Ned. It really is related to just how we define well service. So in particular, there was a seven-well pad that the wells began to be serviced at the end of June, but really most of that volume will come in the third quarter. So the 19 wells, if you take out the seven-well pad, it's really like 12 wells And the decline in volumes from the first quarter was really just a result of going AR going from two completion crews to one completion crew. So it's quite impressive actually today. We were looking back historically when you ran one completion crew, it was about 50,000 barrels a day. So today with one completion crew essentially delivering 80,000 barrels a day is quite impressive and just goes to the efficiency gains overall. But, you know, at AM, going back to your question on the 19 wells, it's really just driven by the timing, and that's going to be third quarter that that 7-well pad gets pushed to.

Got it. Thanks for the time.

Thank you, Sam.

The next question is from the line of Naomi Marsa with UBI. Please proceed with your questions.

Hey, good morning. Maybe to start on some capital allocation questions. Seems like you'll be achieving a three-times leverage target sooner rather than later. AM has maintained its DPU for quite some time now. What's the thought process on buyback versus DPU rates once that leverage target is reached? And is there some M&A that could potentially compete with buybacks?

Yeah, so again, I think we've talked about once we hit our three-times target, we'll start that buyback. Buybacks still look very attractive to us today. So, you know, second half of the year, we'd expect to start the buyback program. And, you know, I think we've got the 500 million authorization out there. And so, you know, based on where we want to end up from a leverage standpoint, whether that's, you know, flat at three times or, you know, 2.9, 2.8, I think we have to be cognizant of just, you know, where our equity is versus internal expectations. And again, today, very attractive. So we would expect to use that that 500 million over a fairly short timeframe given where leverage would be trending over time here.

Thanks, that's helpful. Maybe as a follow-up on drivers of base business, AM increased their 24 EBITDA guidance for the acquisition of assets from some industry. Can you help us understand the drivers of base business growth in 24 and how that sets up for 25? Yeah, so for...

For 24, again, we increased it by about $15 million. That acquisition we talked about, if you do the math on the $15 million increase, a little over $20 million on an annualized basis, so about a three-and-a-half times multiple on that acquisition. So it was a great, great acquisition from an economic standpoint, which, again, allowed us to keep our leverage flat despite acquiring that asset with cash. So still able to hit that three times target in the second half, which was our original plan. As we look out, I think it'll just depend on where the development plan goes at AR. AR is still talking about maintenance capital. So I think at AM, you'll obviously have the CPI on fees. And then on the volumes, should have flat volumes year over year. which gets you in that kind of low single digit from an EBITDA growth standpoint.

Thanks. That's helpful. I'll leave it there. Have a great rest of your day. Thanks.

Our next questions are from the line of Jeremy Toney with J.P. Morgan. Let's just see with your questions.

Hey, this is Noah Katz on for Jeremy. First, I wanted to touch on the 19 wells you connected to the freshwater delivery system in the quarter, which brings you to 36 for the year. Should we expect for similar wells to be brought in service in 3Q and then for a step down in 4Q? Thanks.

Yeah, so if you look at guidance overall, you know, we've pushed, or not pushed, but the 19 wells we talked about, really seven of those 19, you're getting most of that volume in the third quarter. But in terms of what, you know, what we've looked at, to report from a well-serviced, you should have a similar level in third quarter, slight step down in third quarter from the second quarter in terms of well-serviced. And then fourth quarter should be a similar level to what you see in first quarter, assuming you run with the two completion proofs. To the extent that pad we talked about gets deferred, then you'd have less activity with those wells getting pushed out in the fourth quarter.

Got it. That's helpful. And then as a follow-up, can you size the impact that AR having one less completion crew for the deliveries will have on volumes? And I guess what are your expectations for the number of completion crews that they'll have for the remainder of the year? Thanks.

Yeah, so looking at third quarter, one completion crew again. We talked about the second quarter had one completion crew at about 80,000 barrels a day, so it's a fair assumption that'll be a flat number. running one completion crew in the third quarter. And then in the fourth quarter, to the extent, you know, you run two completion crews, I'd expect a similar level of volume, you know, to running those same amount of completion crews in the first quarter. So, you know, pretty simple, I think, math on that just based on the completion crew count.

Thank you.

Our next questions are from the line of John McKay with Goldman Sachs. Please just use your question.

Hey, Al. Thanks for the time. Maybe as just a quick follow-up there, if we're looking at the guidance range for the back half of the year, I guess how sensitive do you think you are to being able to start the buyback sometime in second half to the timing of that deferral at AR? I know we're talking relatively small dollars here, but just trying to figure out

Timing and if that would be a driver for let's say more of a fourth quarter start then let's say later this this quarter No, I mean you're talking a three billion three billion of debt So you're not moving the needle much by a change in EBITDA on the overall three times leverage impact so that's not really factoring into the timing there Fair enough more broadly you guys have been talking up maybe some more third-party opportunities and

Maybe just an update on how those conversations are going, what we could be looking for, timeframe, anything like that. Thanks.

Yeah, John, I think those conversations continue. We're always looking at third-party opportunities on the gathering side. I think we talked primarily about Ohio in the sense that we have excess capacity there. There is more activity going on in Ohio, so we've had conversations there. But whether that comes to fruition, it's always tough to get third-party deals done So whether that comes to fruition, I think it's still in the works. So nothing to add at this point.

Got it. Thanks for your time.

Thanks, John.

Our next question is from the line of Zach Van Everen with TPH. Please proceed with your question.

Perfect. Thanks for taking my question, guys. I just got one for you today. Looks like rates across both gas and water ticked up quarter over quarter. I know the CPI escalator is in Q1. maybe just any color on what might be driving those rates a little bit higher.

Yeah, I think on the gathering, it was, it was really the high pressure gathering rate. Uh, and that was just a function of how we're accounting for the, uh, the summit bolt on acquisitions there. So a small change there. Um, but again, just do the accounting treatment. Um, still, when you, when you think about EBITDA impact for that, again, uh, it's in that, you know, $20 million mark for annual EBITDA, um, It's just a matter of how it was accounted for in terms of fee versus volume.

Gotcha. And then maybe on water, it looks like that one went up quarter over quarter as well.

Yeah, I want to get back to you on that. There should be no real impact there on water. So we'll come back to you on that one.

All right. Perfect. Appreciate it. Thanks, guys.

Thanks.

Thank you. That will conclude our question and answer session, and I'll now turn the call back to Justin Agnew for closing remarks.

Thank you, everybody, for joining today. Please feel free to reach out with any questions.

This will conclude today's conference. We disconnect your lines at this time. Thank you for your participation, and have a wonderful day.