Q2 2020 Antero Midstream Corp Earnings Call
Greetings and welcome to the Antero Midstream second quarter 2020 earnings Conference call.
At this time all participants are in listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press Star Zero honor telephone keypad. Please note that this conference is being recorded.
I will now turn the conference over to our host Michael Kennedy Chief Financial Officer. Thank you Sir you may begin.
Thank you for joining us for Antero Midstream second quarter 2020, Investor Conference call.
We'll spend a few minutes going through the financial and operating highlights and then we'll open it up she went away.
I would also like direct you to the home page up our website at Www Dot Antero midstream Dot com.
Well, we have provided a separate earnings call presentation that will be reviewed during today's call.
Before we start or comments I would first like to remind you that during this call and Taro management will make forward looking statements such statements are based on our current judgments regarding factors that will impact the future performance of Antero resources, and Antero midstream and are subject to a number of risks and uncertainties.
Many of which are beyond anteros 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 for the most comparable GAAP financial measures.
Joining me on the call today, our Paul Reighty, Chairman and CEO of Antero resources and Antero midstream.
Glenn Warren President and CFO of Antero resources, and President of Antero Midstream and Dave Conte, along the vice president of liquids marketing and transportation.
That I'll turn the call over to Paul.
Thanks, Mike.
I'd like to start by discussing a ours asset sale program, which continues to improve a ours liquidity position and will allow it to repurchase debt at attractive discounts to par.
Slide three titled a our asset sale program update.
Details the progress that a our has made to date is $750 billion to $1 billion asset sale program.
During the fourth quarter up 29, teen Hey, our commenced its asset sale program with the sale of am shares.
Two am for $100 million.
Despite the ongoing covert 19 pandemic aer was able to execute a $402 million overwrought overriding royalty interest sale in the second quarter of 2020, including $300 million of upfront proceeds and $102 million of contingent payments.
In July a our monetized excess 2021 natural gas hedges for proceeds of $29 million.
This brings a ours total completed asset sales to $531 million.
These asset sales have allowed a our to reduce total debt by approximately $365 million since commencing the asset sale program in the fourth quarter of 29.
In addition, a our is in active discussions for further asset sales and we remain confident that we can achieve the 750 million to 1 billion dollar asset sale target in 2020.
We believe this positions a our to repay its 2021 and 2022 maturities and significantly de risks the Antero complex.
Before moving onto a ours liquidity position I want to briefly touch on a ours hedge position pro forma for the recent monetization on slide number four titled enhanced natural gas hedge position.
In the second half of 2028 are.
Is 94% hedged on natural gas production at a price $2.87 per M. M B to you.
Due to the overriding royalty interest sale a our was previously Overhedged added 2021 natural gas production.
As a result, a our monetized 100, BP BBT use per day of excess quote unquote edges above its 2021 natural gas production for a gain of $29 million. These proceeds were used to continue repurchasing debt at attractive discount.
Once to par.
Pro forma for the monetization A.R. is approximately 100% hedged added 2021 natural gas production at $2.77 per MMP to you.
Hey, our was also active in the second quarter and added 620 BB to use a day to its 2022 natural gas hedge position, which now stands at.
1300, BB to use a day.
This is consistent hedging.
And allows a are to maintain a stable development program that benefits am as well.
Slide number five titled substantial liquidity enhancements at a our shows the liquidity impact of the asset sale program and significant and significant drilling and completion capital savings achieved to date.
First as a reminder.
They are as borrowing base under its credit facility was confirmed at $2.85 billion in April.
Well in excess of lender commitments of $2.64 billion.
As of June 32028, there had approximately $1 billion of liquidity, which as depicted on the dark Green bar on the left hand side of the page.
Based on today's strip prices, a ours development plan is expected to generate $200 million a free cash flow in the second half of 2020 further improving its liquidity position.
This ability to generate free cash flow is driven by the significant capital savings and improvement in NGL prices in the second half of 2020.
Which Dave Ken Longo will discuss in his comments assuming execution of the remaining sales at the high end of a ours targeted asset sale program, a $469 million air would have $1.7 billion of liquidity at year end 2020.
Prior to any further bond repurchases.
This is more than sufficient to repay both the 2021 and 2022 maturities, which have a total par value of $1.26 billion at market value of one point.
$4 billion with that let me turn it over to Dave can along though our vice president of liquids marketing.
Expertise.
Thanks, Paul.
Let's turn to slide number six and begin by discussing the NGL macro environment.
The effects of Cobot 19 on oil and transportation fuel demand and the resulting decline in Reagan completion crew activity in oil focused shale basins has set up expectations of a prolonged period of depressed us oil production.
More notably this backdrop results and depressed associated NGL production relative to the volumes that were being produced and fractionated just prior to the onset of cobot 19 around the world.
The chart on the left hand side of this slide illustrates the NGL supply forecasts have declined by over 1 million barrels a day since the beginning of this year.
Further it highlights that it may take several years for us NGL production to return to pre cobot 19 levels as the momentum of production declines from the dramatic slowdown in U.S shale activity over the last four months plays out.
The chart on the right hand side of the slide highlights that sufficient export capacity along the Gulf Coast has help clear the domestic market and tighten Mont belvieu pricing to international pricing.
Turning to slide number seven title.
NGL price recovery expected.
We can see the strength of NGL markets relative to Wi Fi and Brent has continued to stay elevated as a result of more resilient petrochemical and residential commercial markets. During this pandemic.
Sure we illustrate the outperformance of Mt Belvieu propane relative to Wi Fi in 2020.
On the right, we see a similar outperformance from propane relative to Brent at the far East index, or FBI, which is the benchmark in Asia.
This is important as antero has exposure to not only domestic NGL markets, but also international destination pricing through our export access on the Mariner East system.
While the fundamental backdrop for NGL prices has set up for improved pricing as we head into next year. The limited liquidity in the futures markets for such products does not always reflects the anticipated value further out the curve.
Or put another way there is typically very little correlation between the future strip in the out years and the ultimate physical price.
Slide number eight title NGL pricing outlook.
Illustrates the value that some third party analytical teams, including the Citibank commodities team shown here are placing on Ngls in 2021 and beyond based on their bottoms up global supply demand models.
Looking more closely at the northeast take away capacity slide number nine title.
Northeast LPG supply and demand.
Highlights the reason for a tightening of the northeast differentials to Mont Belvieu for LPG that has resulted from the Mariner East project.
The increase in takeaway capacity out of the Marcus Hook terminal through Mariner East led to markedly improved in basin pricing relative to Mont Belvieu.
Marcus Hook has the capacity to evacuation in excess of 225000 barrels per day of LPG from the basin through exports, helping support northeast domestic LPG prices.
The anticipated final completion of the Mariner East two pipeline system. This winter ticking Emmy to capacity to 275000 barrels a day will create ample capacity to export northeast NGL production for the next several years and we anticipate in basin differentials to remain tight to Mont Belvieu going forward with that I will.
Turn it over to Mike.
Thank you Dave.
I'll begin my am comments with second quarter operational results beginning on slide number 10 titled year over year midstream throughput.
Starting in the top left portion of the page.
Low pressure gathering volumes were 2.9 Bcf per day in the second quarter.
Which represents an 8% increase from the prior year quarter.
Compression volumes during the quarter averaged 2.7 Bcf per day, a 13% increase compared to the prior year.
During the second quarter and placed online a new Marcellus compressor station, adding 240 million per day of capacity and supporting the compression volume growth in the quarter.
Hey, ours compression capacity was 91% utilized during the second quarter 2020.
Our 50 50 joint venture gross processing volumes averaged 1.4 Bcf per day, a 42% increase compared to the prior year quarter.
Assessing capacity was 100% utilized during the quarter.
JV gross fractionation volumes averaged 33000 barrels per day, a 22% increase from the prior year.
Freshwater delivery volumes averaged 102000 barrels per day.
16% decrease from the prior year quarter.
The reduction in freshwater delivery volumes driven by a are moving to one to two completion crews during the quarter as we discussed on our first quarter conference call.
Hey, ours currently operating to completion crews on Antero midstream dedicated acreage.
Moving on the financial results adjusted EBITDA for the second quarter was $201 million, a 2% decrease compared to the prior year quarter.
During the quarter Antero midstream only received two monthly joint venture distributions compared to three monthly distributions received in prior quarters.
Resulting in a $7 million reduction in an adjusted EBITDA.
Distributable cash flow for the second quarter was $152 million, resulting in a DCF coverage ratio of one times.
Capital expenditures during the quarter were $59 million, a 63% decrease compared to the second quarter of 2019.
During the second quarter, we generated a company record $108 million of free cash flow before return of capital compared to just $15 million last year.
Moving onto the balance sheet and liquidity as of June Thirtyth 2020, Antero Midstream had 1.16 billion drawn on its 2.13 billion revolving credit facility, resulting in approximately a $1 billion of liquidity.
Ams total debt was flat quarter over quarter at $3.1 billion as a result, the improved free cash flow profile.
As well as receiving $39 million of the $55 million cash tax reimbursement under the cares Act.
Looking ahead to the back half of 2020, we expect capital expenditure expenditures to continued to decline.
Driving increasing free cash flow before return of capital.
As a result, we expect to Ams total debt remained relatively flat at 3.1 billion for the remainder of 2020.
I will finish my comments on slide number one title inflection point of generating free cash flow.
This slide depicts just how far we've come since our IPO in 2014, or we outspend cash flows by approximately $600 million before returning capital.
In 2020, we're now at the point of harvesting those five years of capital disciplined investments and leveraging our core gathering processing and water infrastructure.
We have stayed true to our disciplined capital investments loss philosophy, and not made any expensive acquisitions or investments in downstream opportunities.
Did not meet our return thresholds or tied up capital in long lead time capital projects.
Just in time capital investment philosophy, and capital discipline has allowed us to reduce our capital budget by over $100 million in 2020, and target 445 to 475 million in free cash flow before return of capital.
This continued downward momentum and capital spend and our stable fixed fee earnings.
Allows them to maintain a strong and flexible balance sheet.
I'd like to finished the call by thanking all of our employees, who safely delivered an exceptional operational quarter with no material curtailments. Despite all the ongoing uncertainty and challenges surrounding the co bid 19 Anda.
With that operator, we're ready to take questions.
Thank you.
Ladies and gentlemen, this time, we will conduct a question and answer session. If you would like to ask quite a question. Please press star one on your telephone keypad.
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Our first question comes from Jeremy Tonet with JP Morgan. Please state your question.
Hi, good morning.
Jeremy.
Just wanted to start off with capital allocation philosophy, if we could.
Seems like even if the third JV payment for the quarter came through.
The coverage on the distribution would have been pretty tight this quarter.
And so just wondering when it comes to capital return of capital loss fee.
Paying a 22% yields versus increasing share repurchases or paying down debt just wanted to see what Scott what goes into.
This distribution level as opposed to reducing it to pursue one of those other avenues. It seems like could be more accretive to buyback units at this point.
Jeremy We've stated our coverage ratio kind of range from the start in 2014 and it's around 1.1 time. So if you did do that 7 million you would have been at that 1.1 time so.
The quarter was well within our expectations in our and our philosophy on paying the dividend.
Other thing that influences that is when you look at our free cash flow.
Plus that tax payment there was no leverage added during the quarter. So the return of capital and that the dividend was within our free cash flow and we look at that as well we look at our capital budget to its just in time, there's no long lead time and its decreasing so that free cash flow increases over the next couple of quarters levels.
For the dividend payments and then you look at our leverage courts, where in the mid three times, so very strong balance sheet compared to our peers. So all those factors go into when we determined the dividend and we're comfortable with the level that was that.
Got it yet just in terms of the absolute level of yield at 22% seems a bit high there. So I just didn't know like there was certain level of I guess accretion that could be achieved on repurchases, where it might make sense to pivot in that direction or that goes into kind of your thought process and anyway.
No. We didn't expect expect the equity to perform better over time that yield the come down to match the dividend.
Volatile quarter and obviously.
There was some weakness in the whole industry and so I don't think Devon yields reflective of the true underlying fundamentals of the business.
Got it thanks for taking my question.
Thanks, Jeremy.
Thank you just a reminder to ask a question press Star one we'll pause for a couple of moments of poll for questions.
Once again Thats a question press star one.
Our next question comes from Holly Stewart with Scotia, Howard Weil. Please state your question.
Good morning, German maybe just.
One or two.
Mike It looks like the process.
With that person utilized during the quarter could you just remind us of the schedule there.
Yes. So it's the third one is the next plan the sherwood's that capacity with 13 plants and that was at 100% capacity spits third one is.
Almost entirely complete and that should come on either later this year into 2021.
But with that said, a ours that kind of at a maintenance capital.
They produced around 3.5 Bcf a day in the second quarter, so theres not much growth going forward. So Sherwood right now has the ability to handle it slowing at above nameplate, but still has the ability to handle the volumes.
Okay, Great and then maybe for one for Paul or Glenn just on.
We sold the cake in transaction earlier in the week with them with CNX and CNX midstream.
Just kind of curious your thoughts there.
Yes, I think same here, we share the curiosity it'll be interesting to watch that transaction.
We.
We certainly looked at a combination of a our when we went through the simplification in 2018 as you recall that was a lengthy process with lots of.
Different outcomes analyze the decision was made.
For Antero really to separate the governance and convert am from.
LP into a.
C Corp. So our situation is not really analysis of that we'll watch this year that situation.
We also see.
Further am just too much bigger midstream business relative to our upstream.
Compared to see indexes you next midstream but.
Curious situation be interesting to watch.
Yes, maybe the maybe the vice versa, and taking an a or.
Thanks for the idea.
[laughter].
Thanks, guys.
Hi, Thanks.
Our next question comes from net Bam off with Wells Fargo. Please state your question.
Yes.
Hi, Thanks for taking the question a two part one on the JV distributions. So first could you maybe talk about the reason for only two monthly distributions being received by am and and second it seems the distributions for the so the two months, where 90 million, which would imply nine.
And a half per month.
While you quantified the impact to EBITDA for the third month to be about 7 million. So if you could just talk about the step down in monthly distributions from the JV.
Yeah. The first it's just simply a timing issue, we only book on when we actually get paid received and so we only received too.
One of these quarters down the road, obviously there'll be a catch up payment or exceed four and that was just hard to predict.
On the 19 million versus seven.
It's generally around that $21 million core quarter for the three months.
When we looked at the.
When we budgeted we budgeted at that 7 million a month, so that 7 million, probably with where the volumes were at right now in excess of of where we had forecast probably would have been more around that nine and 10, but when we just highlight to seven that was actually what was in the forecast.
Got it that's helpful. And then maybe just switching gears on your supply demand analysis of the North American gas market.
Maybe could you just talk about your view on the development of the Haynesville as opposed to the northeast so fill in the supply reduction from declining production in most other basins.
Okay.
Well I think yeah, we've seen a decline in Haynesville I think the latest numbers I saw was 13 Bcf a day went under 11 Bcf a day out of the Haynesville and just the last few months and.
What is the.
Reason for that don't know, we would we look at the Haynesville as not quite as economic as really the.
Very premium gas basins like Appalachia so.
As it just add capital allocation issue, but we're following it as well and.
We do see it's been a puzzle I think to many in the industry as to how the Haynesville as stayed so high and so I don't know the exact answer but I think it probably doesn't surprise industry that much that it's declining relative to some of the other gas plays.
Got you and then last one for me if I may are there any updates on the litigation with Veolia, then you could share.
There are no updates.
Okay. Thanks, that's all I had thank you. Thank you. Thanks.
Our next question comes from Sunil Sibal with Seaport Global Securities. Please state your question.
Yes, hi, good morning, guys and thanks on the clarity.
Just wanted to go back the slide nine.
Thank you talked about.
Thanks infrastructure build out.
On the differentials between say Noughties, Dan Mont Belvieu, so it seems like second floor.
What a too.
The one time items and then.
Let me start demand is probably out so.
Okay.
In addition to the new infrastructure you talked about.
Yes.
Pipe in the capacity being expanded.
Those that do you think would lead to tightening of the Bellevue to the northeast spread.
To me Thats really the the primary driver I mean, the northeast.
Its infancy was always a premium to Bellevue when the market was short Ngls for refinery gasoline blending for the Butanes and contains and then propane for the rest calm market.
Appalachia is growing so much now that we've really needed the export outlet to two during the basket leader as you've heard us say in numerous times. So that's really been the key driver and.
The arms that will be received a lot of Mariner east will play a role on what the floor is back in the basin and we've we've seen we got to predicted the this slide has been shown for some time before Mariner East came online.
Witnessed the results over the last year and happen.
It's very much met our expectations of what it was going to due to the to the the for profit by lower price in the basin.
Once that was.
The bottleneck.
Okay got it and could you remind us.
On on the transport side, you, obviously have capacity on Mariner east.
Then in terms of locking in.
The bodies.
Our Dod European prices do you have.
On the on the shipping side also.
We have indexed.
Sales to the far East index in the northwest Europe, we have not ourselves actually charter the vessels. So we are predominantly selling fob the market's hooked up Doc but.
Peter a Mont Belvieu IRA RFP linked to price and so when you sell versus international Index you can.
I'm one imply what you're shipping cost was in the price that you are you sold the docket.
Okay got it.
And then one kind of broader question on on the leverage and that dividend coverage philosophy. So it seems like I think in the past you've articulated 1.11 by the Wix and a dividend coverage. We are you comfortable bed.
And lemonades, so three and a half the forex.
So obviously, you're staying within those kind of broader put Amit does the same type.
It is king overall, yeah complex and title complex.
You should think about you kind of revisiting those.
It does.
At some point of time, obviously, you know you execute on.
No debt reduction strategy.
I think that midstream and Thats, what all is going up more will be on in all those kind of numbers and kind of pointing to more on the victim.
Yes on both.
On those two criteria.
Yes, nothing at this time I think the midstream industry is trying to get down to our balance sheet or is that in the mid threes.
I do see some of those coverage ratios going higher for other midstream providers, but that's generally because they may have long term capital.
Projects or other kind of calls on there are cash at Antero midstream Doesnt have so right now we're comfortable in those those ranges that you mentioned.
Okay got it thanks.
Thanks Neil.
No no further questions at this time I'll turn it back to management for closing remarks. Thank you.
I'd like to thank everyone for participating in todays conference call. If you have any further questions. Please feel free to reach out to us.
Thanks again.
Thank you. This concludes today's call all parties may disconnect have a good day.