Q3 2019 Earnings Call
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Hi, It's Rachel are a C.H.O. Smith and I T H.
Thank you that every company.
Era A.I.E.R.A.
Thank you and which comes to close to join.
That will be the.
Antero Mint mid mid stream sorry partners.
Sure and it was a I.E.R.A.
Yes. It is.
Thank you are going to either on a per lateral foot basis, or approximately $1.2 million to $1.7 million per well.
The left hand side of the page illustrates a ours January 2019, well costs.
At $970 per foot that was assumed in a ours budget.
Today, a ours well costs are $895 per foot.
Which equates to savings of nearly $1 million per well.
The savings already achieved our substantially ahead of our previous second half 2020 target of $930 per foot.
Our ability to achieve lower well costs ahead of schedule is primarily due to the acceleration of localized blending operations during the third quarter that resulted.
In reduced flowback water costs.
The coordinated effort between a RN am allowed us to quickly and successfully execute our blending program and deliver savings ahead of schedule.
Before getting into the details of our new flowback and produced water blending operations I want to briefly discuss our decision to idle.
Taro Clearwater facility.
As you remember we began construction on the facility in 2015 to become industry leaders in water recycling and to be at the forefront of environmentally responsible shale development.
At the time flowback water was not used in completions and there were industry wide concerns regarding the long term viability of injection wells in Appalachia.
The decision to idle the facility was driven by its inability to operate at its intended specifications.
As a result of idling the plant we recorded a 457 million dollar impairment of the facility.
While we're disappointed in the outcome, we remain focused on developing new opportunities such as blending and other flowback and produced water initiatives that reduced the overall cost structure at a are.
This in turn supports the sustainable development at a are that underpins the long term growth at a.
Particularly at a lower for longer commodity price environment.
Slide number three.
Titled.
Antero water savings performance.
Shows the blending operations to date.
Antero midstream plays an integral role in providing blending operations for both flowback and produced water that drives capex and Eloise savings at a are.
As depicted by the yellow line on the chart.
Ours all in cost dispose of wastewater was in the 10 dollar per barrel range during the first half of 2019.
The downward trend in cost per barrel shown on this slide is driven primarily by an increase in blending volumes, which are depicted in the purple buyers.
These savings from blending combined with reduced trucking costs is expected to reduce a ours wastewater disposal costs by over $4.50, a barrel compared to the first quarter of 2019.
While the EBITDA contribution from blending operations is not material to am's overall portfolio. It is a critical business for am supporting a arc and driving down costs.
Now, let's move onto the discussion of our prime of our preliminary 2020 capital budget on slide six titled 2020 preliminary capital target.
As depicted on the map on the right side of the page in 2019, we constructed the backbone of our infrastructure into Tyler County.
West Virginia that supports a ours development over the next several years.
Looking ahead to 2020, we have optimized our capital plan to focused on the highest rate of return locations. At a are that are also in close proximity to existing gathering and water infrastructure.
This allows us to target a capital budget of 375 million to $425 million in 2020, or a 40% reduction compared to the midpoint of the updated 2019 capital budget of 670 665.
To $685 million.
Looking at our processing investments in the joint venture with MPLX, we have already invested a majority of the capital for Sherwood 12, and 13, which adds 400 million cubic feet today of combine processing capacity in the fourth quarter.
29 team.
This increase in processing capacity Sherwood.
Along with one expected plant in the new Smithburg side in mid 2020.
Supports anteros 2020 production growth without a significant amount of incremental processing capital investment.
Am's capital flexibility in addition to its visibility into a ours development plan is a competitive advantage for am.
Before handing the call over to Mike I want to briefly touch on a ours hedges on slide number seven titled industry, leading natural gas hedge position.
During the third quarter, a are added to its hedge position for both gas and Ngls.
On the gas side, we shifted 2022 hedges into calendar year 2021 to more closely aligned a ours hedge profile with its unutilized firm transportation expenses and modest growth profile.
And there is now over 90% hedged on natural gas in 2020.
At an average price of $2.80 87 cents per mm BT EU.
And 89% hedged in calendar year 2021 at an average price of $2.80 per M. MBT EU, assuming approximately 8% to 10% annual growth in 2020.
And 10% growth in 2021.
Based on strip pricing today, a ours hedge realizations more than offset its net marketing expense through calendar year 2021.
On the NGL side, a our has been actively hedging and was able to take advantage of the global price spikes falling following the incident in Saudi Arabia.
As depicted on slide number eight titled C, plus NGL hedges, capturing recent pricing strength.
Hey, our is currently 50% hedged C plus NGL volumes for the fourth quarter and 28% hedged in calendar 2020.
This includes a balanced mix of domestic hedges and international hedges for the volumes shipped to Europe , and Asia out of Marcus Hook.
While a ares capital budget.
Well, a ares capital budget will be flexible based on commodity prices.
This industry, leading hedge portfolio allows a our to have more consistent capital budgets that are less sensitive to drastic changes in response to commodity prices.
With that ill turn the call over to Mike.
Thank you Paul.
I'll begin my comments by highlighting the recently announced am cash dividend of 30 in three quarters cents per share, 114% increase year over year for former AMCP shareholders, and a 40% increase year over year for Antero Midstream partners unit holders.
The dividend a him with the 19th consecutive distribution declared since the IPO of Antero Midstream partners in 2014.
In addition, during the third quarter, we commenced our 300 million dollar share repurchase program and repurchased 3.5 million shares for approximately $25 million, which equates to five cents per share a return of capital in addition to the dividend.
Repurchasing shares at today's prices generates attractive rates of return in DCF per share accretion at am.
Looking forward, we expect our high single digit return of capital growth target in 2020 to be comprised primarily of share repurchases.
We believe this is an attractive capital, especially when combined with a 40% year over year reduction and Am's capital budget.
Now, let's move on to third quarter operational results, beginning with slide number nine titled high growth year over year midstream throughput.
Starting in the top left a portion of the page low pressure gathering volumes were 2.7 Bcf per day in the third quarter, which represents a 25% increase from the prior year quarter compression volumes during the quarter averaged 2.4 Bcf per day.
39% in feeds increase compared to the prior year.
Compression capacity was 90% utilized during the third quarter.
Our 50 50 joint venture growth processing volumes averaged a bcf a day.
71% increase compared to the prior year quarter.
Processing capacity was 100% utilized during the quarter.
Joint venture growth fractionation volumes averaged 32000 barrels per day, and 88% increase from the prior year.
Freshwater delivery volumes averaged 141000 barrels per day, a 28% decrease over the prior year quarter.
During the fourth quarter Antero resources picked up an additional completion crew, which we expect to drive an increase in completion activities and freshwater delivery volumes as compared to the third quarter of 2019.
Hey, our remains on track to achieve volume metric targets for the first $125 million earn out payment from them as expected to be paid in the first quarter of 2020.
Moving on to financial results adjusted EBITDA for the third quarter was $218 million and 18% increase compared to the prior year quarter.
The increase in adjusted EBITDA was driven by increased throughput volumes distributable cash flow for the third quarter was $170 million, resulting in a DCF coverage ratio of 1.1 times.
Antero midstream invested $135 million in gathering compression water infrastructure and the processing and fractionation JV during the third quarter.
Gathering compression in water infrastructure capital investments totaled $121 million and investments in the JV totaled $14 million.
Moving on the balance sheet liquidity as of September Thirtyth, 2019, Antero midstream had $726 million drawn on its $2.1 billion revolving credit facility.
In October we added an additional lender to our revolving credit facility, resulting in a $134 million of incremental commitments, bringing our total liquidity to $1.4 billion. Additionally, am's net debt to LTM adjusted EBITDA was 3.3 times at quarter end.
I'll finish my comments on slide number 10 that summarizes the 2019 guidance changes.
The left hand side of the page depicts the change in our 2019 capital budget.
Driven by the deferral of just in time gathering processing and freshwater delivery projects.
Capital saving initiatives and the removal of the final Antero Clearwater facility milestone payment, we lowered our capital budget to a range of $665 million to $685 million from 750 to 100 million.
The reduction in capital more than offsets the decrease in our adjusted EBITDA guidance, resulting in a net positive cash flow impact of approximately $50 million at the midpoint of the guidance ranges.
The reduction in EBITDA guidance is primarily driven by the idling of the Antero Clearwater facility in and includes an additional $10 million to $15 million of idling expenses during the fourth quarter.
We do not expect to persist into 2020.
In summary, we remain highly focused on capital discipline in our overall cash flow profile.
During sustained periods of low commodity prices. This results in lower am capital budgets in non speculative investment that's still generates high asset utilization rates and EBITDA growth.
This capital flexibility results in attractive cash flow profile and maintains am strong balance sheet.
Positioning it to continue growing the return of capital shareholders in the future.
With that operator, we're ready to take questions.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If he would like to ask your question. Please press star one on your telephone keypad. The confirmation from late indicate that your line is in the question Q you May press star to listen we'd like to remove your question from the Q for participants the speaker equipment and may be necessary to pick up your handset before pressing the star.
Keith.
Our first question comes from the line of Holly Stewart with Scotia Howard Weil. Please proceed with your question.
Good morning, gentlemen.
Good morning, I highlight.
Mike maybe the first question just on the Tony Tony.
Back number I think last quarter, you mentioned something in kind of that 600 million dollar neighborhood to big reduction at this point in terms of what you're thinking.
Is there or was there a change in a ours like development plan I'm just trying to think curious since their growth plans havent.
Haven't changed for 2020 was there something else that you are able to reduce that infrastructure spend yeah. I think you could see it on that math that's in our presentation, we're really focusing on the development in the Tyler County area with all the blending of the water really.
I would say ours cost structure to kind of just to drill that next pad over so really just focusing at Tyler area.
And not expanding out into the Wetzel County, really eliminate a lot of capital.
Also clearwater, not having any clearwater capital.
In 2020.
It's beneficial and then we highlighted that sure with 12 and 13 just came on in the fourth quarter of this year. So you have ample processing capacity to grow into so kind of focus and Tyler County, and then having you know processing capacity and not having Clearwater really drove those capital reductions by about 200 million dollar.
Okay, and so sort of think about that you know, what's still county development being pushed out to maybe Tony one or beyond exactly what is gradually build out from our Tyler County position that really is very efficient just kind of do pad by pad development mowing the lawn l. towards Wetzel County is our plants okay. Okay.
And then on Yeah, we began the repurchase program how should we think about that is that going to be systematic lumpy just trying to get a sense for how we should allocate that capital.
Yeah. It will be opportunistic you saw we bought back $25 million worth about three and half million shares in September .
What we've kind of we've got a 300 million dollar program.
It is obviously beneficial to buy back earlier, rather than later, so that you can get those shares and not have to pay the dividend on than.
We said that program would be.
We would not leverage the balance sheet to do that so when you look at that that gives you about $100 million the to play with so we plan on on buying about back that amount over the next couple quarters.
Okay, Great and then maybe just one.
Final one from me on on a are is there or is there any implications to am is a our should receive a downgrade.
Like our financing standpoint, no that they're not.
Well for am I mean am.
Generally follows a seller's credit rating.
So in as much as they are consistent with that am with they are would would probably go down in tandem, but it's not a.
It's not on any sort of am credit metrics.
Got it.
Thanks, guys.
Thanks Alan.
Thank you. The next question is from the line of Jeremy Tonight with JP Morgan. Please proceed with your question.
Hi, good morning.
Just want to follow up with the Capex side of equation here and I did a good job pulling back capex for 2020, but just want to kind of think longer term normalize I guess and realize it's very difficult question asked but if we look into 2021 seems like the system is largely kind of mature back home built out for that argue there's not a lot of capex.
That's left but then there's other areas that you could expand to I think as you just touched on a poly there just wondering how you think about what normalized capex could look like for this business going forward with.
What you guys see in front of you.
Yeah, we talked about we had a $2 billion backlog in the initial cadence of that was 750 to 100 million. This year. We've always had reduced that the 665 to 685 and then we thought around 600 million next year and that's down the 400 and then the subsequent years after that were like 400 million 400 million.
And then 200 looking out now with reduced net capital this year next.
That kind of puts the capital budgets and 20 120 to 23 in the $4 million to $500 million range. So kind of just evens everything out around that kind of 400 million dollar a little bit over range over the next four years.
That's helpful. Thanks, and if I think about capital allocation here. Just wondering you talked about the return of capital to two equity holders, but with the am bonds kind of yielding near 10% right. Now just wondering if that factors into your calculus. There if you might be opportunistic there or what do you think about that side.
Now, we really don't have any plans around that those they and bonds have term on it the first one's not maturities not till 2024, and then the the next two or 27 and 28, so I think the opportunities at a our that those bonds traded at a at a discount plus the maturities there and 20 120 twos a little more near.
Our term, but am you know, we've got a really nice maturity schedule out there and we enjoy that term.
That's helpful. Thanks, one last one if I could just if I look at the guidance I don't think the JV contributions.
You guys list in the last slide here is down a little bit versus what you said before just wondering if he could provide a bit of color as far as the delta is that timing or is there anything else happening there as you go just timing.
The JV is definitely on schedule and with a we just put on the Sherwood 12, and 13 in the fourth quarter and those should be filled in the next couple quarters. So it's definitely meeting expectations.
Great that's it for me thanks.
Thanks, Jeremy.
Thank you. Our next question comes from Crawford Cop with Tudor Pickering Holt. Please proceed with your question.
Morning, guys.
So with regard to the share repurchase program any preference between repurchasing am units owned by a are.
Relative to to him units in the open market.
Now we just been focused on the open market I mean, that's obviously where am can go Alan just purchase everyday and it's just been opportunistic like I mentioned, so really haven't havent thought.
Around the a are the a our position is something that generates dividends for them and they enjoy so.
Really just kind of been focused on when you see the dips in the am share price trying to be opportunities that can pick some up and.
Got it that makes sense all right. That's it for me thanks guys.
Thank you.
Thank you. Our next question comes from Kyle name with capital One Securities. Please proceed.
Good morning.
I wanted to talk a little bit more about the water program. So you've talked about the water savings initiatives, but just wondering if you can give us some more perspective on how this affects the outlook it antero midstream compare to your prior expectation.
[noise], Yes go ahead, yeah, no I was going to kind of just run through some numbers here.
From our.
For a blending operations, it's about $7 million of capital to am for the second half of 29 team.
And 2020 that capital, it's about $10 million to $15 million.
That will generate EBITDA and really kind of starting in 2020.
Of $3 million to $4 million from the blending in the room the trucking that actually occurs during that we get cost plus 3%. So that's about six to 7 million of EBITDA. So it'll generate about 10 million of EBITDA.
And that's all from the blending you know just review from the Clearwater side. The Clearwater had a couple million dollars of EBITDA. This year, but it was costing about $10 million a quarter and capital.
So it was actually a consuming about $8 million of net cash flow. So.
Not having that continuing after the fourth quarters, obviously beneficial for am and then you add in this blending opportunity for us. So you know the water initiatives are going to improve am definitely in 20 versus 2019.
Got it that's helpful. Thats all from me today. Thank you.
Thanks Scott.
Thank you. The next question comes from the line of Ethan Bellamy with Baird. Please proceed with your question.
Hey, guys. Good morning, what is the probability of a renegotiation of contracts between our and how should we think about that.
[noise]. That's that's one of many discussions we're having I think it's in that.
We have to think about the overall antero family. There. So if something were done it needs to be favorable for both at the end of the day and so.
Obviously, if we did something that was overly favorable for our that would be good Friday, our but not necessarily for for a and and historically by not doing anything that's it's been tough overall for for a our than theirs to flow through negativity that I am so.
There's a there's room for something to happen there, but it's just one of gosh, a half a dozen different parties were having those discussions with around sort of amended expense extend type discussions and and otherwise. So it's just one of one of many it's hard to handicapped whether or not anything happens with any particular one at this point.
But hopefully we get something done with a with the majority of those.
Okay. Thanks, Glenn with respect to the 2020 Capex program.
Can you give us any granularity about how much is within and without of the MPLX JV and is there any lumpiness.
Or returns that we can remodeling in terms of.
Specific spending or projects.
Hey, I can kind of give you a year over year comparison, it's in a you know the low pressure is very similar in 2020 to 2019, the compression you're actually spending quite a bit less than 2020, we put a lot of compression on this year definitely up and that Tyler County, So you're spending about $90 million less than compress.
Fashion in 2020 versus 2019 high pressures you know somewhat similar freshwater infrastructure, a you're down about 40 million year over year, we built a big trunk line in 2019 that goes through the heart of our Tyler County development. So obviously don't need to replicate that you're down about 40.
In dollars on Clearwater see obviously don't have any capital in 2020.
Versus 2019, and then specifically to your question for the processing and fractionation JV are down about $100 million. We spent 175 million. This year Oh are thinking it's you know 80 to 90 next year.
That does even indeed have the hope feel hopedale five a election in for the fractionation. So.
And even includes that so quite a bit less spend we did just put on as I mentioned Sherwood 12, and 13. So I think you only have one processing plant in the budget for next year.
Yes, and remind me the governance of the JV, who controls the spending there.
It's it's a joint JV its 50 50.
Usually agreed to but a antero.
Proposes what its growth plans are and.
It goes from there with the.
Partners planning what will be needed in what timeframe.
Okay.
Last question, you've got to dividend yield at I am that.
Uncompetitive and compelling.
Assuming that the share price does not recover.
You know it it looks like that cash might be better used for something else.
Could you talk about.
How you think about the distribution policy or dividend policy here and.
Is there some point in the future, where you're modeling a are not necessarily needing that cash or.
Oh, allowing you the flexibility to change dividend policy, if you wanted to do that.
No we really haven't thought about changing the dividend obviously, we haven't increased and we don't plan on increasing and like I mentioned the return of capital is going to come in the form of.
Buying back shares, but when you actually look at our model.
Highlighted that that trend of the capital going much lower and then you have the EBITDA growth that kind of mirrors a hours growth plans. Your coverage goes up you know to the one two to one three range. So that's really not a profile that would lend itself to be.
Reducing the dividend you also kind of look out and 20 122, the cash flow plus the dividend payout is you know a capsule excuse me less the dividend payout less the capital is about at parity or almost that free cash flow. After dividends. So again not a profile that would suggest that you would be needing to cut.
Any of the dividends. So we don't see that in the future or we just play on holding flat and then returning capital through buying back shares if it just stays down at these.
Low prices will this be opportunistic and I get a lot of shares and.
Okay, Thanks, Mike and Paul if you'll indulge me just one question with respect to gas macro you guys are.
Historically made an argument about decline rates.
Leading to supply correction, which would approve price do you do you still see that are we sort of in the doldrums, but just early on that thesis what do you what are your thoughts right now.
[laughter].
Yeah, and do we have a page of that in our presentation I'll, maybe on our website <unk> on our website Ethan is a shows what.
Natural gas prices are Nymex prices plot and over this last year. So Cal 19, and it shows what horizontal gas rig count is doing and we have that both for.
Nationwide and also for a Appalachia and a that is tied to the local price to the Tetco mtwo price, but.
You know the big picture is that prices have been sliding it's taken a little while the rig count is that has begun to fall pretty dramatically as many people are following and then we also a show that for completion crews and those are getting idle too and so as you know.
You know from experience in the business that.
Self correcting on both sides and.
You know on the high side itself corrected on the low Sag itself corrected so should see a fall off in supply of course, where that it takes a little while there's a lag time, if you drill a well you actually want to complete it before you.
Before you back away and stop and start spending money so.
So a little bit of lag time, what will be the packing order well [noise].
The lease sensitive it courses or the pure oil plays as in Permian basin. So on that the gas prices not material for them, but Ted that's not that large of a proportion of the total gas supply.
10 to 13 Bcf a day at a 90 plus and so then what are the you know that next lease vulnerable well, it's a mixed in in the plays like Antero with a liquid supporting the development and then a one gets to the dry gas basins and.
I think many people who follow those have that more vulnerable ones on the last you can always already see rig counts dropping in some and maybe it'll happen and some others too. So do you see it self correcting and.
Meanwhile, on the demand side, you know I've I've made the argument before that.
Demand will be stickier, especially with the LNG that a the LNG shippers and offtakers, they're looking for 10 to 20 year contracts and so they'll need that gas once they put in the infrastructure much longer so supply can fall off with gas prices lower rig count.
While demand will increase once the infrastructure is sunk so.
So.
I would say that it's just a matter of time as it has been for that last many downturns and.
You know.
All investors are.
Seeing that macro but wondering when and so for that obviously, we all hope sooner the better.
Yes, Sir thank you very much.
Yes.
Thank you. Our next question comes from Pat Sheehan with Bank of America. Please proceed with your question.
Hi, guys. This is actually quite ready.
Hold on for me.
Yeah.
Hey, guys.
Thanks for all the color obviously a big.
Please update today across the border they aren't I am.
Just.
Just wondering on a few things you mentioned.
On the M&A are working together and also the opportunity to take some of your transportation hubs to renegotiate some of your your transportation costs.
The third parties.
We think about how that plays out is it you know men stem worse net present value neutral or is the possibility that doesn't case of am.
It actually there's some share.
Shared pain I guess.
Yeah. It all depends on the parties and you know, we're not going to get into details on that a great but.
I'd say discussions are pretty freeform around all of those so.
Midstream service arrangements, so it's hard to pinpoint any particular.
Viewpoint or strategy at this point of that you'll have to be patient and we'll see what what gets done there.
Got it that's helpful. Alright, I appreciate that you can negotiate against yourself on the phone so.
Just in terms of dividend you you mentioned you have to a number out there I think of 100 million over the next couple of quarters because it is that what we're supposed to think about is when you talk about high single digit growth.
Growth of return on capital then it's effectively up.
$100 million you've allocated for 2020.
For that no 100, yeah. The 100 million early that name number comes from when you. If you recall Greg from our initial when the board approved this share repurchase it could not that add yeah additive to leverage.
When you do the math on how much you have that you're supposed to increase the dividend by sled, 7% to 9% and that's off of $600 million. So you know when you do the math on that you know, it's what was that $50 million to $60 million increase dividends that it was kind of initial pod youre working with but when you actually buy back shares.
Theres sooner rather than later, you don't have to pay dividends over that two year timeframe. So that adds to the pot. So you can add that 50 to 60 million plus the dividends that you don't have to pay on the shares that you bought back and that's how you get to $100 million.
Got it that's taking that was you ran to the Matt and I was trying to figure out.
Alright, and then maybe just just one more here with just clear water. So <unk> I think I heard you say on the call that there's the this is $10 million to $15 million spent for idling doesn't continue next year.
But I'm just reading it can you put out that says it's on your unable to estimate the cost thereafter.
Is that.
Hi, gentlemen.
Did you know there always should be some costs in 2020, but not $10 million to $15 million a quarter.
And then you mentioned that it just wasn't operating as expected.
It looks like this was sort of the sure paying together.
That would you know priority I haven't worked together how'd you how did you think about.
Isn't as simple as it wasn't working properly or or is it just was there. Some net present value analysis you guys are doing when you thought about.
Willingness and not using it.
Yeah fundamentally it just wasn't working properly relative to a the design and what we what we envisioned it was going to be able to achieve.
All right guys up, especially for the time I appreciate all of it sure.
Thank you Greg.
Thank you. Our next question comes from net <unk> with Wells Fargo. Please proceed with your question.
Good morning, Thanks for taking the questions I'm, just looking at a ours production growth guidance for 2020 of 8% to 10%.
Could you maybe talk about what does that translate to in terms of gathering growth on the A.M. side, given all the puts and takes related to royalty interests and third party acreage dedications et cetera.
Yeah, it's it generally the only real reconciling item. If you recall that is that we are on the eastern side kind of in Harrison County, West Virginia of our Antero resources acreage in the dry gas area, that's not antero midstream dedicated acreage and there's no development that occurs there so that AG.
Actually declines.
So when you actually hear about percentages for a are you generally at about one or 2% for the gathering compression volumes and a little bit more than that on the processing.
For Antero midstream growth.
Got it and then maybe can you can you break out the maintenance capex number or from the total Capex guidance you provided for 2020.
We don't have that exactly calculated but generally runs and it's not calculate this way, but if you look at our maintenance capital is generally in a 10% of kind of Oh.
Or 10% of a capital range so.
Yeah, I think this quarter of $13 million or something like that so.
Probably around 50 $60 million next year.
Got it thanks, that's all I had <unk>.
<unk>.
Thank you we have no additional questions at this time, so I'd like to pass the floor back over to management for any additional concluding comments.
Sure. Thank you for joining us on our conference call. Today. If you have any further questions. Please feel free to contact us. Thanks again.
Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.