Antero Resources Corporation

Greetings and welcome to the Antero Resources fourth quarter 2020 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. And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Kennedy, Senior Vice President of Finance. Thank you, sir. You may begin.

Thank you for joining us for Intero's fourth quarter 2020 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'd 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'd like to first 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 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, Glenn Warren, President and CFO, and Dave Canalongo, Vice President of Liquids Marketing and Transportation. I will now turn the call over to Paul.

Thank you, Mike. Let's begin on slide number three by discussing the formation of the drilling partnership that we announced this morning. Under the agreement, QL Capital, an affiliate of Quantum Energy Partners, will fund 20% of drilling and completion capital in 2021, and between 15% and 20% of total drilling and completion capital in 2022 through 2024 in exchange for a proportionate working interest percentage in each well spud. QL will participate in every well that Antero drills over the next four years, starting with wells that were spud as of January 1st this year, so as of about seven weeks ago. As you can see on the lower right side of the slide, we will drill and complete over 300 wells over the next four years together. The result is an incremental 60 gross wells being drilled through 2024 as compared to our initial base development plan. Importantly, on a net basis, AR's net capital spending and production will remain unchanged from our prior maintenance capital programs. Slide number four, illustrates how Antero is in a unique position to benefit from a drilling partnership. First, we have over 2,000 premium undeveloped core drilling locations in the Marcellus and Ohio Utica, and a contiguous acreage footprint that delivers efficient development. I'll discuss our advantaged drilling inventory in more depth a little later in the presentation. Second, since over 1,400 of Antero's 2,000-plus premium undeveloped core locations are liquids-rich, we are well-positioned to take advantage of the strong NGL prices that Dave Canalongo will talk about in just a minute. Based on our recent basin-wide study of the remaining undeveloped locations in Appalachia, We estimate that these 1,400 AR locations represent approximately 38% of the remaining liquids-rich core locations in Appalachia. Third, we have unutilized firm transportation to premium markets that supports the incremental gross gas production from this drilling partnership. This allows Antero and our partner to deliver gas to NYMEX-based indices unlike many Northeast producers that don't have firm transportation to cover all of their production, and so they experience frequent basis blowouts and often have to shut in supply due to low Northeast gas prices. Lastly, incremental production from the drilling partnership will allow AR to capture additional fee rebates from our already established low-pressure gathering incentive program with Antero Midstream. These factors, all of which are unique to AR, drive the substantial increase in our free cash flow profile over the next several years as detailed on slide number five, titled Free Cash Flow Enhancement. As depicted by the red box on the left-hand side of the page, The drilling partnership allows Antero to fill unutilized premium firm transportation and reduce net marketing expenses by approximately $260 million over the next five years. This benefit really starts to kick in in 2022 as we put to sales the incremental wells drilled in our 2021 tranche of the drilling partnership. The incremental production from the drilling partnership also allows us to capture $75 million of additional midstream fee incentives. We are estimating $50 million of drilling carry under the drilling partnership based on strip pricing and interest expense savings of $20 million. And finally, most of the $400 million of free cash flow derived from the drilling partnership is not very sensitive to natural gas and NGL prices. Slide number six, titled Partner Production Fills AR's Unutilized FT, highlights Antero's gross volume forecast under the drilling partnership as compared to base plan volumes. As you can see, With the drilling partnership, we now expect to fill our premium long-haul transportation by 2023. Slide number seven, titled Growth Incentive Program, summarizes the gathering fee rebate thresholds that were previously established with Antero Midstream. The incremental gross volumes generated by the partnership should result in AR achieving additional LP gathering earnouts totaling $76 million, possibly more. Lastly, we estimate that we will receive a delayed carry on the drilling partnership in the form of one-time payments per tranche one year after the tranche is drilled that total approximately $50 million by achieving certain IRR thresholds. Now, let's turn to slide number eight, titled Enhanced Free Cash Flow Profile. In total, the drilling partnership is expected to increase AR's free cash flow by $400 million compared to our base plan. This equates to over $1.5 billion of free cash flow through 2025 based on today's strip prices. This increase in free cash flow results in a substantially lower leverage profile from 3.1 times today to under two times this year. Remember, this free cash flow profile is based on a backward-dated strip price. If 2021 strip prices held flat through 2025, we would expect Antero to enter into generate $3.5 billion in free cash flow. That is at $2.90 gas and $35 per barrel C3 plus NGLs. Now let's discuss the drilling inventory in the Appalachian Basin. Slide number nine, titled Peer Leading Premium Core Inventory, provides a summary of the core inventory remaining in the Appalachian Basin as we see it. We recently completed our annual detailed technical review of peer acreage positions, undrilled acreage, and location potential. This technical review also analyzes BTU, well performance, and EURs. The results led us to bifurcate the cores of the Southwest Marcellus and the Ohio Utica into premium and tier two sub areas. we've identified approximately 5,200 premium undeveloped locations in the Southwest Marcellus, which are located within the red outlines on the map. Of that, we estimate Antero holds 1,865 of those premium locations, or 36% of the total. In the Ohio Utica, we estimate roughly 1,100 premium undeveloped locations, of which Antero holds 210, or 19% of the total. Beyond that, we estimate that there are 1,600 Tier 2 locations remaining, which you can see are located within the blue lines. You can see much of the acreage is covered up with existing Marcellus and Utica production horizontal wells, which are the red lines on the map. Antero's extensive undeveloped premium drilling inventory made a drilling partnership highly accretive to our development plan with only 60 incremental locations committed to the partnership. Ultimately, we believe that the so-called inventory fatigue and the limited number of premium drilling locations will be a critical distinction between the haves and have-nots across Appalachia producers. I'd also like to thank the ANTERO land, GIS, geology, and reservoir engineering teams for all of the time and effort that went into delivering this rigorous technical analysis. Our people have always done an exceptional job providing basin and pier level details that are critical to our strategic decision-making process. This analysis leaves us even more optimistic about ANTERO's competitive advantages as we look toward the future. With that, I'll turn it over to our Vice President of Liquids Marketing and Transportation, Dave Cantalongo, for his comments. Dave?