Antero Resources Corporation

Greetings and welcome to the Antero Resources third quarter 2019 earnings 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 our host, Michael Kennedy, Senior Vice President of Finance. Thank you. You may begin.

Thank you for joining us for Intero's third quarter 2019 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.interoresources.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, Intero management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Intero and are subject to a number of risks and uncertainties, many of which are beyond Intero'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 reconciliation to the most comparable GAAP financial measures. Joining me on the call today are Paul Rady, Chairman and CEO, and Glenn Warren, President and CFO. I will now turn the call over to Paul.

Thank you, Mike, and thank you to everyone for listening to the call today. In my comments, I will provide an update on the considerable progress we've already made on our Well Cost Savings Initiative. I will also discuss meaningful operating cost reductions that we have achieved across our business that we expect to further reduce going forward. Glenn will then highlight our second quarter financial achievements and our expanded hedge position that now covers essentially 90% of our projected natural gas production through both Cal 20 and Cal 21. He will conclude with comments on our balance sheet and liquidity position. I'd like to start by discussing the expansive cost savings efforts underway at Antero. Over the last year, we have been intensely focused on reducing the overall cost structure at Entero to make us more competitive in a lower for longer commodity price environment. This process includes a line-by-line review of every expense item throughout the company. Through this comprehensive review, we have identified the potential to remove $250 million from our overall cost structure in 2020 alone. As detailed on slide number three, titled Cost Reduction Strategy Overview, the majority of these significant reductions will come from lower well costs and reduced LOE. Firm transportation mitigation and G&A reductions account for the remaining savings. These efforts are already delivering results as our third quarter DNC CapEx was $290 million, the lowest quarterly spend since our IPO in 2013. Further, due to the cost savings realized to date, we reduced our full year 2019 DNC CapEx budget to a range of $1.275 billion to $1.3 billion, a nearly $100 million reduction from the midpoint of our original 2019 guidance. Despite this capital reduction, we increased our annual production guidance to the high end of the prior range, a 2% increase at the midpoint. Now let's discuss each of these items individually. Last quarter, we announced a well cost savings initiative that targets 10% to 15% reduction in well costs on a per lateral foot basis, or approximately $1.2 to $1.7 million per well. Turning to slide number four, titled Targeted Marcellus Well Cost Reductions, We begin with our January 2019 well costs at $970 per foot that was assumed in our budget. Today, our all-in well costs are $895 per foot, which equates to savings of nearly $1 million per well. And by all, all-in, I do mean all-in, as our well costs include pad, roads and facilities costs, which are on average $900,000 per well or $75 per foot. The savings already achieved are substantially ahead of the second half 2019 target of $930 per foot that we announced last quarter. We were able to accelerate localized water blending operations during the third quarter, which reduced flowback water costs ahead of schedule. Our team was able to quickly execute a development plan to blend flowback water at the pad sites being completed during the third quarter, which was ahead of our initial timeframe. This acceleration illustrates the direct benefit of our relationship with Antero Midstream as compared to the long lead time that would have been required if we were working with a third-party midstream provider. The closure of the Antero Clearwater facility also accelerated well-cost savings, as we increased blending in order to minimize the high wastewater injection fees and trucking costs associated with it. Also contributing to lower well costs was drier completions. During the quarter, we used fewer barrels of fresh water per foot in approximately 20% of our completion stages. Looking ahead, we are targeting a well cost of $830 to $870 per foot in 2020 and have outlined several savings initiatives to achieve this goal all of which are within our control. By the first quarter of 2020, we anticipate an average well AFE of $880 per foot, with further declines expected as we move through the next year. Turning to slide number five, titled Marcellus Drilling and Completion Efficiencies, We also continue to realize cycle time improvements. During the third quarter, we set new records for average lateral length, average lateral feet drilled per day, averaging 6,000 feet per day, and setting a new one-well world record, drilling 10,067 lateral feet in a day in 24 hours. This dramatic increase in lateral feet drilled per day has reduced the days to drill as well to 11 days from spud to spud. That's a 62% improvement since 2014, despite having increased our average lateral length by 42% to 11,500 feet. Further, the reduction in fresh water use in our completions helps increase our completion stages per day, which increased to a new quarterly record of 5.9 stages per day, and we also set a new record, a one-day record, of 11 stages in a day. Slide number six, titled Antero Water Savings Performance, highlights the reduction in LOE and capital driven by our transition into blending and reuse of produced and flowback water. We expect to increase our blended water for reuse to 40,000 barrels a day on average in the fourth quarter from 10,000 barrels a day on average in the third quarter. This increase in blending operations, combined with reduced trucking miles and lower negotiated trucking rates, is projected to result in over a $4.50 per barrel decrease in water handling expenses compared to the first quarter of this year. As shown in the green line on the chart, we expect this per barrel decrease will translate to approximately $57 million in cumulative 2019 savings relative to our initial budget. Slide number seven, titled Water Savings, Driving LOE Lower, illustrates the overall LOE impact from the Water Savings Initiative. Our third quarter LOE of $36 million was down 17% sequentially. Historically produced water costs represent 80% of our LOE. By transitioning our operations to localized blending and reuse starting in August and shifting away from the Ontario Clearwater facility in September as the facility was idled, we were able to drive down our LOE substantially. We expect even further reductions in LOE going forward as we benefit from a full period of these cost savings with fourth quarter absolute LOE expected to decline another 15% for nearly $5 million. As it relates to our 2020 outlook, we anticipate LOE savings of at least $60 million from these initiatives compared to 2019. Our goal is to blend 100% of our flow back in produced water. This is achievable, we believe. We have actually reused 100% a number of times and set a new record just this last week of blending 60,000 barrels a day. So we believe it's quite possible. Turning to slide number eight, titled Firm Transportation Mitigation and Guidance Update, we continue to work aggressively at mitigating our excess firm transportation costs. We recently released 250 million cubic feet a day of excess FT to third parties during the months of September 2019 through March of 2020. This offload will reduce our net marketing expense by $15 million over the next several months and led to the lowering of our 2019 net marketing expense guidance by two cents per MCFE at the midpoint. We continue to see attractive opportunities to market some of our excess firm transportation capacity, driven by the recent widening of local basis and attractive spreads to the Midwest and Gulf Coast. As illustrated on the chart, 2019 is our peak year for firm transport capacity at 4.6 BCF a day. At Antero's option, this capacity comes down by 100 to 200 million cubic feet per day each year going forward, declining to 4.1 BCF a day in Cal 23. We expect to have essentially all of our premium firm transport organically filled by the fourth quarter of 2021. Switching to G&A expenses, We recently launched a cost savings initiative targeting a 10% or $14 million annualized run rate reduction in mid 2020, by mid 2020. These savings will come through employee headcount reductions that occurred earlier this year, natural employee attrition, and a reduction across the board in business operating expenses. In summary, we will remain steadfast in reducing our overall cost structure with a goal of being a peer leader in returns regardless of the commodity cycle. Our relentless effort to reduce costs has already delivered benefits as highlighted by 2019 capital guidance being reduced 4% to under $1.3 billion. Despite reducing capital, we are increasing our production target to the high end of our initial guidance range of 3.15 to 3.25 BCF equivalent per day, highlighting the improving capital efficiency of our assets. Looking ahead, with these lower costs, we now expect D&C CapEx to be under $1.2 billion in 2020, while delivering production growth in the range of 8 to 10%. This preliminary target is supported by our peer leading hedge positions with 90% of our natural gas protected through Cal 21 at prices well above the strip. Based on the current commodity strip, we expect our 2020 modest growth program to outspend by 100 to $150 million. It's important to note that our capital program will remain flexible. depending on NGL prices, and can be reduced accordingly in order to prioritize the strength of our balance sheet. With that, I will turn it over to Glenn for his comments.