Q3 2021 Antero Midstream Corp Earnings Call

Greetings and welcome to the Ontario, Midstream third 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.

As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Brendan Cougar, Chief Financial Officer at Antero Midstream. Please proceed.

Thank you operator thank.

Thank you for joining us for Antero Midstream third 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 dotcom.

Where 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 management will make forward looking statements such statements statements are based on our current judgments regarding factors that will impact the future performance of Antero resources Antero midstream and are subject to a number of risks and uncertainties many of which are beyond <unk> control.

Yes.

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, Antero Midstream and Michael Kennedy CFO of Antero resources and director at Antero Midstream.

With that I'll turn the call over to Paul.

Thanks Brendan.

I'll start on slide number three entitled expansion projects supporting the drilling partnership which illustrates the progress on our midstream build out supporting the AAR and QL partners drilling partnership.

First as shown on the bottom left portion of the page we placed the Smithburg one processing plant online in early July, adding 200 million cubic feet, a day of incremental joint venture processing capacity.

This brings the joint venture's total processing capacity to one six Bcf per day.

Consistent with our just in time capital investment philosophy.

Adventure processing capacity was 96% utilized during the third quarter.

As you can see on the right hand side of the page we continue to build out our.

Our compression infrastructure in Tyler and Wetzel counties in West Virginia.

These stations, which will be placed online in early 2022.

We'll support the incremental throughput growth from the drilling partnership over the next several years.

Looking ahead to 2022, we will continue the Marcellus midstream buildout constructing a high pressure pipeline from Tyler and Wetzel counties down to the Sherwood and Smithburg processing complex.

In addition, we will continue building out our low pressure gathering infrastructure in this area, where Ar's development is focused over the next several years.

Importantly, we are encouraged by the well performance in the core Marcellus, where our Buildout is focused which drives stronger economics for Antero midstream.

Slide number four.

Entitled.

Ours peer leading premium core drilling inventory.

It provides a summary of <unk> premium inventory that underpins the AAM capital investment and throughput growth over the next several years.

Sure we regularly perform a technical review of pure acreage positions and drilled acreage and location potential based on Btu regimes and EU ours.

Based on these results we subdivided the core of the southwest Marcellus and Ohio, Utica into premium and tier two sub areas.

We have identified approximately 5200 premium undeveloped locations for industry in the southwest Marcellus, which are located within the Red line the red outlined on the map.

We estimate a R holds 1800 and 65 of these premium locations or 36% of the total which includes more than 1000 liquids rich locations in the Ohio, Utica, We estimate roughly 1100 premium undeveloped locations for.

Our industry of which holds 210 locations or 19% of the total.

You can see that much of the acreage is covered up with existing Marcellus and Utica horizontal well bores, which are the red lines on the map.

Ultimately, we believe the concept the inventory for tea and the limited number of premium drilling locations will be a critical distinction between E&P operators in Appalachia.

Importantly for AAM, it's primary producer.

<unk> has over 15 years of liquids rich drilling inventory and a highly contiguous acreage position, which results in efficient midstream build out and peer leading return on invested capital for AAM.

With that I'll turn the call over to Brendan.

Thanks, Paul I'll begin my comments, highlighting our recently published 2020 ESG report as a leading midstream company and one of the lowest cost basins Antero midstream plays a vital role in transporting and processing low emission hydrocarbons needed to power our economy and heat our communities are.

Infrastructure links reliable energy supply in Appalachia with global demand and allows us to aid in the effort to eliminate energy poverty across the world as depicted on slide number five titled.

<unk> role in supporting Global energy access Aam's integrated midstream services allowed <unk> to transport its LPG, both domestically and internationally, including to many developing nations.

Specifically approximately one third of Ar's LPG exports went to developing nations in 2020, which included Nigeria, Peru, and India to name a few.

This trend continued through 2021 and importantly, we expect this trend to continue into the future.

This delivery of LPG to these communities directly improves People's health safety and livelihood through the displacement of more expensive and carbon intensive energy sources used for heating and cooking. We are very proud of our role in responsibly delivering the energy needed to drive our recovering global economy, and a lower carbon future.

Slide number six highlights our ongoing commitment to the communities in which we operate safe operation Environmental excellence and strong governance.

Even through the COVID-19 pandemic, we remained active in our communities supporting hunger relief efforts through the United way and other community organizations.

With a company wide focus on safety, we had zero employee lost time incidents this for the sixth consecutive year.

We are also environmental leaders in the midstream industry in 2020, we reduced our methane leak loss rate, 2.015% significantly below the one future industry goal of 1% and more than 50% lower than the midstream industry peer average of 0.033.

3%.

Our integrated water system allowed us to recycle and reuse 84% of our total wastewater gathered in addition, 100% of freshwater used in completions.

Transported by pipeline, eliminating $32 million truck traffic miles and abortee, avoiding 14000 metric tons of Cotr polyvalent.

Lastly, we took our ESG focus further by aligning our executive compensation with ESG performance and established an ESG Committee.

I believe this core ESG focus and culture of continuous improvement ultimately benefits all of our stakeholders.

Now, let's move on to the third quarter operational results beginning on slide seven titled continued high asset utilization.

Utilization rates.

During the quarter, we maintained our high asset utilization rates with compression capacity, averaging 86% utilization and processing and fractionation capacity, averaging 96% and 93% respectively. These impressive utilization rates include the 200 million a day of incremental JV processing.

At Smithburg, one which was placed in service at the early part of the quarter.

As detailed in the earnings release throughput volumes were negatively impacted by approximately 100 million a day due to downtime at the Sherwood in Oakdale processing and fractionation facilities, resulting in a I'm not paying out the third quarter earn out of $12 million to a R.

Looking ahead to the fourth quarter, we have brought all volumes back online and expect to pay the fourth quarter fourth quarter fair enough.

Adjusted EBITDA for the quarter was $219 million capital expenditures during the quarter was $80 million.

Capital expenditures were slightly lower than what we discussed on last quarter's call due to the deferral of capital into the fourth quarter as a result of weather impacts.

For the full year, we still expect to be within our capital guidance range of $240 million to $260 million.

During the third quarter, we generated $94 million of free cash flow before dividends year to date free cash flow after dividends has totaled $32 million.

Which has allowed us to reduce our leverage to three six times as.

As we look to the fourth quarter, we expect a modest outspend after dividends driven by increased capital expenditures as just discussed which will result in a full year 2021 profile that is approximately free cash flow neutral after dividends in line with the guidance, we put out there.

Moving on to the balance sheet on slide number eight as of September 30, we had $521 million drawn on our bank credit facility.

As you recall in the second quarter, we refinanced the 2024 senior notes extending the maturity to 2029 at the same coupon of five and three eighths.

October we extended our bank maturity by five years to 2026, resulting in no senior note or debt maturities until 2026 and.

In addition, we elected to reduce our bank credit facility commitments from 213 billion to 125 billion.

The reduction reduces our unutilized commitment fees is viewed favorably by the credit rating agencies and reflects our long term plan focused on absolute debt and leverage reduction.

As a reminder, we previously announced that we are targeting approximately $500 million of free cash flow. After dividends from 2021 through 2025, which would result in a completely undrawn credit facility at the end of that time period, assuming the free cash flows utilized to repay credit facility borrowings.

Importantly, our integrated long term planning with <unk> provides us with significant visibility into the next five years and beyond which gives us confidence in delivering on that outlook.

Lastly, I wanted to highlight Aam's momentum on the credit front on the bottom half of the page. So far in 2021 AAM has received multiple upgrades from both S&P and moodys, bringing us to double B and <unk> ratings, respectively.

The upgrades reflect aam's pure leading leverage profile strong liquidity position significant improvement in our financial strength and derisked internally financed capital budgets and dividends.

This has resulted in a much lower cost of capital for am which in turn helps drive value for the <unk> shareholders.

With that operator, we are ready to take questions.

Yes.

Operator.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question. 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'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please.

While we pull for questions.

Okay.

Your first question comes from the line of Jeremy Tonet with J P. Morgan. Please proceed with your question.

Hi, good morning.

Good morning, Jeremy.

I.

Just wanted to touch base on completions would be good.

Just wanted to see what expectations or what color you can share for <unk> that you might expect to be service. It seems like a are still has 65 to 70 in the guide in a M is serviced about 59 I think so that six to 11 range is kind of a wide range for the quarter. So just wondering if you could provide any more color there.

Yeah, I think what we said on last quarter's call still holds so we said mid to high teens.

During the third quarter, and we came out with 18, and we said that.

Low to mid double digits.

For the fourth quarter on completions for well serviced and that still holds for the fourth quarter. So low to mid double digits for completions in the fourth quarter.

Got it that's helpful. Thanks.

Just wanted to refresh on tax I guess at this point as far as cash taxes paying expectations and if there is a corporate minimum tax how that might impact <unk> outlook for cash flow.

Yeah. So based on based on what we know thus far in terms of what's being proposed out there is no change to our to our impact right now as we look out to the later part of the decade I think we said last time.

We don't do not expect to be a cash taxpayer too.

By the end of the 2000 Twenty's and then.

At that time, depending on what the situation looks like.

We may begin to start paying taxes in 2000 Thirty's.

Got it I'll leave it there thank you.

Thank you.

Your next question comes from the line of Brian Reynolds with UBS. Please proceed with your question.

Hi, Thanks for taking my question.

To start off on capital allocation, and given and terrorists pivot to free cash flow in 2022, and moderating Capex I know you guys talked about you know reducing the credit facility of 500 million, which is in line with your long term free cash flow forecasts, but is there a kind of a leverage target where you know buybacks could become part of the conversation just given the spread.

Between equity and debt over time thanks.

Yes, I think we've been pretty public on the three times target out there on leverage.

We expect to hit in that in that 24, 2025 time period and after we hit that leverage we will evaluate at what a further return of capital could look like at that time.

Fair enough as a quick follow up just given you know where the Nat gas and NGL macro stands right now within the northeast.

And the rate relief.

Program falling off at <unk> 22, I believe is there any opportunity to extend that rate relief program in exchange for more Julien.

Activity from a R or is that something that you would consider thanks.

Yeah, No I think.

It's important to keep in mind that that rate relief program was put in place in late 2019.

Both both X days did not really have access to capital markets. So it helped address some of the challenges on the balance sheet side of things.

Just to clarify that it does run through the fourth quarter of 'twenty three not the fourth quarter of 'twenty due in and currently there'll be no no plans to extend that I think.

I would be happy to.

To take the incremental free cash flow in 2024, plus as a result of that.

And no no plans right now to consider a further extension there.

Great. Thanks for the color I appreciate it.

Thank you.

Your next question comes from the line of Colton Bean with Tudor Pickering, Holt and company. Please proceed with your question.

Good morning, So just one on my end I think in the ER call. The team noted that you are rejecting about 150000 barrels a day of ethane with the south and pipeline, reaching commissioning. This month in crackers startup expected next year should we see a step up in extraction and commensurate increase in JV frac volumes.

So just as a reminder on the.

On the ethane side.

The JV does not participate in the Dia amortization.

On the on the fractionation side on the <unk>.

So no impact from the ethane.

Recovery will recover more volumes as a result of its commitment to the shell cracker, but that will not have an impact to the processing David.

That's helpful.

Your next question comes from the line of John Mackay with Goldman Sachs. Please proceed with your question.

Hey, good morning, Thanks for the time, just one quick one for me.

Don't think we talked about you had just on 22 Capex do you guys have kind of guided a couple of times in the past on that $2 $75 million to $300 million level, just curious given where we've seen steel prices go and kind of inflation more generally if you will.

Looking at that range still still holding right now.

No. Thanks for the question John I appreciate it good question I think overall that too.

75% to 300 is still the range that we have out there you certainly have seen some inflation.

On steel, but I think it's important to note for antero given the visibility that AAM has ended the development program with a are we do have the luxury of being able to preorder some of that steel and so we are not going to see necessarily the impact that others may see out there that don't have the visibility.

And then the second point I would just imagine us.

Labor does make up about 75%.

That capital cost and so you're not seeing an impact commensurate with what youre seeing on the steel side with with labor.

So overall still expecting within that $2 $75 million to $300 million for 2022.

Alright, thank you.

Thank you.

Your next question comes from the line of Michael Cusimano with Pickering Energy Partners. Please proceed with your question.

Hi, Thanks for taking my question.

Talk about the capital required for EM.

I would now like to grow I understand they are expected to remain flat but.

Is the capital required at a M part of that decision process, when I think of the whole enterprise.

Yeah, I mean, I think certainly as they are looked at its development plans and given it is a 30% owner of am I think yeah, certainly looks at the whole picture when it makes its decision.

Overall, I think it's difficult to.

To say, whether whether incremental growth would require incremental capital it depends on where the growth is relative to where the infrastructure is built out.

So tough to give you any sort of direct answer today, but again I just reiterate I think right now.

Still is planning for maintenance capital and no change on that front and and so as we look at the AGM.

Capital backlog were still at that 1.1 billion at the midpoint.

For the five year period.

2021 through 2025.

Okay.

Could you if possible.

Help me understand where capacity might be available today.

Yeah, I mean, I think overall there is certainly availability in various areas.

<unk> operations.

<unk>.

Not to get into specific areas, but I think it's diversified around ar's acreage position.

Both on a liquids rich side and the dry gas side.

Availability and then.

Where I am.

As investing most of the capital going forward is certainly in the more liquids rich areas, which is where <unk> is developing.

Today.

So a lot of the growth or the.

Grow through the drilling partnership.

Planned into that liquids rich areas, and Thats, where am's investing capital today, but but overall access to the extent there is excess capacity, it's diversified across kind of the portfolio outside of <unk>.

Where we're developing to that.

Got it alright, that's helpful I'll leave it there I appreciate it.

Thanks, Michael Thank you Michael.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Brendan Cougar for closing remarks.

Yes, thanks, operator, and thank you for joining us for the call today and please reach out if there is any further questions. We are available. Thank you.

This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.

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