Q1 2021 Antero Midstream Corp Earnings Call
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Greetings and welcome to the Antero Midstream first quarter 2021 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 this conference is being recorded.
I will now turn this conference over to our host Brendon Coover, Vice President of Finance. Thank you you may begin.
Thank you for joining us for Antero Midstream first quarter 2021, Investor Conference call and well spend a few minutes going through the financial and operational highlights and then we'll open it up for Q&A I would also like to direct you to the homepage of our website at Www Dot Antero midstream Dot com, where we have provided a separate.
Earnings call presentation and will be reviewed during today's call.
Before we start our comments I would first like to remind you that 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 of Antero resources, and Antero midstream and are subject to a number of risks and uncertainties many of which are beyond antero and control.
Actual outcomes and results could materially differ from what is expressed implied or forecast and 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 Warren President and CFO of Antero resources, and President of Antero Midstream and Michael Kennedy CFO of Antero midstream.
And I'll turn the call over to Paul.
Thanks Brendan.
I'd like to start on slide number three highlighting the step change improvement to pay our.
And Thats Antero resources balance sheet.
During the first quarter of 2021, a or generated over $400 million of free cash flow.
And as depicted on the top left portion of the slide.
<unk> used this free cash flow to reduce total debt from.
$3.1 billion to $6 billion during the first quarter the top right quadrant of this slide illustrates the LTM EBITDA improvement from one point or $1 billion to $1 3 billion.
Improvement was a direct result of a ars liquids focus and scale, which allowed us to take advantage of the improvement and C III plus NGL and oil prices.
The total debt reduction combined with an improvement and a ars LTM EBITDAX decreased ar's leverage by over a turn to 2.0 times.
Lastly, during the spring Redetermination period.
<unk> borrowing base was reaffirmed at $2 $85 billion.
Supported by the deep drilling inventory of liquids rich locations and a arris portfolio.
This reaffirmation along with the $700 million senior note issuance and debt reduction during the quarter resulted in a arris.
Liquidity doubling to one $8 billion.
Looking ahead, we expect <unk> to continue generating free cash flow and reducing total debt, which is expected to result in a completely undrawn credit facility balance over the next few quarters.
This significant improvement and the financial strength of Aam's primary customer a or continues to strengthen the outlook.
Yeah.
<unk> first quarter financial results and the perspective, let's turn to slide number four.
Since we are early in the reporting cycle. Most of these figures are based on consensus estimates the top of the slide highlights <unk> balance sheet positioning compared to its E&P peers and Appalachia on.
On the top left you can see a ars two $6 billion of total debt ranks third amongst its peers. However, the chart on the top right hand side of the page shows that <unk> net debt to EBITDAX at 2.0 times ranks second.
The bottom of the page focuses on financial performance and scale <unk> $519 million of EBITDAX and the first quarter ranks second in Appalachia, and it's substantially above the remaining peers.
Looking at free cash flow, a ars $419 million of free cash flow during the first quarter is dramatically above the Appalachian peers and highlights the significant scale and liquids rich exposure that AAR has in a rising commodity price environment.
In summary, <unk> is one of the strongest customers and Appalachia today and a strong.
Our results and a strong.
Now, let's turn to slide number five to discuss the recent NGL hedging done at a our debt.
And that protects their free cash flow profile and results and further debt and leverage reduction throughout 2021.
While the fundamentals remained strong for our <unk> III plus Ngls, we viewed this hedging program as an insurance policy to protect against any seasonal weakness or risk associated with the change in the COVID-19 pandemic recovery.
Before getting into NGL hedging on the slide I want to remind everyone that a R is also over 90% hedged and natural gas and Cal 'twenty one.
At $2 76 per M and Btu.
During the first quarter, a are hedged 36000 barrels a day.
And 35000 barrels a day of C III, plus Ngls for the second quarter and third quarters of 'twenty one respectively.
This represents approximately one third of a ours C III plus NGL production during the summer months, which can be seasonally weakest the weakest pricing months for Ngls and importantly, we are hedging at incredibly attractive prices during the summer around $36 a barrel.
This is approximately double the price today I realized at the same time last year hedging.
Hedging and I always been a core principle at a R and we plan to continue prudently and layering on additional hedges across all commodity products to support <unk> and assistance development program.
Before and it before turning the call over to Mike I want to congratulate Glenn and his upcoming retirement and thank him for all of his contributions to the antero entities over the years go.
And I have been partners for over 20 years dating back to Coalbed methane exploration and production and the powder River basin.
Since then we became early shale pioneers adapting horizontal drilling and multi stage completions and the Barnett shale and have built antero and to the one of into one of the largest and most integrated NGL and natural gas producers in the U S.
Over this last year, Glenn was instrumental and successfully executing the series of strategic transactions and capital market activities, which allowed us to navigate the challenging environment and put us in the position that we are today and.
As we look ahead, a R and M R and the strongest financial positions that we've been and since inception.
Both generating significant free cash flow with strong balance sheets and leverage profiles, while one will be missed I am very excited about internally back filling his positions with Mike Kennedy and Brandon Krueger, which highlights the deep bench, we have here at Antero.
With that I'll turn it over to Mike.
Thanks, Paul.
I'll begin my am comments with first quarter operational results beginning on slide number six titled year over year midstream throughput.
Starting on the top left portion of the page low pressure gathering volumes were two nine Bcf per day, and the first quarter, which represents a 5% increase from the prior year quarter.
Pressure on volumes during the quarter averaged two seven Bcf per day, and 8% increase compared to the prior year quarter.
Our 50 50 joint venture gross processing volumes and volumes averaged one four bcf per day, and an 8% increase compared to the prior year quarter.
Processing capacity was 100% utilized during the first quarter.
JV gross fractionation volumes averaged 38000 barrels per day, a 15% increase from the prior year quarter.
Freshwater delivery volumes averaged 104000 barrels per day, and a 43% decrease from the prior year quarter.
Driven by lower completion activity by Antero resources as it transitioned to a maintenance capital and development program.
Adjusted EBITDA for the quarter was $219 million, a 1% increase year over year capital expenditures were $30 million or 64% decrease year over year.
Looking ahead, we expect an increase and our quarterly capital expenditures as we begin construction on infrastructure supporting the drilling partnership that.
And we expect to drive throughput growth over the next several years.
Specifically, we expect and invest roughly two thirds of our 2021 budget of $240 million to $260 million.
And the second and third quarter combined as we take advantage of better weather during the summer months.
Importantly, a third drilling rig has already arrived and Utica to commence development by the drilling partnership utilizing midstream infrastructure is largely in place.
We expect completion activities using aam's freshwater delivery system to begin on those two beds and the back half of the year and expect to turn in line those wells by year end to drive throughput growth heading into 2022.
During the first quarter of 2021, we generated $146 million of free cash flow before dividends of $50 million increased compared to last year and importantly for the second time and the last three quarters, we generated free cash flow after dividends, which totaled $39 million during the quarter.
And I'll finish my comments on slide number seven titled that uniquely positioned midstream entity.
We're very excited for the future of Antero midstream following the announcement of the drilling partnership.
We believe a M is uniquely positioned on the midstream space with a C Corp structure and one of the very few companies with expected throughput and EBITDA growth over the next several years.
And importantly, AAM has significant visibility into this throughput growth, which supports our confidence and generating attractive rates of return on the incremental investment supporting the drilling partnership.
As a reminder, we expect the incremental $175 million of capital investments supporting the drilling partnership over the next five years to generate $200 million of incremental free cash flow net of that capital. So these are highly economic and attractive opportunities for am.
Well. It does result in a near term increase and capital for am as a midstream company and we're in this business to evaluate and invest in projects that generate attractive rates of return and deliver value to our shareholders.
Have a strong track record generating a 14% ROIC on average over the last six years well in excess of our cost of capital and.
Accordingly, our new financial policy allows us to internally finance, both our capital investments and a return on capital to shareholders, which we believe is the prudent decision results and leverage trending toward the low three times range.
With that operator, we are ready to take questions.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
You will hear on atone acknowledging your request.
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To withdraw your question. Please press Star then two.
We'll pause for a moment, let's call those joined the queue.
Our first question is from Brian <unk>.
With UBS. Please go ahead.
Okay.
Alright, Thanks for taking my question, Michael and Brendan first congrats to you both.
Start out I was wondering how we should think about gathering rate relief exploration. When they are in 2023 I was just wondering if we could see a share buyback from a R and exchange for continued growth as it appears that they are made and looked at.
Essentially increase production beyond 2020 on thanks.
Okay.
Yeah, and we talked on the other call the first order of business for a ours and.
And to pay down debt below $2 billion and.
And then we'll assess at that time, whether further debt paydown on our return on capital and what form of return on capital combination of both and we do have a slide out there and <unk> website that walks through all the.
Reductions and the firm transport volumes over that period, and so it does step down.
Between now and 'twenty, four and 25 and and it's more right sized what our actual production and just maintenance capital levels.
And and 24 and 25, but for next three to four years, I would say ours and the maintenance capital mode.
Great.
Thanks, and lastly, just given a long term drilling and expectations for RSV and pretty fixed at this point are there any unique opportunities for them to pursue.
No further downstream or around Marcus hook that could provide incremental about each day antero family as a whole and you kind of would be helpful. Thanks.
And we looked at the drilling JV is that I mean, thats really third party.
Volumes and third party business, so that was terrific for AAM.
And as I mentioned and my comments and to have two to three 4% throughput growth over the next three years is somewhat unique and the midstream.
From a midstream company, so I think I am well positioned from a growth standpoint, and with the capital being very efficient and having just in time visibility into that that will deliver that on.
Free cash flow growth of $200 million net of that $175 million of capital. So I am in good shape from that and with us.
System being almost fully built out and has very low capital over the next couple of years as well, so generating free cash flow after dividends and $500 million plus range and generating free cash flow I'm, sorry, before dividends and $500 million plus range and and after dividends.
This year and next you know kind of flat to $25 million positive and then after that about $100 million a year, so very attractive protein profile for antero midstream.
Great. Thank you guys answering my questions have a great day.
Thanks, Brian.
Our next question is from Jeremy Tonet with Jpmorgan. Please go ahead.
Hey, Good morning, guys. This is James on for Jeremy.
Just two quick ones from me I guess, just starting on the on the gathering and Opex seemed to tick up this quarter.
Just looking past the run rate from last year.
Maybe just looking forward is that a run rate to use or how are you guys thinking about that.
Now it should come down and always in the winter and.
The first quarter is always a little bit higher just drop operating and winter weather once the weather improves which as it comes back down to its normal run rate.
Got it and then just on the free cash flow front.
I'll start on the euro off with a strong kind of wonky with a $40 million after dividends.
You guys message message that <unk> and <unk> will be.
More capital intensive, but just on the cadence of the year do you see kind of <unk> returning to positive free cash flow post dividends or or just any color you can share there in terms of what you guys are budgeting there.
Yeah right now Q4 is about neutral and there is a step down on the water activity in Q4.
And so Youre correct Q2 Q3.
Three there is a bit of a negative just because the capital steps up and that $80 million to $90 million range for those two quarters.
Capital does step down a bit and Q4, but with a little bit less water you have a little bit less EBITDA and that quarter. So its about flat.
So very positive this quarter $39 million, a little bit negative and second and third quarter and and neutral on the fourth that's the cadence.
Got it thanks, and sorry, just one more if I could.
I noticed the asset sale recorded in the quarter.
And I think sure there and if there's a potential down the road first and where sales yeah and I was just some sales from excess pipe that we did not need anymore.
And we had some gains on some sales pipes that showed up and <unk> 'twenty and.
So a little loss here. So it was net breakeven and wireless yourself and some excess pipe.
And nothing further.
Got it thanks I appreciate the questions.
Thanks James.
Our next question is from John Mccain with Goldman Sachs. Please go ahead.
Hey, good morning, and thanks for your time and I just want.
Moving to circle back I know this came up earlier on this call and it came up a little bit on a call, but again, just with you know with <unk>.
They are getting closer to that two times level and now youre talking more about shareholder returns up there, but it sounds like growth is in theory is still on the table. Just wondering if you could unpack a little bit maybe what would drive that decision as it is at NGL prices is it based on takeaway.
And we can kind of frame and argument.
Yes.
And archive and hair growth was on the table, but.
And maybe after like three to four years growth, just depending on what kind of environment, where and because.
But the amount of free cash flow generation, we have a day or over that time frame.
And it's just.
Somewhat astounding how much it and so after three or four years, maybe you would think about it but you know and.
And then it's very focused on paying down debt and returning capital to shareholders.
Okay. Thank.
Thank you.
Yes, the growth is really coming from the drilling partnership I think that's the key takeaway for AAM is am does have growth. It's volume throughput is growing and the gross volumes from this from Antero and field is growing it's just from a net perspective antero is that maintenance capital.
Absolutely and thank you for that and maybe just one more and the weeds.
Looks like Stonewall picked up a little bit this quarter, just wondering is that a.
Timing thing or something new going on on that asset and I know, it's small but yes.
And that was essentially a catch up payment from you know there were some.
On the FERC capital in 'twenty, and 'twenty because of COVID-19 and capital has kind of been pushed into 'twenty, one and they held a reserve for that and so they kind of release that reserve.
To us and the first quarter, we still do expect those annual distributions being a $10 million to $12 million. This year. So nothing's changed there, we just had a catch up payment and the first quarter.
Okay, Alright, and then maybe I'll just squeeze one more and since we're on the JV assets.
Just any update on Smithburg timing and it also looks like and maybe the Sherwood margin stepped up a little bit or at least the processing margin. Overall, so maybe just anything else going on there would be helpful.
And now from there, but on Smithburg its July 1st.
And it'll be quantumly coming on.
Great. Thank you.
Yep Yep.
John.
Our next question is from Kyle May with capital One Securities. Please go ahead.
Hi, Good morning, everyone. I'm, just wondering if you could talk more about the construction and development and infrastructure for the drilling partnership and.
Just curious about more details on the assets that youre developing and maybe longer term. If we should expect kind of the lumpiness of spend similar to this year.
And I wouldn't really say it was on Lumpiness and spend this year I mean, they have $80 million to $90 million and the second and third quarter and call it $60 million and the fourth and those are the quarters post a drilling JV I mean, thats not terribly lumpy I think it's fairly consistent there is always a little less and the winter because it's a.
A little harder to build and the winter.
The projects, it's not really any more processing theres one processing plant like we just mentioned on the last question was smithburg.
It's just building out the low pressure high pressure and compression too.
Third the increased drilling pace that occurs because of the drilling JV. It's about 60 more wells over the next four years. So just gathering that was kind of our bread and butter and then also providing freshwater distribution from those wells for completions.
So right within our existing system and really just building it out a little bit more on an accelerated time fashion to meet the accelerated volumes.
Okay.
Got it and and the water segment it looks like you've serviced 24 wells and the first quarter, which is kind of similar to what you did and the second and third quarter of last year.
Should we think about this is the high watermark for the year or is this a more normalized run rate.
Yes, and thats going to be the high watermark.
It was 24 completions, but you've got and remember that some of those were sinal fracs as those volumes.
And we counted as and when it's spud, but it was completed and kind of work in progress over that March 31 timeframe, so the volume slipped and QQ.
But and the actual wells that are spud and those and those quarters about 15 to 20, and <unk> and <unk> and then drops off around 10 wells in Q4.
But it's very similar and last year.
Okay got it that's helpful. Thank you.
Thanks Scott.
Our next question is from Tim Schneider with Citi. Please go ahead.
Yeah.
Okay.
Got it that was a quick and easy thank you alright.
Our next question is from Sunil <unk> with Seaport Global Securities. Please go ahead.
Yes, hi, good morning, guys.
So just a couple of follow ups actually so first it seems like you know as the activity picks up could you give us a sense of cadence of volume.
Volume on your gas systems for the remainder of the year.
And then they are flat.
And they pick up a bit and and they're relatively flat throughout the year.
Okay.
The drilling JV and really that those volumes are coming on and at the end of the year. So yeah.
And you really don't see the pickup and the volume since till 2022 from that from the drilling joint venture.
So basically then we should think about corn V 20, twos, a little bit on this stuff.
And volumes.
And that's up.
And 2% to 3% and Thats the same case for.
Every year 'twenty, two 'twenty, three and 'twenty four.
Okay.
And then.
On a different subject it seems like the shell cracker and the Nazis.
<unk> is expected to start of it and the next year or so.
I realize that it helps kind of in basin pricing, but I was curious you know and <unk>.
Of any impact on Antero midstream from from the start up on debt.
Correct Yeah.
Yes, there is no impact and it'll just for Antero resources that will help our realizations will get Nymex gas plus pricing on that so it will just improve our margins and antero resources.
Since we're on it maintenance capital and <unk> be additive to the free cash flow profile.
Okay got it thanks for that color.
Yep. Thanks.
Our next question is a follow up from Brian <unk> with UBS. Please go ahead.
Hey, Thanks for taking my question again.
Just a quick question around the water treatment litigation was any of the potential.
And so that's part of the litigation was any of that included in your long term guidance with regards to free cash flow and just any commentary around that would be helpful. With the case coming up now.
And so it was not.
Okay. Thanks.
Yes.
There are no further questions registered at this time I would like to turn the conference back over to management for any closing remarks.
Yes. Thank you for joining us on today's call and please follow up with any questions. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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