Q3 2020 Antero Midstream Corp Earnings Call
This time all participants are in listen only mode. A question answer session will follow the formal presentation.
It should require operator assistance. Please press star zero under telephone keypad. As a reminder, this conference is being recorded its now my pleasure from a coal over to Michael Kennedy Chief Financial Officer. Please go ahead Sir.
Thank you for joining us for Antero Midstream third quarter 2020, Investor Conference call.
Let's spend a few minutes going through the financial and operating highlights and then we'll open it up for <unk>.
I would also like to direct you to the home page of our website at Www Dot Antero midstream dotcom.
Well, we have provided a separate earnings call presentation that will be reviewed during today's call.
Before we start our comments.
At first like to remind you that during this call Antero management will make forward looking statements such.
Such statements are based on our current judgments regarding factors that will impact the future performance.
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 to the most comparable GAAP financial measures.
Joining me on the call today are Paul Rady, Chairman and CEO of Antero resources, and Antero Midstream Glen.
Glen Warren President and CFO of Antero resources, and President of Antero Midstream and David Catalano, Vice President of liquids marketing and transportation with that I'll turn the call over to Paul.
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Thanks, Mike.
I'd like to start by.
Hi, highlighting the progress Hey, our has made on its asset sale program and Twentytwenty beginning on slide number three titled.
ER asset sale refinancing and debt repurchase update.
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Today, Hey, our has executed $751 million of asset sales achieving the bottom end of its 750 million to a 1 billion dollar asset sale target.
These transactions have allowed a are to reduce its near term maturities.
$1.3 billion since initiating the asset sale program in the fourth quarter of 2019.
And position they are to repay its 2021 and 2022 maturities.
Hey, art continues to monitor various asset sale markets and any additional proceeds will be used for further debt reduction.
The current natural gas and NGL and NGL fundamentals.
Continuing to look encouraging as we head into 2021.
As Dave can't along though will discuss in his comments.
This further supports upside to a ours free cash flow profile driven by the scale A.R. has achieved over the last several years.
To put it in perspective as the second largest NGL producer in the U.S. every five dollar per barrel change in C plus NGL prices and.
Groups, a ours annual cash flow profile by over $225 million.
On the natural gas side.
There is 100% hedged in 2021.
But the improving gas strip increases a ours underlying value and opportunity set.
Now, let's turn to slide number four.
Titled a our firm transportation provide stability.
The Red line in the chart represents the Appalachian basis differential, which has averaged 82 cents below nymex going back to 2014.
Hey, ours premium F. T firm transportation has delivered a five cents discount to Nymex over that same timeframe.
It is also worth noting that since they are has had access to its entire F.T. portfolio and 2018.
It has been able to realize a six cents premium to Nymex to date.
During the third quarter. This benefit was even more pronounced as Appalachian basis differentials blew out and regional prices traded at $1.50 below Nymex.
[noise] as depicted on this slide.
Hey, ours, F.T. portfolio provides pricing stability and production flow assurance.
The risking a ours business model.
It effectively provides an insurance policy that protects physical gas flow and allows a R to hedge liquid Nymex Henry hub prices.
Has allowed a yard to avoid shut ins and curtailments experienced by other appears in Appalachia, and Internet drive stability and reliability for Am's revenue stream.
Lastly, I would like to briefly discuss am's corporate sustainability report, which highlights our outstanding environmental social and governance or E.S.G. performance on slide number five.
[noise] since inception, Antero midstream has been committed to and environmental excellence and our greenhouse gas intensity is one of the lowest in the industry.
Our methane leap loss rate of zero point zero.
One 7% in 2019 was significantly below the one to future industry and the sector targets of 1% and 0.28% respectively.
Looking forward, we believe natural gas will be key to the energy transition in the coming decades, as a complement to renewable energy growth.
As one of the largest natural gas gathering and processing midstream companies in the U.S., we are well positioned to maintain our peer leading E. S. G position, while striving to improve our metrics even further through.
Through our Twentytwenty five environmental targets.
On the governance front, and 2020 and 2019 Antero midstream transitioned away from the MLP structure to a fall C Corp structure significantly enhancing shareholder rights and improving corporate governance. Our board is comprised of a majority of independent.
Directors and our compensation plans are based on metrics aligned with shareholder value, including return on invested capital.
Average S.G. metrics and perk per share and cash flow growth.
With that I will turn it over to Dave catalog, though.
[noise] Thanks, Paul.
Turn to slide number six and begin by adding some color on the NGL and LPG macro environment.
In the aftermath of the March Opex, plus price war and the COVID-19 pandemic, the resulting decline in rig and completion crew activity in oil focus shale basins as set up expectations of a prolonged period of depressed U.S. oil production.
Thus far that is what has materialized a decline in flattening of oil production, which has resulted in a decrease and associated NGL production from the oil focus place.
The chart on the left hand side of the slide illustrates that U.S. NGL supply forecasts have declined by 1.1 million barrels per day since the beginning of this year.
We believe it may take three to four years for U.S. NGL production to return to pre COVID-19 levels.
Chart on the right hand side of this slide highlights the expected surplus of LPG export capacity along the Gulf Coast.
Since the start of the shale Revolution, we haven't enjoyed only a handful of periods when ample export capacity has been available looks.
Looking forward.
Full dock capacity will allow the U.S. to fully accessed the international markets on a sustained basis, resulting in U.S. Mont belvieu prices closely linked to international markets.
While antero has enjoyed unrestricted access to these international markets through our Mariner east commitments for nearly two years now this fundamental change on the U.S. Gulf Coast will benefit Antero share of NGL production that is sold domestically and linked to Mont Belvieu pricing.
Turning to slide number seven titled NGL price recovery expected.
We can see that the strength of NGL markets relative to W.T.I. Im Brent has continued to stay elevated as a result of resilient petrochemical and residential commercial markets. During this pandemic.
Here, we illustrate the outperformance of Mont Belvieu C plus pricing relative to WT I in 2020.
On the right, we see the continued outperformance or propane relative to Brent at the far East index or FBI, which is the benchmark in Asia.
What we've witnessed as that demand for LPG in key Asian markets. During the third quarter has actually increased year over year and that the strength of Ngls witnessed early in the pandemic was not temporary looking.
Looking beyond the resilient residential and commercial demand the relative perform preference of gasoline in the global transportation fuels market. During this pandemic has also been favorable for NGL pricing on a relative basis to oil.
Gasoline has been less affected than distillate, which have seen inventories increased significantly due to the more pronounced and prolonged decline in jet fuel demand.
Resulting weak distillate demand has led to reduced refinery runs in the U.S. and globally, which in turn has lowered the production of refinery LPG and other gasoline blend components such as Napa.
Ultimately these downstream trends have been using even further supportive of blending butanes and C five plus into the gasoline pool.
In addition, the relatively tighter supply and demand dynamics for NAFTA has a knock on effect for LPG as there is some competition between naphtha and LPG for use as a feedstock in select steam crackers in Europe and in Asia.
Overall, we believe the global market dynamics are constructive for NGL prices at a minimum in the near to mid term timeframe.
Turning to slide number eight titled NGL pricing outlook the chart illustrates.
Straight to the value that some third party analytical teams, including the Citibank commodities teams shown here continue to place on Ngls in 2021 and beyond based on their bottoms up global supply demand models behind.
Hi, many of these forecast as the realization that if oil was to stay range bound throughout 2021 at 40 to $45 a barrel the world will simply not be able to supply enough hydrocarbons in the subsequent years to meet demand in a post pandemic environment, which undoubtedly will result in higher prices.
Looking more closely at the northeast takeaway 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.
Realized northeast differentials continued to improve year over year with more and more volume shipping out of the basin on the Mariner East system as energy transfer has added incremental capacity since initially, placing mariner east two in service.
The northeast LPG supply potentially at its peak here in 2020, we ultimately expect northeast differentials to Mont Belvieu to strengthen even further in coming years with that I will turn it over to Mike.
Thanks, Dave.
I'll begin my comments, the third 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 3.1 Bcf per day in the third quarter, which represents a 13% increase from the prior year quarter.
Compression volumes during the quarter averaged 2.8 Bcf per day, a 16% increase compared to the prior year.
Am added 120 million per day compressor station in the Marcellus and compression capacity was 90% utilized during the third quarter of 2020.
Our 50 50 joint venture gross processing volumes averaged 1.5 Bcf per day, a 43% an increase compared to the prior year quarter Cross.
Processing capacity was over 100% utilized during the third quarter.
JV growth fractionation volumes averaged 39000 barrels per day, a 22% increase from the prior year JV fractionation capacity was 98% utilized during the quarter.
Freshwater delivery volumes averaged 111000 barrels per day, a 21% decrease from the prior year quarter, driven by lower completion activity by Antero resources.
Freshwater delivery volumes were ahead of expectations during the third quarter driven by an acceleration of complete completions as they are averaged a company record eight and a half completion stages per day.
This pulled incremental stages into the third quarter originally scheduled for the fourth quarter and as a result, we expect a reduction in freshwater delivery volumes in the fourth quarter.
Moving on to financial results.
Adjusted EBITDA for the third quarter was $229 million, a 5% increase compared to the prior year quarter. The.
Distributable cash flow for the third quarter was $189 million, resulting in a DCF coverage ratio of 1.3 times.
Capital expenditures during the quarter were $37 million, a 77% decrease compared to the third quarter of 2019 dirt.
During the third quarter, we generated a company record of $158 million of free cash flow before return of capital compared to just $23 million in the prior year quarter.
Moving on to the balance sheet and liquidity as of September Thirtyth 2020, Antero Midstream had 1.19 billion drawn on its 2.13 billion revolving credit facility, resulting in approximately $950 million of liquidity.
Total debt and leverage were both flat quarter over quarter at 3.1 billion and 3.7 times respectively.
I'll finish my comments on slide number 11 entitled.
Am updated guidance summary.
As depicted on the slide we have taken significant steps to reduce capital investments by over $100 million compared to our original budget a 34% decrease.
Driven by throughput exceeding expectations and operating expense reduction achieved to date, we increased our adjusted EBITDA guidance from the previous range of 800 850 $15 million.
$835 million to $145 million.
These two factors have driven a $90 million or 23% increase in our free cash flow guidance in 2020 at the midpoint of the revised revised guidance range of 485 and $495 million.
In addition, we are currently trending towards the higher end of our return on invested capital target of 14% to 16%.
Our just in time capital investment philosophy has positioned us to quickly adapt to changes and they are its development plan and avoid being overbuilt on midstream infrastructure.
All of these achievements would not be possible without the hard work dedication from all of our employees, who safely delivered another exceptional operational quarter.
With that operator, we are ready to take questions.
Good job.
Ducking your question and answer session, if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you like Trubridge a question from the queue for participants using speaker equipment, maybe necessary to pick up your handset before price.
Star one one moment, please what we pull for questions.
Our first question today is coming from Jeremy Tonet from JP Morgan. Your line is now live.
Hey, Good morning, guys. This is James on for Jeremy.
I guess, just starting off with 2021 and I understand it's early.
To provide any any numbers there, but I guess just given the revised guidance for 2020.
And then what that assumes for for Q.
Would it be fair to assume that Fourq you might be a good annualized run rate for 2021, just assuming.
Stephanie document here.
No I mean, it would be it.
At least on the revenue side, probably okay, but.
Antero Midstream had a couple expense items in 2020 that will not repeat in 21 and thats specifically around the.
The Clearwater facility and then also.
On the.
Remains to be seen but.
The rebates step up in 2021, though the threshold level. So some of those may or may not be achieved whereas in the 2020 timeframe in fourth quarter. We expect those to be achieved so EBITDA should be higher than that kind of fourth quarter run rate.
Got it that's helpful.
Then just shifting to the debt profile here.
It seems like it's been trending a little bit higher the past few quarters can you just talk maybe about.
Back in terms of the pace of deleveraging next year I know you guys had mentioned you're comfortable with in this kind of three to four times range, but just want to see given the free cash flow inflection. If you can see that leverage ticking picking over next year.
Yeah, I don't know what you are referring on the second in the third quarter, we actually pay down a little bit in the second quarter in the third quarter, we only increased leveraged by $30 million and Thats, because we have our interest expense and the actual cash interest paid occurred in March and September of every year for $60 million versus an interest expense 30. So.
We actually had free cash flow above the return of capital. This quarter I think it is 147 in about $10 million worth so thats first time so.
Now, we expect leverage to be flat when we look at the model going forward, we don't add any absolute leverage.
It stays flat and with EBITDA ticking up a little bit that that 3.7 times trends a bit lower but kind of stays in the mid to.
Mid threes level.
Got it and then just one more if I can.
First of all the macro on but.
See you given the take away the base and you have the Atlantic coast cancellation.
Theres MVP hurdles remaining.
I guess, just looking out next year.
It really impacts if maybe MVP is delayed on the on the business.
For me I think that would be encouraging for.
Hey are obviously, a R has from France transport already in place to deliver its production to the premium priced markets. So any widening in basis does not affect them from a production flow assurance from a throughput in am system, but it probably allow a arda have lower marketing expense.
Sense, which would improve just their overall financial profile.
Got it thanks for that for me.
Yeah. Thanks, Thanks James.
Thank you. Our next question today is coming from John Mccain from Goldman Sachs. Your line is alive.
Hi, everyone. Good morning. Thanks for the time just wanted to circle back on to those actually just that's been a little bit different way. The 2020 guidance implies a bit of a step down four for Q 20, I understand that they are.
Production's going to step back a little bit but is there anything else moving there maybe a one off on either side.
No I mean, one thing I mentioned in my comments.
You probably about half the completion activity that we had in the second and third quarter on the water.
And so when you look at that way I think the water EBITDA for this quarter was in between 30 and $35 million. So half of that would suggest you on next quarter's water EBITDA would be 15 to 17 million. So thats part of the primary step down and then you do have.
A little bit lower.
About 100 million a day lower volumes of throughput. So those two in combination gets it to that implied EBITDA kind of at the midpoint in the fourth quarter of $195 million to $200 million.
Great. That's helpful. Thank you and then my Oh.
Well, it's actually.
Didnt use the buyback this quarter, but can you guys just share how you think about using the buyback going forward and whether or not you might consider increasing leverage even just temporary temporarily to buy back shares.
Yeah, no, we wouldnt consider increasing leverage to buy back shares we still have 150 million.
Available to us and were just opportunistic around that.
But we definitely take into account our leverage and do not want to increase our leverage for buybacks.
All right that's it for me thank you.
Thank you John.
Thank you. Our next question today is coming from Gregg Brody from Bank of America. Your line is now live.
Hi, guys.
Just just a clarification on the.
Midstream fee.
Incentive which was hit this quarter.
I guess, you paid a or do you expect that to.
To occur in the fourth quarter as well, yes. It's.
And that's that's where members and Theres no delay in that that.
That happens so it was in the third quarter that happened you paid pay our third quarter four point should you actually had one more way we pay them in October October okay.
Is it for me thanks for the time.
Greg.
Thank you. Our next question today is coming from Sunil Sibal from Seaport Global Securities. Your line is now live.
Yes, hi, good.
Good morning, guys. Thanks for taking my question.
First question was related to the NGL volumes that you process the JV.
It was a.
Decent pickup.
Sequentially in that number.
Is that anything to do with it.
Turning NGL, so because the processed volume slowed up 6%, but.
NGL flows seems like went up more so just trying to understand that.
No nothing different I was just from the production growth today aren't being focused of late.
Heavy liquids window of the Marcellus.
Okay.
And then.
On on the consolidation front obviously.
NP sector.
Seeing some consolidation effort.
Curious you know what.
Two views are.
Consolidation in the midstream side I think in the past you guys have talked about growing third party.
And as I was wondering if you could frame.
We must put US you know any opportunities or do you see that playing out.
No we're still focused on an organic the organic business, but we said, we definitely keep our eyes open for opportunities and.
I don't think there's anything near term, but we'll keep evaluating anything that comes up in the air.
In the basin and we generally have shied away from situations, where we buy.
By into gathering driven by another producer so that's not really been of interest it's bit more looking at downstream opportunities.
Got it. Thanks. Thank you thank you Neil.
Thank you we've reached end of our question answer session I would like to turn the floor back over to Michael Kennedy for any further or closing comments.
I want to thank everyone for participating in our conference call. Today. There are any further questions. Please feel free to reach out to us. Thanks.
Thanks again.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.