Q1 2022 Antero Midstream Corp Earnings Call
Greetings and welcome to Antero Midstream, So Q1, 2022 earnings conference call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Justin Agnew director of Finance.
Good morning, and thank you for joining us for Antero Midstream first quarter Investor Conference call.
We will 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, 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 many of.
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 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 Brendan Krueger CFO of Antero midstream and micro 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 today, I will discuss aam's unique position in the LNG value chain.
Also our de risk business model.
And our efforts to minimize the impacts of inflation and tight supply chains.
Brendan will then discuss the highlights from our first quarter earnings and our long term outlook.
I'll start my comments on slide number three titled the critical first link to LNG supply.
This slide illustrates am's unique position in the increasingly important LNG value chain.
Given the recent geopolitical events. It is clear that there will be a significant call on safe and reliable natural gas and LNG from the U S.
Ams custom built irreplaceable and integrated gathering and processing infrastructure is the critical first step in transporting natural gas to LNG facilities.
As depicted on the left hand side of the page.
Aam's infrastructure directly connects Ar's production to one of the largest firm transportation hubs in Appalachia at the Sherwood and Smithburg processing complex.
As a reminder, Sherwood and Smithburg is the largest processing complex in North America with two eight Bcf a day of processing capacity.
<unk> currently has two three bcf of firm transportation that delivers gas to various LNG facilities or approximately 75% of its gross gas residue production.
This two three Bcf a day includes two point or to the Gulf Coast LNG facilities, and 330 million a day to Cove point.
With this connectivity AAM is uniquely positioned to benefit from the increasing global LNG demand despite not operating along the Gulf coast.
In fact operating in Appalachia has significant competitive advantages.
First Appalachia as the lowest cost natural gas basin in the U S, finding and development or F&D cost for a R. R. Approximately 30.
For Mcf.
This compares favorably to other natural gas plays such as the Haynesville, where F&D costs are often two to three times higher.
This translates to fewer rigs completion crews sand and water needed to grow production in Appalachia.
To put it into perspective, <unk> is able to grow gross production volumes dedicated to AAM utilizing only two to three rigs and two completion crews. This is particularly important during times like today.
Where there is tight labor and supply markets in many parts of the U S.
We continue to believe that Antero <unk> business model with lower capital intensity repeatable results and a prolific resource base is well positioned for the years ahead and decades to come.
Now, let's move to slide number four titled inflation and supply chain risks minimized.
This slide highlights the benefit of Aam's business model and the measures we have taken to alleviate the broader impacts of inflation and tight supply chains across the industry.
First as depicted on the left hand side of the page our EBITDA margins are over 85%.
With a low cost structure, even a 10% increase in costs due to inflation only impacts our margins by less than one 5%.
In addition.
Our gathering and watering water agreements that run through the mid twenties thirties have annual CPI adjustments.
Given the higher EBITDA margins, the CPI adjustments tend to more than offset any increase in cost we see in our operations.
Lastly, since we have maintained consistent operations through the previous commodity cycle, we are benefiting from consistent labor supply. Unlike other parts of the U S. The labor market in Appalachia as well balanced. This is driven by several large pipeline or infrastructure projects that have recently been.
<unk>, thereby freeing up additional labor supply.
Moving to the right hand side of the page. We've also managed our capital budget to limit the impacts of inflation.
Prior to 2022, we pre bought over 85% of our raw materials. This includes all of the steel for our 20 mile High pressure trunk line from Wetzel County that makes up a substantial portion of our 2022 capital budget. We've also received the <unk>.
Bids for over 85% of our capital budget. The remaining 15% that is still out to bid as already been risked in our capital budget.
This results in minimal overall risk to our 2022 capital budget looking ahead, even in a scenario of persistent inflationary and supply chain pressures our capital budgets will continue to decline for the next several years.
As a result, the overall exposure to these pressures will continue to decline.
In summary, Aam's business model as the critical first link to supplying LNG is well positioned in today's environment.
With a Ars 20, plus years of drilling inventory plus global demand for U S. LNG the runway for Aam's throughput volumes has become clearer for much longer.
Antero midstream is connectivity to growing demand along with our high visibility into Ar's development plan.
Risks our growth outlook for the next several years and beyond.
With that I will turn the call over to Brendan.
Thanks, Paul I'll begin my comments with first quarter results on slide number five titled year over year midstream throughput growth.
During the first quarter Aam's low pressure gathering volumes were two nine Bcf a day, a 3% increase year over year compression volumes were two eight bcf per day, a 4% increase year over year and joint venture processing volumes were one five Bcf a day, which reflects a 6% increase year over.
A year.
<unk> ahead, we expect throughput to be approximately flat in the second quarter as compared to the first quarter and then are expecting an increase in throughput in the back half of 2022.
As Paul mentioned, we have de risked this growth profile through our visibility into Ar's development plan and integrated business model acting as the first step in the LNG value chain moves.
Moving on to the water side of the business freshwater delivery volumes in the first quarter averaged 87000 barrels per day with 21 well service.
These 21, well serviced includes seven wells on a pad that was utilizing simultaneous completions in late March resulting in wells that started completion operations in the first quarter, but will have water volumes, primarily delivered in the second quarter.
This is expected to result in an increase in freshwater volumes in the second quarter as compared to the first quarter of 2022.
Moving to slide number six we wanted to highlight the consistent track record of AAM growth and pure leading return on invested capital.
Our organic business model has resulted in consistent EBITDA growth since our IPO in 2014, despite the volatility in commodity prices during the high growth shale era.
While the industry and have transitioned to maintenance capital programs, we still expect to generate attractive low to mid single digit EBITDA growth over the next five years as a result of volume growth from the drilling partnership and the fee rebates from AAR Rolling off after 2023.
Aam's organic approach not relying on third party business or competitive projects further de risks our ability to achieve this growth profile.
The bottom half of the slide illustrates our historical return on invested capital, which has averaged 15% since 2015.
These returns highlight the stability and consistency of our fixed fee inflation protected high visibility business model.
Looking ahead, we expect our volumetric in EBITDA growth combined with lower capital budgets to result in flat to increasing returns in the high teens over the next five years.
I will finish my comments on slide number seven titled Free cash flow inflection point.
This slide illustrates our free cash flow after dividends as we discussed last quarter and 2021 and 2022, we will be approximately free cash flow breakeven due to growth capital investments supporting the drilling partnership.
However, with the first quarter outspend behind us and declining quarterly capital throughout the year. We are now transitioning to generating free cash flow after dividends as we enter the second half of the year.
This marks 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 and EBITDA increases. This is a result of both volumetric growth and margin expansion.
In total we are targeting $700 million to $800 million of free cash flow after dividends from 2022 through 2026, which remains unchanged in summary, we remain very excited about the future of Antero midstream as Paul touched on in his remarks, we believe we have one of the most derisked business profiles in the midstream space with high visibility.
Two attractive volume and cash flow growth and the ability to generate sustainable free cash flow for the years ahead.
With that operator, we are ready to take questions.
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One moment, please while we poll for questions.
Our first question today comes from John Mccain of Goldman Sachs. Please proceed with your question.
Well thanks for the time I wanted to ask about some of the moving pieces on Capex. So they can mix and your comments on kind of getting ahead of inflation makes sense. There, but you also have some comments on I guess pre buying for 2023. So I'm just curious if you could spend a little more time kind of walking through.
Whether or not that's kind of properly pulling forward some of what we would've expected in 2023 into the 'twenty two budget or maybe just if that was already already in there really just kind of looking for the kind.
Kind of curve on Capex over the next couple of quarters off of that thanks.
Yes, John Thanks for the question I think.
The quick answer is there is no change I think in the guidance and targets. We've put out there previously so still expect to be in that $2 75 to 300 million for capital in 2022, and then I think we've highlighted on previous quarterly calls.
You do have a couple of projects in 2022.
Secondly, a high pressure line, that's about $50 million in 2022, and then some additional compression capacity capital in 2022 that will not be there in 2023. So as we as we look forward to 2023, we would expect that to be more in that $200 million to $225 million of capital at am So a nice move down and then.
To be announced that while 200 level or lower in the years ahead.
To hit the $1 billion overall five year capital targets that we put out there.
So no change.
Alright thats helpful. Thanks.
Maybe maybe just wanted to in the weeds here. So you mentioned kind of the timing driver for why water was down a little bit quarter over quarter, I think that makes sense and the released there's also a comment though around.
Starting water again back up in the Utica and some higher costs around that.
Not like a one off start up costs or is that kind of a slightly higher cost rate going forward.
No that was just related to a pad that we completed in the first quarter. So we had a six well pad in the Utica, we completed in the first quarter.
And it was placed to sales early in the second quarter, but overall that was just a one pad we don't we don't have.
Get out development plan in the Utica beyond that this year.
Okay.
It makes sense I will I'll leave it there thanks for the time I appreciate it.
Thanks, John .
Okay.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Michael Triesman Pickering Energy. Please proceed with your question.
Hey, guys. Thanks for taking my question.
Okay.
To start.
How are we thinking about capital allocation after you hit the.
The three times leverage multiple.
I imagine.
Whenever you get to that point is it a.
All of the above approach do you continue to take leverage down or just if you could talk through how you all think about it today.
Yes, I think we just a reminder of the three times target, we do expect to hit that.
2020 for Purion and at that time, then, we'll we'll evaluate what what is appropriate from further return of capital I think as we sit here today and we've talked about this in the past.
Share buybacks, certainly look attractive just given the valuation of am today.
On a number of different factors.
Whether that would be relative valuation, we look at it from just an inherent discounted cash flow valuation and having that visibility that AAM has.
As we've talked about during the call in terms of.
Decades of visibility into the infrastructure needed.
That gives us a lot of comfort into the overall inherent value of AAN and then I think most importantly, as Paul touched on.
Earlier, I mean, aam's has such a irreplaceable.
Asset base in terms of being the first linked to this this growing LNG demand on a global scale. So.
We really like where aam's position and if you look at.
What makes sense today from a return of capital share buybacks, certainly not very attractive to us.
Got it yeah that definitely makes sense.
And then I have one follow up I guess kind of two part question on the <unk>.
Only a lawsuit.
One if there's any comments you will have an update in that process and then second.
Jello comment at all on.
How do you view, the opex and G&A costs associated with that plant trending kind of over.
Your time and let's you'll quantify.
Quantified it seems like it's like $10 million of annual cost.
Is that something that we should just expect to continue from here or does that roll off whenever this lawsuit resolved.
Yes, I'll take the first one on the lawsuit there is no change I think we put in the in the Q you can see that.
Coordinated.
Mark has ended.
Oriented in end of February and that we are awaiting a decision on that so no timing update other than that and then as you think about cost we would expect.
Going forward at least this year about $500 to $1 billion per quarter and overall costs as we move forward related to that facility.
Okay got it that's helpful. That's all from me guys. Thank you.
Thanks, Michael Thanks, Michael.
There are no additional questions at this time I'd like to turn the call back to Justin Agnew for closing remarks.
Thanks, everyone for joining us today on today's call. Please feel free to reach out with any further questions.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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