Q4 2020 Antero Midstream Corp Earnings Call
[music].
Greetings and welcome to the Antero Midstream fourth quarter, 2000, and 'twenty earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I will now turn the conference over to our host Michael Kennedy Senior Vice President Finance and Chief Financial Officer. Thank you Sir you may begin.
Thank you for joining us for Antero Midstream fourth quarter 2020, Investor Conference call.
I'll spend a few minutes going through the financial and operating highlights and then we'll open it up for Q&A.
Also like to direct you to the homepage of our website at Www Dot Antero midstream dot com for it provided a separate earnings call presentation that will be reviewed during today's call.
Before we start our comments I would first like to remind you and during this call Antero management will make forward looking statements.
Such statements are based on our current judgments regarding factors that will impact the future performance from Antero resources Antero midstream.
And are subject to a number of risks and uncertainties, many of which are beyond and tariffs 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 are Paul Rady, Chairman and CEO of Antero resources, and Antero midstream and.
Glen Warren President and CFO of Antero resources, and President of Antero Midstream that I will turn the call over to Paul.
Thanks, Mike.
I'd like to start by discussing the significant steps a R has taken to improve the balance sheet.
And senior note term structure on slide number three.
Yeah.
Since embarking on the asset sale program just over a year ago.
<unk> has successfully executed and $751 million of asset sales, which allowed us to access the senior unsecured market several times in 'twenty, and 'twenty and 'twenty 'twenty, one raising $1 $5 billion and proceeds.
Antero has also raised $1 $1 billion of committed capital to the creative financings, which included a volumetric production payment.
And overriding royalty transaction and now a drilling partnership.
This level of Counterparties support is a strong endorsement of antero <unk> assets and operations.
Proactive steps allowed AR to eliminate approximately $2 $3 billion of near term maturities.
As depicted on the slide.
Our has completely eliminated its 2021 and 2022 maturities through a combination of open market purchases and early redemptions.
Looking forward <unk> expects to generate over $1 $5 billion of cumulative free cash flow through 'twenty and 'twenty 'twenty through 'twenty and 'twenty five to repay long term maturities and addition to the ability to access.
These senior unsecured markets to refinance.
So in summary.
And we've made tremendous strides to improve the financial strength of a R and right size the balance sheet and maturity schedule.
Now, let's turn to slide number four.
To discuss a erez formation of a drilling partnership.
Under the agreement <unk> capital and affiliate of quantum Energy Partners will fund, 20% of drilling and completion capital in 2021 and between 15% and 20% of total drilling and completion capital in 2022 through 2024 and exchange for a proportionate work.
And interest percentage and each well spud.
Q well, we'll participate in every well that antero drills and the Appalachian basin over the next four years, starting with wells spud as of this last January 1st this year.
As you can see and the lower right hand side of the slide we will drill and complete over 300 wells over the next four years together.
The result is an incremental 60 wells.
And being drilled through 'twenty and 'twenty four as compared to our initial base development plan.
On a net basis and net capital spending and production will remain unchanged from our prior maintenance capital program. However, the incremental drilling partnership completions are expected to drive incremental gross production growth benefiting both aam's.
Gathering and processing and water businesses.
Slide number five.
Illustrates how antero is in a unique position to benefit from a drilling partnership.
First <unk> has over 2000 and premium undeveloped core drilling locations in the Marcellus and Ohio, Utica and a contiguous acreage footprint that delivers efficient development.
Second since over 1400 of <unk> 2000, plus premium undeveloped core locations are liquids rich hey are as well positioned to take advantage of the strong NGL prices.
Based on our recent basin wide study of the remaining undeveloped locations and Appalachia, we estimate that these 1400 AAR locations represent approximately 38% of the remaining liquids rich core locations and Appalachia.
Third.
A R has unutilized firm transportation to premium markets that supports the incremental gross gas production from the drilling partnership.
This allows <unk> and its partner to deliver gas to Nymex base indices. Unlike many northeast producers that experience frequent basis blowouts and often have to shut in supply.
Lastly, and its partner are able to quickly developed and resource given the integrated nature and flexibility of Antero midstream.
These factors all of which are unique to our drive the substantial increase in <unk> free cash flow profile over the next several years as detailed on slide number six.
Titled a our free cash flow enhancement.
As depicted by the Red box on the left hand side of the page. The drilling partnership allows a R to fill unutilized premium firm transportation and reduce net marketing expense by approximately $260 million over the next five years or approx.
<unk> hundred $65 million per year, beginning in 2022.
Driven by the throughput growth on am dedicated acreage, we now expect to achieve additional low pressure gathering earn outs totaling approximately $75 million through 2023, when the earn out program expires.
It is important to note that the incremental am freshwater EBITDA from the additional completions more than offsets the additional earn out state by AAM and addition to the benefit AAM receives through the increase and gathering compression processing and fractionation throughput.
Right.
Lastly, we assume that day or will we will receive a delayed carry and the drilling partnership in the form of one time payments per tranche that totaled approximately $50 million by achieving certain IRR thresholds.
And total as depicted by the Green bar the drilling partnership increases <unk> free cash flow by approximately $400 million through 2025.
Importantly, the drilling partnership also enhances <unk> free cash flow profile as detailed on slide seven.
As depicted in the Blue box the incremental completions over the next five years serviced by Aam's freshwater delivery assets results in approximately a $150 million of incremental freshwater EBITDA compared to the AAR maintenance capital.
And I'll play them.
And the Gray bar you can see we expect a low single digit annual throughput.
To drive approximately $225 million of incremental gathering and processing EBITDA net of the $75 million of additional low pressure earn outs under the growth incentive fee program.
After netting out the $175 million of additional capital most of which is an acceleration of capital we are forecasting to $200 million of incremental cumulative free cash flow after dividends through 2025 compared.
To the AAR maintenance capital base plan.
With that I will turn it over to Mike.
Thanks, Paul.
I'll begin my am comments with fourth quarter operational results beginning on slide number eight titled year over year midstream throughput.
Starting in the top left portion of the page low pressure gathering volumes for $3, one Bcf per day and the fourth quarter.
Which represents a 16% increase from the prior year quarter and flat sequentially.
Compression volumes during the quarter average $2 nine Bcf per day, and an 18% increase compared to the prior year.
Our 50 50 joint venture growth processing volumes averaged one five bcf per day.
26% increase compared to the prior year quarter.
Processing capacity was over 100% utilized during the fourth quarter.
JV gross fractionation volumes averaged 40000 barrels per day, a 22% increase from the prior year.
<unk> fractionation capacity was 100% utilized during the quarter.
Throughput volumes for ahead of expectations due to the acceleration of well turn in lines and outperformance of our recent pads turned to sales.
Freshwater delivery volumes averaged 43000 barrels per day, a 71% decrease from the prior year quarter, driven by lower completion activity by Antero resources as expected.
Before moving onto our full year 2020 achievements I wanted to briefly touch on our balance sheet and liquidity.
As of December 31, 2020, Antero midstream had $613 million drawn on its $2, one 3 billion revolving credit facility.
<unk> and approximately $1 $5 billion of liquidity.
<unk> total debt and leverage for both flat for <unk>.
Third consecutive quarter at $3 1 billion and three seven times respectively.
Now, let's move on to full year 2020 achievements on slide number nine and.
Adjusted EBITDA for the full year 2020 was $850 million, a 3% increase year over year and $10 million above the midpoint of our guidance.
Capital expenditures for $207 million.
68% decrease year over year and in line with guidance.
<unk> EBITDA growth and declining capital generated a company record $498 million of free cash flow before dividends and 2020.
Compared to just $62 million from the prior year.
Importantly, we generated a return on invested capital of 17% and 2020, a four point increase compared to the prior year highlighting the benefits of our just in time capital philosophy and high asset utilization rates.
Slide 10 illustrates our capital budget and reallocation of capital to fund the 2021 capital budget.
As detailed on the left hand side of the page our prior capital target supporting <unk> maintenance capital base plan was $185 million.
With the announcement of the drilling partnership and expect to accelerated approximately $65 million for capital into 2021.
Bringing the revised capital budget for $240 million to $260 million.
Over the next five years am expects to invest an incremental $175 million to support the additional activity and throughput growth from.
From the drilling partnership.
In order to finance, the incremental capital investment, we announced a reduction and aam's dividend to <unk> 90 per share beginning in the first quarter of 2021.
This reduction allows us to allocate capital towards the highest rate of return project.
And an expanded portfolio.
As a result for the drilling partnership development plan.
As depicted on the right hand side of this page. This allows and internally fund both its return of capital to shareholders and capital investments and 2021 based on the midpoint of guidance.
We believe this transition to self funding C Corp, significantly de risked and business models, so that no longer requires incremental outside capital to deliver on this organic growth program.
In addition, and expects to Delever to three times or less over the next five years.
Slide number 11 illustrates for five year outlook for am from 2021 through 2025 based on a drilling partnership announcement.
Driven by the throughput growth from the drilling partnership we're forecasting low single digit annual growth and EBITDA through 2025, which results in cumulative EBITDA of $4 $5 to $4 $6 billion from 2021 through 2025.
As you can see this fully funds our return of capital to shareholders and purple and organic project backlog of 1.05 to 1.15 billion over the next five years.
The remaining excess free cash flow after dividends depicted in orange totals approximately $500 million over the next five years.
This excess free cash flow will be utilized to reduce debt and opportunistically repurchase shares under our share repurchase program, which we have extended an additional two years to June 30 of 2023.
As a reminder, we have previously utilized $150 million of the $300 million share repurchase program capacity repurchasing 31 million shares at an average price of $4 88 per share, leaving $150 million of remaining capacity.
I'll finish my comments for slide number 12, titled Antero Midstream outlook summary.
This slide illustrates the benefits for AAM from the drilling partnership compared to the previous outlook based on and our maintenance capital base plan.
With the drilling partnership Antero midstream expects a low single digit annual EBITDA growth through 2025 compared to a flat EBIT profile previously.
Zero and partnership also increases and organic project backlog from $925 million at the midpoint to $1 1 billion from 'twenty, one and $2 25 or $175 million increase.
These organic projects are forecasted result, and $200 million of incremental free cash flow after dividends over that timeframe.
Paired to the previous maintenance capital plan.
Due to the upfront acceleration of projects, we expect 2021 and 2022 to be approximately free cash flow breakeven after dividend and then for AAM to generate $500 million of cumulative free cash flow after dividends. After those projects are placed online through 2025.
And importantly, we expect <unk> to continue generate peer leading ROIC and the mid to high teens and <unk>.
<unk> leverage profile declined to three times or less by 2025.
Under the prior dollars 23 per share dividend level and drilling partnership resulted and outspend in 2029 and leverage and the high three times range.
Given these circumstances, we have decided to reallocate a portion of the dividend payments, so that a and does not add any debt or leverage to its balance sheet to fund these attractive opportunities.
In summary, we believe this plan allows am to check all the boxes to be a best in class Midstream C Corp, with enhanced corporate governance EBIT growth free.
Free cash flow positive after dividends and peer leading ROIC and a strong balance sheet.
With that operator, we are ready to take questions.
Thank you.
At this time, we will be conducting a question and answer session.
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Our first question comes from Shneur.
<unk> <unk> with UBS. Please state your question.
Hi, good afternoon, everyone.
Just wondering if we can start off with the decision around the dividend reduction.
Wondering if you can walk us through the different scenarios that you shared with the board and and how you are.
EBIT for the level that you put it to you.
I think we fully appreciate the fruit and nature of not borrowing to fund capex and dividends.
But the level seems kind of surgical.
What's the goal to just sort of sit there and say I need to cover the capex for this year, but we don't want to cut it too much because you are comfortable with where leverage is headed.
Alternatively, why not just cut at 50% or more to sort of get to your goals faster just kind of curious if you can walk us through the decision making process and.
Whats different considerations you you've thought about in terms of the the choice level.
Yeah. Thanks for the board of course considered every alternative and and you stated at the plant and at the end of the day was to set the dividend such that we have ultimately positive free cash flow after.
Payment of dividends and capital so we havent bit of a surge and capital for the next couple of years because of the drilling partnership but that ends up spitting out a 100 and another $100 million or so of EBITDA down the road, if you get three or four years down the road and once you built that out so it's a very profitable venture for AAM suddenly and a lot of sense. So recap.
Allobrain, we're already well positioned at three seven times leverage and didn't feel the need to drive it down overnight by.
By slashing and dividend and we want to take care of our shareholders and distributed and appropriate amount and we felt like this was the.
And calibration for us for the next couple of years anyway, and then if you model this out.
Once you get back into a strong free cash flow position. There is room for more return of capital when you get further out while at the same time Delevering and so we felt like that was it was a sweet spot that non <unk> was the right place to be.
Okay.
You talked about being at a point, where you can actually.
Buy back shares at some point and the future of return capital I think towards you chose.
Given the fact your stock is obviously trading down significantly today, I mean, do you sort of sit there and sort of oscillate between potentially buying back shares and the interim as well also.
Or is it at this stage right now it's sort of like following the reallocation plan and not looking at this share says is opportunistic at these levels.
We will always be opportunistic and.
We have been in the past we book.
Got back I think it was 30 million shares.
Just under $5 $4 80 suffered over the past couple of years. So it will be opportunistic and that has paid off very well right. So.
I wouldn't be surprised to see us buy back shares if the shares are performing but we think that they should so thats. The reason, we extended that plant and it's a $300 million plan of which we repurchase plan of which we've already utilized 150 of that so we have 150 to go so that is alive plant thats out there.
Okay, and then maybe a quick follow up question on Slide 12, you talk about you're targeting and ROIC of 15% to 17%.
And what are what are the chances odds probabilities. However, you want to characterize it that there is another drilling partnership down the road that.
Dies, and we get like an incremental $65 million bump in Capex like do we have to Kingston and ourselves about the potential that the dividend, it's almost becoming variable in nature that you would have to cut it again.
To achieve and if you had net incremental step up or is it and in fact that <unk> is now filling its capacity.
The fixed capacity that it has and it was you're kind of drilling up to that point and you don't see a or potentially.
Expanding above that that would require a M to spend more capital.
Well number one it's not a variable dividend and.
It was set like I said and the sweet spot on the.
At the lowest level in terms of from here. We think it's just upside in terms of variability it'll be increasing the dividend overtime, but Ah <unk> holiday or you know this was a one time deal to fill up.
Firm transportation.
So I don't see another drilling partnership and and <unk> future. It was a one off to address.
Our concern or sort of a burden on AUR to continue to pay for unutilized firm transportation and not fill that because of its needs to stay at maintenance capital and Thats what the market. Once these day. So it was a good way to address the market stay at maintenance level capital flat production for a R and to fill that with a wedge of third party.
Paul.
Dissipation and production so no I would consider that as a one off transaction, yes, and I'd also add.
And I don't know about your work concern.
Actual drilling JV is adding an incremental $200 million and free cash flow over the five years, we're investing in projects that have very high rates of return and then ultimately it's about $100 million of additional EBITDA and an annual basis and year three and out so.
And it's in a very attractive opportunity for am and we're very happy that they are entered into this drilling JV.
So yes.
Yes and.
And the top matrix right because you actually have growth not meeting midstream was half growth out there and we're looking at call it 3% and year EBITDA growth leveraged very manageable three seven and going down over time.
Free cash flow positive so it really checks all the boxes.
Yes.
I totally get it.
It was just we're trying to understand.
How to be thinking about all the different almost like putting it on a Bayesian trio of how youre thinking about it so.
And there's some conclusion here is it's basically surgical in nature, you were targeting something specific and there is.
There was no reason to consider a larger card or the fact that there could be a scenario down the road that would result in another time.
Given the commodity environment that we see today is that kind of and a fair recap repair if rates, yes, I think thats I think thats well said.
Okay perfect. Thank you very much guys I appreciate the color and stay safe.
Thanks.
Thank you. Our next question comes from Jeremy Tonet with J P. Morgan. Please state your question.
Hey, Good morning, guys. This is James on for Jeremy just following up with <unk> question.
And just doing the math on the savings from the.
Dividend reduction this year.
And taking out the incremental Capex you still have about.
Call. It 90 to 100 million of savings do you expect that to all go back to paying down debt and and do you expect that the three seven.
Average that you guys entered 2022 kind of remained flat and 2021.
Yes.
Actually it ticks down a little bit but yes.
<unk>.
Those amounts.
And would have been paying dividends and we used to pay down debt and also may have some amounts for allocation for.
Repurchases of shares if it's opportunistic.
Okay Fair enough and just a second question. If you can remind us when you expect to become a cash taxpayer and within the guidance for free cash flow through 2025 is there any consideration for for cash taxes for that yes.
We're not a cash taxpayer over that five year period.
Got it alright, I'll leave it there thank you.
Thanks.
Our next question comes from John <unk> with Goldman Sachs. Please state your question.
Hey, Thanks for the time I just wanted to follow up I appreciate the longer term outlook for free cash flow and EBITDA.
Just wondering if you could talk a little bit about maybe the risks to those numbers either relative to the upside or the downside. Thank you.
Yeah.
Well I think you can look at am historically right I mean, it has been steadfast in terms of its capital spending and the generation of returns and these are the same types of projects that we've been doing is just accelerating.
Projects for this compression our LP gathering or.
HP gathering water et cetera. So it's the same type of projects that we've been doing it's just pulling it forward and so yeah, we feel very good about that in terms of returns and.
Lack of variability or variance and the outlook.
So at a R.
Address all their near term maturities or leverage is coming down and will be below two times debt to EBITDA by year end and it's already a maintenance capital program for them. So.
I think there's not much downside from those from that and drilling partnerships.
And I am continually as you saw this share in years past feeds on volumes.
Our 12 and performed very well.
Okay. That's fair. Thank you made my follow up will be on that that last point.
It seems like a are probably mostly done and kind of liquidity management.
All steps right now any new thoughts on net remaining AAM stake and what they might want to do with that.
AAR continues to enjoy that.
<unk> that stay for dividend stream. So no no real change there I mean are generating so much cash free cash flow this year and going forward at the current strip even in a backward dated strip that there's there are some.
Need to sell any shares.
Okay.
Thank you.
Thank you.
Okay.
Thank you and just a reminder to ask a question press star one.
You can press star tutor and move your question from the queue.
Our next question comes from Chris still left with Barclays. Please state your question.
Hey, guys good afternoon.
I appreciate the comments there on the debt.
And not being any cash tax and the forecast, but are you able to share even broadly speaking sort of when you do expect and start paying cash taxes.
Yes, no we don't have that year.
And it's not in any of our forecast and they go out six seven years, so it's not in that timeframe.
Okay.
And then maybe as a follow up to what I believe and Cheniere was asking.
And through the slides it looks like they kind of.
Right.
Max FTE capacity and that 2025 time frame.
And so.
And if I marry that with kind of what you guys said about not really anticipating.
Further drilling partnerships or ramps and capex should we be viewing that.
And sort of.
Peak production from a midstream standpoint.
And what kind of what what would you envision would be next for <unk>.
Midstream beyond that.
No I don't think so.
At some point here, especially with higher prices and Youll.
And Youll see companies like Antero I'll go back to some growth and at least and the single digit range. So I wouldn't read that as.
And driven strictly by the Ft, and then also the drilling partnership.
Drills and completes last completions will be early year 2025, and after that the drilling partnership will be done. So those volumes will start to decline on that side, so there'll be some ft available.
For our growth there.
If you follow what I'm, saying, so and we don't have to match our production exactly the FTE I mean, they're our local markets.
And within our thesis is to avoid being dependent on the local markets.
And our shrink to growth and by that I think you are going to see some real inventories fatigue and that was the purpose of one.
One of the slides that we put out today as I mentioned on our call. If you are completing 1000 wells a day and the southwest Marcellus and Ohio Utica combined.
And we're not quite at that rate today, but I think with commodity prices, where they are you're going to see some uptick and brakes. I mean, we will be adding one because the drilling partnership that you're really only looking at five or six years of the best.
Premium inventory and that area. So.
At some point, you'll need higher prices and all that but you likely will see some also see some capacity going back to the market for operators like us we still have plenty of zone praise.
Liam inventory.
Okay. So.
And I guess not necessarily a ton of concerned about.
Pipeline constraints at that point in time.
That's right, yes, I wouldn't read too much into that FTE chart in terms of growth that doesn't mean, it doesn't capture growth and they are.
Okay.
And then final question for me just on.
And on the water side can you share sort of what your latest.
You said your assumptions are for for well completions and then.
Kind of how long do you expect to run those.
13000 per lateral.
Yes.
We do have.
A bounty and just a law.
Long inventory of 30000 foot laterals.
Benefit and <unk> seen it out and the maps of our acreage being so contiguous and.
And where we control it and in terms of <unk>.
Being the operator with nearly or almost always 100%.
<unk> interest.
35 barrels of water per foot right as our current formula.
We're doing pilots to dry it up a little bit but.
And 35 barrels a foot.
Standard.
Mix right now.
Okay, and then I guess.
Maybe more of what I was getting at and is there any risk to.
Either of those numbers starting to creep down and the next.
12 months to 24 months.
Non-GAAP area, where the entire in terms of lateral length and tower five year plan and average 13100 feet.
So we've got long laterals as far as you can see and with our land efforts. We continue to add onto laterals that are and the plan year six seven and whatever that are shorter.
We continue to add to that and grow those if you will so.
That's where it will be for quite some time and a.
And 35 bear.
Barrels of water per foot as our standard.
Completion.
Right right.
Okay.
That was it for me guys. Thank you very much.
Great. Thank you. Thank you.
Our next question comes from net Bam off with Wells Fargo. Please state your question.
Hey, Thanks for taking the questions based on the current production plan do you expect to all for any low pressure gathering fee rebates to a R.
2021, and then also does the incentive fee agreement that you have in place.
Are there any thoughts on potentially extending the term of that I know that it goes through 'twenty and 'twenty three currently.
Yes for your question on the fees, we've got a slide and the presentation that outlines the current forecast and there are no fee rebates and 'twenty, one, but they do achieve them and 22 and 23, so there's a schematic out there and it does expire and 23.
Okay got it and then maybe can you talk about the cadence of the remaining $110 million of growth capex associated with that.
<unk> drilling partners partnership that's expected in the period.
'twenty 'twenty two through 2025.
Yeah, the majority of and it's in 'twenty, two and then a little bit and 23, so the midpoint of this year's guidance to 50.
And you can kind of think of 'twenty, two it'll be a little bit higher and that may be $2 75 to 323.
And beyond stepped back for $200 million and below and returns below $200 million and that 24 timeframe and beyond.
Very helpful. That's all I had today. Thank you.
Thank you, Dave and thanks Pat.
Thank you that's all the time for up for questions today, I'll now turn it back to management for closing remarks. Thank you.
I'd like to thank everyone for participating on our conference call. Today. If you have any further questions. Please feel free to reach out for us. Thanks again.
Thank you. This concludes today's conference all parties may disconnect have a great day.