Antero Resources Corporation

Greetings. Welcome to Antero Resources third quarter 2024 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, please press star zero on your telephone keypad. As a reminder, this call is being recorded. It is now my pleasure to introduce Brendan Krueger, CFO of Antero Midstream and Vice President of Thank you. You may begin.

Thank you. Good morning, everyone. Thank you for joining us for Antero's third quarter 2024 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.anteroresources.com, where we have provided a separate earnings call presentation that will be reviewed during today's call. Today's call may 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, Michael Kennedy, CFO, Justin Fowler, Senior Vice President of Natural Gas Marketing, and Dave Canalongo, Senior Vice President of Liquids Marketing and Transportation. I will now turn the call over to Paul.

Thank you, Brendan, and good morning, everyone. I'll start my comments on slide number three, titled Drilling and Completion Efficiencies. Our 2024 operating performance continues to set new records. I'd like to highlight the significant gains that we've achieved over the past two years. Faster drilling times have reduced the required time it takes for us to drill a well. Now it's below 11 days from 14 days in 2022. This is a 22% reduction from 2022. And on the completion side, we again set a new quarterly record averaging 12.1 stages per day. And in this last August, we set a new monthly record at 13.3 completion stages per day. The quarterly average represents a 51% increase compared to the completion stages per day average in 2022. These improvements in drilling and completion rates result in reduced cycle times. Shown in the chart on the bottom of the slide, our cycle times have declined to 126 days, which is 23% below the 2022 level of 163 days. Overall, these improvements have reduced our total well cost by 8% since last year to their lowest level since 2021. These step changes in operating efficiencies directly result in reduced capital expenditure requirements. This is shown on slide number four, titled Reduced Capital Budget. For this year, 2024, we reduced our drilling and completion capital budget to $650 million at the midpoint, a 28% decrease from 2023 while holding production flat. A significant driver behind this lower capital is that today we are able to sustain maintenance production with just two rigs and approximately one completion crew. Looking ahead to 2025, we will continue to focus on improving our efficiency. We recently switched to an E-Fleet for our completion activity. Early results have been encouraging, and we estimate potential future well cost savings could be upwards of $150,000 to as much as $200,000 per well, driven by increased pumping time and lower fuel costs. Now, to touch on the current liquids and NGL fundamentals, I'm going to turn it over to our Senior Vice President of Liquids Marketing and Transportation, Dave Canalongo, for his comments. Dave?

Thanks, Paul. Realizing strong export premiums for our LPG sales highlighted our third quarter liquids results. The expected dynamic resulting from U.S. Gulf Coast export dock constraints discussed last earnings call ultimately played out to our benefit as we continued to execute on our strategy to target international prices and market the vast majority of our export barrels in the spot market. Because export cargoes are being marketed 30 to 60 days before actual ship loadings, we have great visibility into our C3 Plus realizations for the remainder of 2024 and expect these premiums to remain in place for the next several quarters. Slide number five shows historical propane exports and highlights the consistent increases we have observed over the past four years. Export volumes have averaged over 1.7 million barrels a day year to date, setting up for another record export year. Since 2021, exports have increased 46%, driven by resilient international demand, particularly from Asia. As seen on slide number six titled Antero holds Northeast LPG export advantage. Export capacity additions in the U.S. are not expected until the second half of 2025. Over this timeframe, we expect to continue benefiting from robust export premiums that are likely to persist until new export capacity comes online. In addition to the export recovery, overall total U.S. propane demand exceeded 3 million barrels a day recently, a high going back to February. as seasonal crop drying demand picked up in October. As colder weather begins to arrive, the market will look to increases in heating demand to continue this strong October demand. Slide number seven quantifies the propane export premiums that Antero realized in the third quarter, with a 22 cent per gallon average premium to Montbellevue. This is up from premiums of eight and nine cents per gallon to start this year, and $0.05 to $0.09 per gallon in 2022 and 2023, respectively. Current markets show these premiums should improve in the fourth quarter to nearly $0.27 per gallon on average. Butane premiums are similarly showing their value with recent export differentials averaging in the mid to high teens above Montmelville prices. To conclude, with unconstrained access at the Marcus Hook Terminal in Pennsylvania through our firm commitments, Antero is well-positioned to continue realizing these high export premiums for the balance of 2024 and into 2025. With that, I'll now turn it over to our Senior Vice President of Natural Gas Marketing, Justin Fowler, to discuss the natural gas market.

Thanks, Dave. First, let's look at the year-to-date power burn trends that are shown on slide number eight. 2024 has once again been a record-setting year for natural gas power burn demand. Year to date, natural gas power burn is averaging 1.4 BCF higher than last year, while over the last 10 years, natural gas power burn demand has increased 15 BCF per day. Looking ahead, we believe this trend of higher annual natural gas power burn will continue to be driven by demand growth from AI data centers, crypto mining, and electric vehicles. This power demand growth provides an incremental uplift on top of the highly anticipated second wave of LNG demand that is expected to add in combination 20 BCF of incremental demand by the end of the decade. Antero is uniquely positioned to benefit from these expected step changes in demand. Our firm transportation portfolio delivers 75% of our natural gas to the LNG corridor, and provides us with direct exposure to growing LNG demand. While our asset position in West Virginia is within the region where a significant number of new data centers are expected to be built. Further, our firm transportation portfolio provides the necessary infrastructure to connect our natural gas to data centers and utilities in need of reliable supply. Turning to slide number nine, let's review the current natural gas storage level. The record natural gas power burn I just highlighted, combined with continued producer discipline, has resulted in the surplus and inventory shrinking by nearly 500 BCF since the highs in March of this year. Today, we sit at just 167 BCF above the five-year average. a level that supports our constructive outlook for 2025. We continue to believe low rig counts combined with an upward step change in demand will support a continued tightening of inventories and lead to higher prices in 2025 and beyond. With that, I will turn it over to Mike Kennedy, Antero CFO.

Thanks, Justin. I'd like to start with slide number 10 titled Lowest Free Cash Flow Breakeven. This slide compares 2024 unhedged free cash flow breakeven levels across our peer group. Our approximate $2.20 breakeven level benefits from two primary drivers. First, our low maintenance capital requirements. This is driven by our operational improvements as highlighted by the reduction in our drilling and completion capital guidance for this year. The second driver is our high exposure to liquids. Despite the weakness in natural gas prices, which average just $2.10 through the first nine months of 2024, strong C3 plus NGL prices have provided a $1.10 uplift to our equivalent price realizations during that period. The chart on the right-hand side of the slide illustrates unhedged free cash flow through the first nine months of the year. While we have just a small outspend year to date, our peers with higher break-even levels have unsustainable outspends. In our opinion, this is the best way to determine the quality of a company's asset base and operations. Turning to slide number 11, titled Peer Leading Capital Efficiency, this chart depicts the tangible benefits from our operational gains that Paul detailed earlier. Antero has the lowest maintenance capital per MCFE of its peer group at just 52 cents per MCFE. This is 41% below the peer average of 88 cents per MCFE. Further, most of our peers have declining production, suggesting true maintenance capital requirements that are higher than illustrated on that slide. Intero's capital program provides us with important flexibility in our future development plans. Given current natural gas pricing, we elected to defer the completion of a pad from the third quarter until the end of the year while still maintaining our previously raised production guidance. In addition, we now plan to defer completion of a second pad that has been drilled and was originally scheduled to be completed in the first quarter of 2025. These two pads are drier gas pads with less liquids and therefore require higher natural gas prices to incentivize us to complete the wells. Let's turn to slide number 12, titled Free Cash Flow Uplift, that summarizes the benefits of what we've highlighted on the call today. Beginning at the top left graph on the slide are total capital budgets. which is drilling and completion plus land capital is expected to be down over $300 million in 2024 compared to last year while maintaining production. Moving down to the bottom left-hand graph on the slide, 2024 C3 plus NGL prices are expected to average more than $4 per barrel higher than in 2023. We produce approximately 40 million barrels per year, so every $1 change in C3 plus NGL prices results in a $40 million change in cash flow. Thus, higher C3 plus NGL prices is driven in approximately $175 million increase in cash flow. In combination, the result is nearly $500 million of incremental cash flow being generated in 2024 compared to 2023 while maintaining our asset base. These attributes allow us to remain approximately free cash flow neutral in 2024 despite being unhedged in a $2.25 natural gas price environment while providing significant free cash flow upside in 2025 based on today's strip. With that, I will now turn the call over to the operator for questions.

Thank you. 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question is from Bertons with Truist Securities. Please proceed.

Hey, good morning, team. I just wanted to take a stab at your guidance right now. It looks like you are not building that many ducts this year. Obviously, you're delaying those duct pads, but what are your views on maybe mirroring some of your peers where they're building a backlog of either ducts or turning lines and maybe providing a spring in the future for higher prices?

Well, that's actually what's happened, Bert. In 2024, we built Right now, we have two pads, two duct pads with 12 wells on them that we are not completing this year. One of them was scheduled to be completed in the third quarter, the other one in the first. Right now, those are to be determined when we complete them based on natural gas prices.

And that would be the extent you don't want to really go past two pads and build kind of a, you know, some sort of larger program?

Well, we just run a two-rig program, so whatever that generates versus a one-completion crew program is how the ducts build, and that's how we build two pads this year. So if we continue just to run one completion crew next year, we'll continue to build further pads.

That makes perfect sense. And then could you maybe elaborate on your buyback strategy? Obviously, this year has been pretty rough on the gas side. I think your liquids have done great holding you up. But we and the street as well forecast a pretty strong full year 25. Are you guys, you know, champing at the bit, waiting for that to come? Or is there any logic to maybe, you know, buying before the free cash flow shows up? Or is that maybe fiscally irresponsible?

No, we've, you know, we just made investment grade this year. And part of that plan was communicated that the first $600 million of free cash flow will be to reduce debt. That's essentially to take our credit facility down to zero, and then we have 2026 notes of approximately $97 million, I think, that are still outstanding. So in combination, that's $600 million of debt, and that's the first call on the free cash flow. Then after that, the majority of free cash flow will be for buybacks.

That's great. Thank you. Sure.

Our next question is from Arun Jamaram with JP Morgan. Please proceed.

Yeah, good morning. Arun Jamaram with JPM. I had a question just on the Northeast LPG kind of export advantage slide. Dave, in terms of maintaining or sustaining this nice premium that you've benefited from for the last couple of quarters, What's your expectation in terms of the timing of the Gulf Coast export capacity increases, and how do you think about how the premium will play out in 2025?

Yeah, thanks, Arun. So in that slide, the first step up you see we've got illustrated there is July 1st. I think it's currently guidance of around mid-25 or second half of 25 from that particular midstream party. And then the next big step is shown there is January 1st to 26th. So we certainly think until you see some expansion capacity, we're running at max here in the U.S. with... NGL production up year over year. So that pressure is there, and we think it'll continue until there's some kind of relief of that constraint. Another thing I would just toss some people on, when you look at that LPG export capacity growth coming in 25 and 26, a lot of that capacity is able to do multiple products. So at first they may do LPG, but we think over time you'll see a lot of that migrate more like ethane. So the additional capacity is going to be needed to be built in the U.S. to kind of keep this from continuing to happen. But certainly for us being in the Northeast, that's one of the benefits we have when these tight situations occur. We're not constrained. As we've talked about on prior calls, we can get everything we want to the market, to the export market. So we'll continue to do that and see what we can do with our strategy. But so far, they've done a good job when these have appeared of always capturing it.

Okay. Mike, maybe one for you, a couple of questions from the buy side in terms of, you know, building some ducts just given, you know, right now there's not a large, you know, kind of call on U.S. gas volumes today just given the storage, modest storage overhang. But what type of conditions are you guys looking for? Is it price in terms of those 12 ducts that you're building in this current software commodity price environment? Is there a price signal? Help us understand what would cause you to complete those wells.

Yeah, Arun, obviously we really focus on the very high BTU liquids in our typical program, that's 1,275 BTU plus. And with that and $40 C3 plus NGLs, that's really kind of our break-even level at $2.20. With these pads, they're more along the 1,200 BTU spectrum. So when you do that on $40 C3 plus NGLs, you need 250 gas and higher. That's where the strip is, so it would suggest that we complete those in 2025, but We're cautious around the strip and being unhedged. We wait, and it's pretty immediate response when you want to complete them. It's about a 60-day timeframe, so you have the ability to look at front month pricing and see where that's headed and your confidence in that, and if we're confident that it'll be over 250 gas, we'll complete them.

Great. That's helpful. Thanks, gentlemen.

Our next question is from Leo Mariani with Roth Capital. Please proceed.

Yeah, hi. Just wanted to get a little better sense of how you guys are thinking about maintenance capital. Obviously, you guys have reduced CapEx a handful of times during the year. Sounds like a lot of that is efficiencies, which is kind of nice to see. I mean, generally speaking, should we expect production to be relatively flat next year? And is that kind of 2024 CapEx level of around 650 a reasonable number at this point for maintenance?

Yeah, right now, you know, what we've maintained, if you recall, in 2022, we produced 3.2 BCFE a day and we went to maintenance capital, you know, in 2020 and 2021 at those levels. 23, we spent $900 million, but we actually grew 6% to 7% up into the high 3.3 BCFE a day. But our maintenance capital always been centered around 3.3 BCFE a day to 3.4 BCFE a day. We've been ahead this year based on our efficiencies and well-performance, but we still, on the long-term plans, are targeting that 3.3 to 3.4 BCFE a day. And when you look out the next year and the years beyond, that's around $700 million of capital. You could be at the 650 level, but you'd be in the low 3.3s. In the $700 million level, you're more in the mid 3.3s. So what we think about is about $700 million of capital to hold 3.3 to 3.4 flat being at the midpoint. Okay.

That's very helpful for sure. And then just, you know, in the near term, I understand some of the caution here on, you know, bringing back some of these dry gas pads. It certainly makes sense to wait for better returns. But, you know, if that strategy, you know, sort of plays out, can you just give us some, you know, directionality in terms of, you know, production? I mean, should we expect it to kind of tick down the next couple quarters as you guys are maybe waiting for a little better gas market?

Yeah, I think the guidance at the midpoint would suggest 3.35 for the fourth quarter. That would get you to the midpoint of 3.400, and then that's about where we're at in 25 as well.

Okay, thank you.

Our next question is from Addy Modak with Goldman Sachs. Please proceed.

Hi, good morning, Deem. As you think of the gas price realizations, anything you can provide on how you are thinking about the marketing strategy over the next few quarters and what we should expect to see?

Same marketing strategy that we currently have, which is flow all of our gas as much as we can to the Gulf Coast and to the LNG corridor and the LNG facilities. That's about 75% of the gas, and then the remainder really goes to TECO and the Midwest. all the gas molecules get out of the basin, and all of our transport is relatively full. So, similar gas strategy, and we expect those premiums to increase as we move forward, and this LNG comes on in 2025.

Got it. And then you talked about the price level for completions of the ducts that you're deferring into 2025, but maybe... Any incremental color on whether anything you're drilling right now could be potentially deferred or is that relatively more liquid-focused?

Yeah, it's a good question. It's more liquid-focused. Those wells that we drilled were in the 1200 were some of our last inventory kind of in that middle of our field in the North Canton area. Now we're really – and we have been really focused on Wetzel County and Tyler County, which is higher BTU content.

All right. Thanks for the answer.

Our next question is from Josh Silverstein with UBS. Please proceed.

Hey, thanks. Good morning, guys. You mentioned before, you know, 100,000-plus savings were moved to an E-Fleets. Are you guys now looking to lock in this E3 for next year, or is there something else that you want to continue testing with it before locking it in for next year?

Yeah, it's a two-pad trial. We've done one pad that went well. We're on our second pad, so once that's completed, we'll evaluate and potentially lock that in for next year.

Got it. And then just on the hedging strategy, you remain unhedged in the forward outlook right now. I understand not wanting to be hedged next year with the strip almost down at $3, but what about 2026 with pricing still over the 350 mark? Do you foresee an opportunity to start locking some gains for then, or is the strategy just to remain unhedged going forward? Thanks.

Well, we're keeping an eye on the curve, of course, and there's some contango in the curve, as you know, early on before it flattens out to give some optimism. We're watching it and we may lock in, no promises, but we continue to watch it and look for threshold gas prices that will improve the economics.

Thank you.

Our next question is from Kevin McCurdy with Pickering Energy Partners. You may proceed.

Hey, good morning. With yesterday's release, you brought the midpoint of your 2024 CapEx down by 25 million. I wonder if you have the rough breakout of how much of that reduction was driven by efficiencies compared to the deferred turn-in lines?

Yeah, 15 million is efficiencies, 10 million is the turn-in lines. The 650 assumes a 50-50 chance whether we did complete that pad at year-end versus the first quarter. So about 10 million of it's that deferral. And then $15 million is the completion efficiencies and drilling efficiencies.

That's helpful. And what are the impacts of those two items on your 2025 budget? That $700 million DNC maintenance CapEx number you mentioned kind of earlier, I think that's a little better than you had communicated previously. I just want to confirm that that $700 million number kind of includes ducts and the efficiency gains?

It does. We feel confident incorporating that now. So those efficiencies, I mean, our well costs in the third quarter were the lowest well costs per foot we've had since 2021. So we're rolling that in 2025. 2025, the lateral lengths are slightly shorter than this year. So on a per foot basis, it equates to 24, but we have rolled those efficiencies in 12 stages per day, drilling, you know, the 10,000 feet of lateral in less than five days that we achieved in 24 and the very efficient rig moves and completion crew moves. So we're excited about it, and it has resulted in lower capital in 25.

I appreciate the details. Thank you, guys. Sure.

Thank you.

Our next question is from David Dekelbaum with TD Cowan. Please proceed.

Thanks for taking my questions, guys. Mike, just a quick one. Can you just refresh us in the Delta on the benefit of The drilling carry that was in 24, that's not recurring in 25, I guess, for apples to apples. And that maintenance program is around $50 million.

Yeah, it's actually $30 million is our latest calculation on that. Your $50 may be at the 20% level. And when we think about it, we think about it more in the 15% level, which is where it was at before the weakness in prices in 24. So it's about $30 million. But the $700 million... and the low $700 million doesn't assume a drilling JV. Perfect.

And then just a comment on the maintenance levels. You know, the 335, I know this year obviously there were periods where you were over 3-4, you know, well in excess, and you experienced quite a bit of productivity gains. Should we think about that forward maintenance level as not necessarily capitalizing those or continuing those efficiency assumptions or performance assumptions, or is it more of a function of shifting more activity towards higher BTU content?

No, we're just lowering levels of activity needed, you know, to try to get the capital as efficient and as low as possible to maintain that 3.3 to 3.4 level. Paul mentioned in his comments those cycle times. We didn't necessarily have those when we were pouring our capital budgets in 23 and 24. We have captured those for 25, and thus we can have lower capital activity and maintain that production level. So we are capturing it. We're just trying to solve for what's the lowest capital possible to maintain that 3.3 to 3.4 BCFE a day.

Appreciate the comment.

Sure.

This will conclude our question and answer session. I would like to turn the conference back over to Brendan for closing remarks.

Yes, thank you for joining us on today's call. Please reach out with any further questions. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.