Q2 2021 Antero Midstream Corp Earnings Call
Okay.
Greetings and welcome to the Antero Midstream second 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.
And once you require operator assistance during the conference. Please press star zero on your telephone.
As a reminder, this conference is being recorded it is now my pleasure to introduce Brendan Kruger and CFO of Antero midstream. Thank you you may begin.
Thank you operator.
Thank you for joining us for Antero Midstream second quarter 2021, Investor Conference call, we'll spend a few minutes going through the.
Financial and operating 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, we have 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 that during this call antero.
<unk> 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 is 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 this and Antero midstream and Michael Kennedy CFO of Antero resources, and a director at Antero midstream with that I'll turn the call over to Paul.
Thanks Brendan.
I'll start on slide number 3 highlighting the continued improvement and the financial strength of Antero.
Screams primary customer Antero resources.
Antero resources or AAR has paid down almost $600 million of debt year to date and.
And has reduced its leverage by almost a turn and a half to 1.7 times achieving it.
So mid <unk> target of 2.0 times well ahead of schedule.
This resulted in an undrawn resolved revolving credit facility and $1.9 billion of liquidity as detailed out and their right hand side of the page.
As we mentioned this morning.
Its leg Antero resources call AR is targeting over $750 million of free cash flow in each of 2021 and 2022, assuming current strip prices. This level of free cash flow strong balance sheet and flexible.
<unk> liquidity position collectively provide protection against a downside price scenario and further de risks the long term growth outlook for Antero midstream.
Now, let's turn to slide number 4 which illustrates the benefits of AI.
<unk> firm transportation portfolio on throughput certainty for AAM.
The Green light on the chart illustrates <unk> historical gas price differential to Nymex and the Red line illustrates the Appalachian differentials.
You can see.
<unk> ft portfolio has generated a premium to Nymex and.
<unk> reduced realized pricing volatility over the last several years.
This provides a M with consistent volume and cash flow assurance as a or does not need to.
As you and volumes when Appalachia basis blows out like many of its peers have too.
This gives antero midstream and additional level of protection as we begin construction on additional infrastructure supporting <unk> and the drilling partnership.
To shut issued this competitive advantage resulted in a are generated and price realizations that were 90, and mcf better than in basin, Appalachia, and pricing, which was 72 and Mcf behind Nymex.
These track to price realizations further.
Further support drilling economics that underpin the volume growth and returns at AAM.
I'll finish my comments by looking at slide number 5 to highlight aam's asset utilization rates and.
And discuss future growth projects.
As you can see.
And it did in the left hand side of the page despite <unk> transition to a maintenance capital program in 2019, and 2020, AAM was able to maintain and asset utilization rates greater than 90% across its assets.
Aam's joint venture processing capacity.
<unk> over the last year has been 100% utilized and we recently commissioned the new Smithburg, 1 processing plant, which added an additional 200 million cubic feet, a day of processing capacity and the third quarter.
This brings aam's total.
And joint venture processing capacity to 1.6 Bcf a day.
Smithburg, 1 will support processing volume growth from the drilling partnership targeting Marcellus liquids rich development over the next several years Sim.
Similarly on the <unk> compression side.
We are currently constructing 2 stations in the Marcellus liquids rich regimes that will add 480 million cubic feet a day of additional compression capacity. These 2 stations along with the associated high pressure gathering projects are expected to be placed online in 2000.
And in 'twenty, 2 to facilitate the development and Tyler and Wetzel counties in West Virginia.
Importantly, <unk> has the visit the visibility and to AAR and the drilling partnerships development plan that allows am to maintain these high asset utilization rates as we transition back.
And to a growth outlook.
As depicted on the right hand side of the page, we expect volume growth combined with high asset utilization rates to generate EBITDA growth and more importantly, mid to high teens returns on invested capital on average through 2025.
With that I will turn it over to Brendan.
Thanks, Paul I'll begin my comments with second quarter operational results and am beginning on slide 6 titled year over year midstream throughput growth.
Starting in the top left portion of the page low pressure gathering volumes were just under 2.9 Bcf a day.
Second quarter, which represents a 1% increase from the prior year quarter and.
As we look ahead to the third quarter, we expect <unk> to be slightly above the LP earn out threshold of $2.9 Bcf a day driven by the continued outperformance of <unk> wells.
Compression volumes during the quarter averaged 2.7 Bcf a day.
A 1% increase compared to the prior year quarter.
Our 50.50 joint venture gross processing volumes average just over 1.4 Bcf a day, a 3% increase compared to the prior year quarter and our gross fractionation volumes averaged 38000 barrels a day.
165% increase year over year.
And you May have seen we did experience a few days of downtime at Sherwood at the end of the second quarter and into the third quarter due to a shutdown and downstream and the facility. We do not expect this to have a material impact on our volumetric or guidance outlook as we incorporate sufficient risking and our forecast for.
Freshwater delivery volumes average 100 for.
1000 barrels a day, a 2% increase from the prior year quarter.
Adjusted EBITDA for the quarter was $225 million, a 12% increase year over year capital expenditures during the quarter were $71 million consistent with our comments from the first quarter call. We expect to invest roughly 2 thirds of our 2021 capital budget.
For a $240 million to $260 million and the second and third quarter combined as we build out the infrastructure supporting the drilling partnership.
This result, and expected third quarter capital of approximately approximately $90 million to $100 million.
And from there, we expect the decline and the fourth quarter to remain on budget for the full year.
<unk>.
During the second quarter of 2021, we generated $111 million of free cash flow before dividends of $3 million increased compared to last year and importantly for the third time and the last 4 quarters, we generated free cash flow after dividends, which totaled $3 million during the quarter.
Year to date and free cash flow after dividends as.
$42 million, which has allowed us to reduce our leverage to 3.6 times.
As we look to the back half of the year, we expect a modest outspend driven by increased capital expenditures as just discussed which will will result, and our full year 2021 profile and is approximately free cash flow neutral after dividends.
Moving on to the balance sheet I wanted to highlight the debt maturity profiles and both AR and am given the drastic improvements over the last 12 months, which we've outlined on slide number 7.
At this time last year.
<unk> had over $2 billion of senior note maturities within the next 3 years fast.
Fast forward to today.
As depicted on the top half of the page.
Does not have any senior note maturities until 2025.
And our successful refinancings and debt reduction efforts through asset sales and sustainable free cash flow generation have transformed it into 1 of the strongest producers and Appalachia.
The bottom half of the page.
Traits and senior note maturity schedule, which tells a similar story.
During the second quarter, we refinanced the 2020 for senior notes extending the maturity to 2029 at the same coupon coupon of 5 and 3.8.
This resulted in our next senior note maturity not occurring until 2026.
In addition.
And we had $514 million drawn on our $2.1 $3 billion revolving credit facility, resulting in $1.6 billion of liquidity as of quarter and.
As a reminder, we previously announced and we are targeting approximately $500 million of free cash flow after dividends from 2021 through 2025 and low to mid.
And low single digit annual EBITDA growth as a result of the drilling partnership between <unk> and.
And <unk> partners.
This financial strength and free cash flow outlook at both entities positions us well as we expect to extend the credit facilities over the next year.
In summary, we are incredibly proud of the improvements for the balance sheet for both AR and am.
Second year, both of which have never been stronger.
Before I close I'll finish my comments with slide number 8 titled uniquely positioned midstream entity.
The last few years have been transformational for Antero midstream and we believe we are well positioned for the unique business model not only in Appalachia, but and the overall U S.
Over the line 19, we converted to a C corp significantly enhancing our corporate governance and shareholder rights, which facilitated aam's inclusion and 2 equity indices like the S&P 400.
As we look at the universe of Investable Securities and the U S. A M checks all the boxes as a C Corp, and scale earnings growth driven by.
For the drilling partnership and then and on inflation protected fee structure.
Of the approximately 6000 and publicly traded securities and the U S.
About 900 companies, our investable, CCAR with scale and enterprise value greater than $6 billion.
Narrowing down those companies to those with earnings growth, which.
And 2 that it is a 3 year EBITDA CAGR of greater than 3% narrowed that down to just over 650 companies.
Additional filters for companies with Derisked business models that are self financing with strong balance sheets, which we measured as leverage under 4 times. The population continues to shrink to just 421 companies of those companies only 1 offs.
Offers an attractive dividend over 7%, which is antero midstream.
Today, and a 9% yield and presents a unique opportunity with an attractive return of capital profile earnings growth and declining total debt and leverage which will further de risks derisk aam's business model going forward.
With that operator, we are ready to take questions.
And.
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And.
Yes.
Our first questions come from the line of Brian rounds with UBS. Please proceed with your questions.
Hi, good afternoon, everyone starting off with guidance.
Just wondering if you can provide some color around the drivers towards the upper and lower and the EBITDA guidance range seems just annualized and the first half of 'twenty, 1 and it seems we're at the high end of the range and I'm curious if you could share some thoughts around the second half expectations. Thanks.
Yes, Brian and I'll take that 1 overall as we as we put the guidance range together.
It was it was a function of looking at the for full year and.
And potential fee rebates, which was 1 of the items that are and it could go either way as you saw and the second quarter. So you know they're there.
The range provides a nice range in terms of where you could end up on that for the rebate perspective.
Other components are of course.
We risk for for production.
And as I imagine and my remarks as.
Wells continue to outperform.
And so from us from a throughput perspective, we continue to see strong results.
At the AAM and side of things.
As we look into the second half I think we.
We feel good about the range still.
And with water in particular.
We put on about 41 wells and the first half of the year. Our guidance is 70 to be service throughout the year. So you have.
You have service more than more than half of that which leads to lower water volumes and the second half of.
And.
As we look forward and so that's the big driver in terms of where why we feel good about where we're at even though we were ahead to start the year would you expect some simple back from from the water volumes, just due to the cadence and the year.
Great. Thanks for the color.
Lastly are there any updates.
On the lawsuit against Mueller water technologies and.
And if theres, a pending court case and January but just wondering if theres any signposts that we can be tracking or if this could ultimately be resolved outside of the court.
Yeah, there's nothing no material updates at this time I think as you saw disclosed in our 10-Q the trial set to begin.
A year and early 2022, which was a slight pushback from the original scheduled day, just due to some COVID-19 delays and the courts, but otherwise no update there.
Fair enough. Thanks for taking my question and have a great day.
Thank you Brian. Thank you our next questions come from the line and Jeremy.
And J P. Morgan. Please proceed with your questions.
Hey, Good afternoon, guys. This is James on for Jeremy.
Just going back to the rebates you guys mentioned him if he goes.
Mentioned in your prepared remarks that you expect to hit the threshold and <unk>.
And just going forward.
And.
Looking at for 2022, especially with strong NGL prices, if antero resources turns to growth how long have you guys budgeted that into your longer term forecast that you guys laid out during the fourth quarter of last year with your guidance for 2025.
Yeah cause weight and we looked at and I think we did we did provide some color.
And he told her.
And the drilling partnership.
Still on the maintenance capital plan that day or the drilling partnership does that growth from a gross volume perspective. So as we look out to 2022, we'd expect to head 3.3 or 4 of those does theory bags as currently.
Color there our plan and then and then 2023, just given the growth we'd expect to hit it all for and it'll depend on on where that growth is in terms of whether you have different thresholds on the rebates, but what do you expect to handle for those few rebates and a 23.
Got it that's very helpful. I appreciate the color there and then last question.
You mentioned the additional build out I think of stations next year.
And just wondering the Capex run if you guys can ballpark kind of a range for next year.
And especially again as a kind of pertains to kind of a longer term free cash flow guidance and how much those stations and my cost.
Yeah I think.
And for me mentioned I think on the first quarter call, but I think we're still and that 275 to 300 million for next year and then you'd see I think as we talked about you expect to be free cash flow neutral for the most part and in 'twenty, 1 and 'twenty, 2 and that $500 million of free cash flow. After dividends is really a 'twenty 3 'twenty for 25 and.
My view, you see capital come down from that $2.75 to 300 launch and a $200 million and and lower levels after that.
Got it thanks I'll stop there.
Thank you. Our next question comes from the line of Kyle May with capital 1 securities.
Please proceed with your questions.
Okay, Hi, everyone. A couple a couple of questions on the water side and the release you mentioned the Opex was lower due to water blending operations.
I'm just curious if you can talk more about what antero is doing and if you've made any changes there and if there's.
Any further cost savings and that you could realize.
Yes, I think overall just on the on the AAR sided it's driven but just by just continued efficiencies on the water side.
Piping.
Our blending facilities.
And and overall timing and cadence of the development plan var level. So.
Continue to see lower costs and low.
And our which is which is driving down the opex on.
And the AAM side related to that water blending operations.
Okay got it that makes sense.
And then also have you made any changes to the amount of fresh water, that's used and the wells or.
Or do you anticipate any changes there.
No. So we thought that 36 barrels a foot.
We were flat on volumes quarter over quarter and.
And we had less well service I think some of the some of the disconnect was just we.
We had wells that were being serviced at the end of the first quarter that were counted and those.
Well serviced and the first quarter, but most of that water showed up and the second quarter. So it was about 20 wells.
Service and each quarter and if you think about.
The amount of water being used per well, but.
And there's a little bit of disconnect in terms of timing there.
Got it that's helpful. That's all for me. Thank you.
Thanks Scott.
Thank you for next questions come from the line and John Okay with Goldman Sachs. Please proceed with your questions.
Hey, Thanks, Paul for the time just wanted to ask 1 quickly on the Sherwood outage I know you said there was enough kind of flexibility and the guidance, which is why you didnt change numbers, but since.
And I called it out specifically how can we think about a similar volume impact for you guys and the third quarter as they are called out.
Yes, I think Thats fair.
And the math on that on that volume impact would be about $6 million to $7 million.
And on an isolated basis again, I think with the risking that.
And you provide and the outperformance we've seen we still feel very good about the range, we have of $840 to $880 million for the EBITDA range.
Okay, great. Thanks, and then I guess, we talk you guys talked about it a little bit already but just on the drilling partnership I think and we saw a or at a rig back into.
Utica just curious if you know if everything in terms of timing is in line there with as you guys talked about beginning of the year.
And then just wanted to clarify too and I think you said it before but on the 2 new compressor stations you talked about adding.
Next year.
Those were included in.
And the kind of long term drilling.
Drilling program affiliated Capex through 25 right.
Yes, that's correct for your firm.
First question.
Overall drilling partnerships going well as planned nothing nothing to note on that front.
In line with what we've provided publicly.
And then those.
Into the ether stations, we were just calling out more.
More details around those but those are in line with our long term.
The guidance that we that we called out earlier, this year, and our and our guidance and long term targets.
And that's it for me thank you.
Thanks, John.
Thank you our next question.
Come from the line of Sunil So Paul with Seaport Global Securities. Please proceed with your questions.
Yes, hi, good morning, guys and thanks for all the clarity on the call. So just starting off on the Smith's book start up a good day.
And does the plant is fully dedicated to Antero did any third party volumes and Duck pond.
Now that's fully dedicated to antero.
Okay.
And then a little bit of a broader question on capital allocation and I'll cover that strategy.
And you laid out this time and.
The last 2 years.
Since then it seems like you know the high yield market improve.
Quite a bit and obviously youll end up.
Refinance some debt I was kind of curious you know considering that.
The credit spreads so much tied to.
No you did any rethink on your part in terms of the capital allocation strategy.
As you know paying down debt.
Most is any incremental cash being used towards.
And obviously you have the share buyback program of 1.2.
No I think overall.
Nice to see the <unk>.
Moving and the capital markets you know from the AAM perspective are we.
And we had just over 500 million drawn on our credit facility.
And at the end of the quarter.
Expect to generate as mentioned 500 million and free cash flow. So it's nice to have some borrowings on the facility to be able to pay down over time and as we get to that 3 times leverage target. We'll look at other potential return of capital, but still focused on continuing to get down to.
Lower leverage levels at the AAM side of things.
Okay and what it.
Thanks for all the color.
Thanks Neil.
Thank you our next questions come from the line of credit Grody with Bank of America. Please proceed with your questions.
Good morning or afternoon.
Hey, guys.
I know this is the a M and costs, but there's certainly slightly privilege day or.
Just the.
And the past you've said they are a makes sense separate.
And I think that's still the case I'm curious what you would you think about it.
And I'll call you were asked about what you would do with all the free cash flow and once you get your leverage target.
Is it possible that would tie more of and it's.
And I am today are owed to them the rack Mount today and could you also sort of leave that conversation into how youre thinking about M&A right now.
Yeah.
I know you're there there's no thoughts around increasing or decreasing are a R.
<unk> and <unk>.
We own our own 30 per cent of AAM and.
I see that as an appropriate level.
As you heard on the call really were just trying to delever.
With the free cash flow and then.
Yeah, and that way and return of capital there.
And with its free cash flow and Delever down and the 3 times and then evaluate its return of capital there.
And from an M&A standpoint, really you know it's hard for M&A to compete.
And like we mentioned we have we have growth of day 3 years to 4% return on invested capitals and the mid teens that's a.
The risk adjusted return on invested capital, we know exactly when the projects are coming on and just in time, there's no speculative capital so very hard for M&A and compete and as with Ar's drilling.
Drilling partnership and kind of viewed that and see M&A you know we are.
We're getting third party volumes, there and have that growth I think for only 1 of a handful of and.
Midstream companies with growth and highly visible growth at that so no real need for them and it.
Great and I appreciate the inside and the type of assets.
Thanks, Greg appreciate it Greg.
Thank you there are no further questions at this time I'd like to hand, the call back over to Brendan <unk> for any closing.
And comments.
Yes. Thank you for everybody for joining today's call and and please reach out with any further questions. Thanks.
Okay.
Thank you that does conclude today's teleconference. Thank you for your participation you may disconnect your lines at this time.