Q4 2021 Antero Midstream Corp Earnings Call

Hello, and welcome to the Antero Midstream fourth quarter 2021 earnings call and webcast. 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. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my.

Pleasure to turn the call over to Justin Agnew Director of Finance. Please go ahead Sir.

Good morning, and thank you for joining us for Antero midstream fourth quarter and full year 2021 Investor Conference call.

Then a few minutes going through the financial and operating highlights and then we'll open it up for Q&A.

I'd also like to direct you to the homepage of our website at Www Dot Antero midstream Dot com, where we've 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 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.

Any of which are beyond <unk> control.

Actual outcomes and results could materially differ from what is expressed implied or forecast in such statements today's.

Today's call May also contain certain non-GAAP financial measures. Please refer to our earnings press release and 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.

Brendan Kruger CFO of Antero midstream and Michael Kennedy CFO of Antero resources, and director of Antero Midstream.

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

Thanks, Justin.

In my comments I'll discuss Aam's 2022 capital budget, along with our updated five year $1 billion organic project backlog.

These projects are underpinned by a ars peer leading liquids rich inventory in Appalachia, the lowest cost gas basin in the U S.

Importantly, this infrastructure drives growth at AAN and plays a vital role in supplying clean natural gas, both domestically and abroad to help lower overall global emissions.

We believe that building and owning midstream assets with high through throughput visibility.

In the lowest cost basin is the most attractive way to deliver value to our shareholders.

Now, let's discuss some of the key infrastructure projects at AAM I'll start on slide number three titled.

2022 capital budget and key projects.

First as depicted on the right hand side of the page we placed the Lincoln compressor station in service in the fourth quarter of 2021, which was accelerated from the first quarter of 2022.

For the full year 2022, we have budgeted capital investments of $275 million to $300 million, which is in line with our comments made on last quarter's earnings call.

Antero Midstream is 2022 capital budget includes approximately $45 million for two additional compressor stations that will be placed online in 2022 and 2023.

These compressor stations are located in the core of the liquids rich Marcellus fairway, where <unk> development is focused over the next several years.

Importantly, aam's visibility into Ar's development plan allows us to phase in capacity at these future stations on adjusting time basis.

Antero Midstream has also budgeted $50 million of remaining capital investment for a 20 mile High pressure line from Wetzel County to the Sherwood and Smithburg processing complex highlighted in green.

This strong client connects.

<unk> core development area highlighted in blue with our processing capacity and supports aam's throughput growth over the next several years.

In addition to some of these larger projects, we will continue to invest in the low pressure gathering and water delivery projects, which reflect the remaining capital in the 2022 budget.

Slide number four.

Entitled.

I am organic project backlog illustrates.

Illustrates am's $1 billion organic project backlog through 2026.

What's the major projects I just discussed are completed AAM will effectively complete the upfront capital investment required to support the drilling partnership.

On a quarterly basis, our 2022 capital program is front loaded and we expect to invest approximately 70% to 75% of our full year capital budget in the first half of 2022.

This resulted in declining capital investments on a quarterly basis throughout the year.

Beyond 2022, we expect declining capital budgets from 2023 through 2026. These just in time capital projects include our bread and butter of gathering compression and water projects infrastructure that support the low single digit throughput and EBITDA growth or.

For the next several years.

Importantly, this development visibility the short lead time projects and adjust in time approach allows us to generate peer leading return on invested capital or ROIC.

Which is illustrated in yellow.

In 2021, AAM generated its highest annual <unk> of 18% and we expect to generate high teens ROIC.

Over the next five years, as our EBITDA growth and capital declines.

I'll finish my comments on slide number five titled a peer leading liquids rich drilling inventory every year at <unk>, we do an extensive technical analysis of.

In the Appalachian Basin.

To evaluate and drilled locations well performance and EUR is in Appalachia.

Map on the right hand side of the page illustrates this analysis with ar's acreage in yellow and drilled stiff locations in red compared to <unk> premium in tier two acreage outlines as you can see AAR holds an extensive position in Appalachia, particularly in the liquids rich core area of less.

Virginia West of the 1100 Btu by.

Specifically <unk>.

<unk> over 925 liquids rich premium core locations with laterals, averaging over 13250 feet, which is nearly 40% of the premium liquids rich core on drilled locations in Appalachia.

This leading liquids rich inventory is the focus of Ar's development program over the next decade, given the attractive economics for liquids rich locations compared to dry gas locations at current commodity prices.

<unk> also illustrates ar's highly contiguous acreage position that results in an efficient midstream build out that generates peer leading return on invested capital for AAM.

Importantly, <unk> continues to be active and it's organic leasing program acquiring bolt on acreage.

This organic approach is both cost effective for AAR and capital efficient for AAM compared to corporate M&A transactions, both in Appalachia or out of basin.

This organic approach historically, avoiding the competitive acquisition markets has resulted in strong balance sheets and attractive outlooks at both entities.

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

Thanks, Paul I'll begin my comments with fourth quarter results at AAN during the fourth quarter AAM generated $213 million of EBITDA, bringing the full year 2021, EBITDA to $876 million.

This was $16 million above the midpoint of guidance and represents 3% year over year EBITDA growth.

<unk> 2021, EBITDA was above the midpoint of guidance due to higher gathering volumes throughout the year capital expenditures in the quarter were $80 million, bringing our full year capital expenditures to $262 million driven by the acceleration of the Lincoln compressor station that Paul just discussed in his comments.

For the full year, we generated $439 million of free cash flow before dividends and $10 million of free cash flow after dividends, which allowed us to maintain a flat debt profile at $3 1 billion and leverage at three six times.

Slide number six titled Free cash flow inflection point illustrates our historical and future free cash flow after dividends as you can see from 2017 through 2020. We were we were in an outspend mode as we build scale through through our organic capital projects and downstream investments such as the.

Our processing and fractionation JV with MPLX.

In the 2021% to 2022 period, we will be approximately free cash flow breakeven due to expansion capital investments supporting the drilling partnership growth.

However, with the declining quarterly capital throughout the year. The outspend is effectively behind us as we transition to generating free cash flow after dividends in the second half of 2022. This will mark a critical inflection point for Antero midstream as we expect to consistently generate free cash flow after dividends for the foreseeable future.

You can see on the right hand side of the page, we expect increasing free cash flow after dividends in 2023, and further growth into 2024 and beyond as capital declines volume continues to grow as a result of the drilling partnership and the LPC rebate program with AAR expires in total we are now targeting 700 to 800.

Millions of free cash flow after dividends from 2022 through 2026 that is up $250 million at the midpoint from our previous five year target of $450 million to $550 million from 2021 through 2025.

Ill finish our prepared remarks on slide number seven titled Antero Midstream guidance and outlook summary.

Left hand side of the page highlights, our 2022 guidance and the right hand side illustrates our long term outlook.

First we are still on track with our five year outlook through 2025 and are now rolling forward that outlook through 2026 is just mentioned, while our EBITDA guidance for 2022 is approximately flat we are still targeting a low single digit EBITDA CAGR through 2026, driven primarily by throughput growth at am.

Our 2022 capital budget of 275 to 300 million is approximately one third of our total organic project backlog of $1 billion through 2026, which implies declining capital in 2023 through 2026.

This EBITDA growth and declining capital result in AAM now targeting two $9 billion to $3 billion of free cash flow before dividends and 700 $800 million as just mentioned our free cash flow after dividends, assuming a <unk> 90 per share dividend for 2022 through 2026. This profile result in declining leverage from our three.

Six times level today to our target of three times or less by year end 2024.

Once we reach this leverage target we will be in a position to evaluate further return of capital to shareholders additional growth investments and further debt reduction.

As a reminder, we have used $150 million of our $300 million share repurchase program, resulting in a $150 million of remaining capacity.

In the near term our primary focus will continue to be debt reduction and to use this program only opportunistically as we have in the past when AAM share price does not reflect the underlying business fundamentals.

Once we reach our leverage targets and have significant financial flexibility. We can further utilize this program or evaluate dividend growth depending on market conditions.

In summary, we remain very excited about the future of Antero midstream.

Particularly as we reached this inflection point in the second half of this year, where we expect to generate consistent free cash flow after dividends for the foreseeable future.

With that operator, we are ready to take questions.

Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if we'd like to we'll take question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star one one moment.

Please while we poll for questions.

First question today is coming from John Mccain from Goldman Sachs. Your line is now live.

Hey, good morning, everyone. Thanks for the time I wanted to just talk about.

Capital allocation and the new free.

Free cash after dividend guidance.

I guess it sounds like the focus is on leverage now through year end 'twenty four.

But I guess I wanted to ask is.

Given the improvement.

Is three.

Three point O still.

Still the right leverage for you just given how much better the sponsor has gotten and can you just talk a little bit more about what's driving that increase in kind of the full year accumulative.

Free cash outlook.

Yes, So I think on your first question. We are still very focused on the three times leverage target I think midstream continues to move lower in terms of focus on lower leverage we've seen a nice response on the IR side as it's taken its absolute debt down and we think we think we will see something similar on the on the.

A M side. It just gives you more flexibility and long term strategic planning.

And then on the second question really.

The addition of rolling forward, a year and a maintenance capital program.

We've talked about the fact that.

Both in 'twenty, one and 'twenty two we were really investing related to the drilling partnership and so those are the years you saw more heavy investment to support that drilling partnership when you get out to.

23, you should see that capital come down nicely from from this year, and then 24 and beyond.

And we will come down even further into more of a maintenance capital mode, which we like to think about in terms of $1 $50 million to $200 million overall beyond maintenance capital level for Antero midstream. So when you roll off another year with the growth we expect the drilling partnership the fee rebate expiring in that lower level of capital.

It drives that $250 million of additional free cash flow on that five year cumulative basis.

Alright, Thats really helpful. Thank you and makes sense, maybe I can just squeeze in one more I understand you can't comment too much. So I'm just kind of want to ask on on process and timeline.

Next Thursday is the next step in the <unk>.

Wastewater Court case I'm, just curious are we expecting an answer from the court at that point or is that just one step and we probably won't see resolution until until later.

Yes, So next next Thursday.

An additional day added to the trial. So just additional items to cover I think for the trial.

As we disclosed at the bench trial, and so theres no definitive timing.

In terms of when a decision will necessarily be made and of course youll likely see appeals as you do in and most court cases, and so tough to gauge when we'll come to a final conclusion, there, but we just to be clear we have not included any sort of assumption.

Assumption of anything in our.

Targets and cash flow guidance that we provided.

Got it alright thats helpful. Thanks for the time I appreciate it.

Thanks.

Thank you as a reminder, that star one to be placed in the question queue. One moment. Please when we pull for questions.

We reached end of our question.

One more please will you pull further questions once again Thats star one to be placed in the question queue.

Our next question is coming from Nick <unk> from Wells Fargo. Your line is now live.

Hi, Thanks for squeezing me in just one quick question it seems that with the expected in service of shelves ethane.

Later this year ethylene production.

So are there any thoughts of.

Having the <unk> am at some point in the future as opposed to keeping them.

Now that those were not part of the.

The JV to begin with and frankly, that's kind of the lowest part of the economics on that.

On the processing complex anyway, so we're happy to kind of keep those outside of Aam's business, Yes, and just to reiterate that's not that's part of the JV, Yes, that's held at MPLX MPLX.

Got it and then I guess with AAR announcing its capital allocation plan.

Could increasing ownership in.

AMB part of part of this framework.

No I don't think any of that.

Or has not come out and said anything there I mean, you have seen some of those transactions certainly out there shallow the recent one much different structure there.

But as we look out at the business today I think.

Separate entities are working well today. So no current plans as we look out right now whether that changes as the company has become more mature to be determined but right now I think the outlook.

Makes sense for both entities.

Thanks for the time Thats all I had.

Thanks, Ed.

Our next question today is coming from Michael Lindsey from Tudor Pickering Holt. Your line is now live.

Good morning, guys. Thanks for the time. My first question is just around 2020 to expectations for the water business I understand that gross completions guidance as tad bit.

<unk> 75 to 80 for the year, but can you guys just kind of walk us through the quarterly cadence you're expecting there.

Yeah, So I think overall.

Roughly 60% or so.

In the first half of the year and the other 40% in the second half.

As it relates to <unk>.

Volumes there.

Got it. Thanks. That's helpful. Helpful. And then I guess, just pivoting to capital allocation. It sounded like you guys really want to kind of reach your debt target before taking a peek at what you can do on the capital returns side of things.

I guess as you look out.

So 2024, plus kind of how do you weigh.

Distribution increases versus buybacks and do you have like an ultimate goal to get back to the prior distribution at around the $1 23 per share level.

Yes, I mean, I think as we look out there.

We look at the business today.

We certainly think the equity looks attractive.

Trading trading where it guys given the organic growth we have the low leverage that we have and just the visibility frankly from a midstream atrophy that we have over.

Multi not just multiple years, but over multiple decades with that inventory.

So if you get out to 2024 and things have not changed to a certain extent I think share buybacks certainly look at more attractive to us.

Versus increasing the dividend overall and then.

We will go from there but.

Obviously quite a ways out and we'll have to evaluate when we get there.

Got it thanks for the time.

Thank you. Thank you as a reminder, Thats star one to be placed in the question queue. Our next question is coming from Telerik Hamid from Jpmorgan. Your line is now live.

Good morning, guys, just following up on capital allocation.

Given sort of your targets for free cash flow and the flip over in the second half of 'twenty two.

Just wondering kind of as you get to that three times leverage target how much of that is continued EBITDA expansion versus how much of that is just sort of using free cash flow to pay down revolver. As you think about getting to that target by year end 'twenty four.

Sorry, what was the first part of your question.

Given the flip over to free cash flow.

In the middle of this year.

Yes, so I think overall as we look at debt Paydown, we certainly have some.

Some notes.

With coupons that are not is not very attractive to us today, so I think that would be the.

First use of it I think we're comfortable having a.

A bit drawn on the revolver and then once you get through.

Some of the higher cost debt you'd likely just turn out or.

Pay down the revolver over time, and you wouldnt have anything drawn on that as well so.

A lot of flexibility there I think on the <unk> side with the debt to be able to attack it.

Got it.

And then just on ratings.

Hey, RNA MSP kind of unique with AMB effectively the same as they are.

Given the debt reduction or they are just wondering kind of.

The conversations you had with the agencies do you expect them to sort of continue to rate.

The same as they are or do you expect them to sort of start to change that methodology over time.

Yes, I would.

Say both agencies they look at.

At the structures a little bit different.

No one likes to look at it on kind of more of a combined one looks likes to look at it more separate.

So overall you could see some differentiation between the two.

It certainly has.

It's leveraged at one three times and heading lower.

In the future AAM does add leverage moving down as well so the push will obviously be to keep them connected and continue to move those ratings up and we do have frequent conversations there, but tough to tell with the rating agencies do.

A little bit of a black box sometimes there.

I can appreciate that thank you very much.

Thank you thanks Tarek.

Thank you we reached end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.

Thanks for joining us today for the call. We're available for any questions should you have any follow up.

Yes.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.