Q2 2022 Antero Midstream Corp Earnings Call

Greetings and welcome to the Antero Midstream second quarter 2022 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 and as a reminder, this conference call is being recorded.

It is now my pleasure to introduce Justin Agnew director of Finance. Thank you Justin you may begin.

Good morning, and thank you for joining us for Antero Midstream second quarter Investor Conference call.

Spend 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 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 Taro 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 Antero midstream and are subject to a number of risks and uncertainties many of which are.

Beyond <unk> control.

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

<unk> 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 Brendan Kruger CFO of Antero Midstream and Michael Kennedy CFO of Antero resources and director of Antero Midstream.

I'll turn the call over to Paul.

Thanks, Justin.

In my comments I will discuss.

Infrastructure expansion into the liquids rich midstream corridor.

Capitals synergies from relocation and reuse of legacy assets.

And well performance.

Gathering system.

Brendan Krueger will then highlight our quarterly results growth outlook and transition to consistent free cash flow generation after dividends.

I'll start my comments on slide number three titled <unk>.

So peak compression construction.

This slide illustrates the construction progress at our castle peak compressor station in the liquids rich midstream corridor in the Marcellus shale.

This station was on time and on budget, which is a testament to the planning engineering and civil groups given the topography as shown in the pictures on this slide as you can see on the bottom right photograph. The castle peak station has an initial capacity of 160 million cubic feet a day in.

In 2023 will we will expand the station's capacity by another 80 million a day to a total of 240 million cubic feet per day.

This phasing in of capacity allows us to maintain high utilization rates and deferred capital until the capacity is needed on a just in time basis.

Importantly, the castle peak station is as the first station that we will be relocating relocating compression units from Antero midstream asset base that are currently underutilized.

As detailed on slide number four.

Titled Capital optimization from relocation and reuse our historical utilization has been very consistent averaging 85% over the last five years.

This is a result of our unparalleled visibility into a Ars development plan and just in time investment philosophy.

Because of these high utilization rates, we haven't previously had opportunities to relocate and reuse underutilized capacity.

As you can see on the right hand side of the page we plan to move four units from a legacy station to expand the legacy the castle peak compressor station by 80 million a day in 2023.

Compared to buying and installing new units, we expect to save approximately $5 million in capital This station alone.

Yeah.

In 2024, we expect to use the remaining eight units from the highlighted legacy station for our Newbuild Grays peak compressor station.

We expect this reuse opportunity to save approximately $15 million, resulting in total capital savings of $20 million.

Importantly, both of these stations are located in the liquids rich midstream corridor outlined in purple, where Ar's development plan is focused focused over the next several years.

Looking forward AAM is well positioned from a capacity perspective to accommodate the highly visible throughput growth expected over the next several years on am dedicated acreage.

I'll finish my remarks on slide number five.

Improving and consistent well performance.

Which highlights the well performance since 2018.

The plot illustrates the average cumulative production over the first 90 to 180 days of the well.

As evidenced on this page well performance at a or continues to improve as a R has optimized completion techniques well spacing and has moved into the higher end of its development area.

To date in 2022, <unk> average wells have displayed a 55% increase in cumulative production.

First is the 2018 average.

These results in the liquids rich midstream corridor give us tremendous confidence in the underlying resource that supports the throughput growth at am.

This also results in a more capital efficient business model at am.

Lastly, I wanted to highlight a Utica pad included in the 2022 production plot.

Wells on this pad have outperformed that 2021 and 'twenty 'twenty production plots average $5 50, and 65% respectively.

While a Ars development plan is focused on the liquids rich Marsh Marcellus shale there are several pads planned in the Utica over the next five years located in areas with existing midstream infrastructure.

This results in minimal capital spend for AAM in the Utica, while still capturing volumes from our strong expected well performance.

In summary, we continue to optimize our capital program as we expand our footprint into the liquids rich midstream corridor.

The well results give us tremendous confidence in executing our growth plan, while maintaining high asset utilization rates.

This results in an attractive return on invested capital, which we estimate will remain in the high teens importantly, we are not reliant on competing for third party growth projects that dilute our overall corporate returns with that I will turn the call over to Brendan crew here.

Thanks, Paul I'll begin my comments with second quarter results at AAN on slide number six titled year over year midstream throughput growth.

The second quarter <unk> low pressure gathering volumes were three Bcf a day a.

A 3% increase year over year compression volumes were two eight Bcf a day, a 1% increase year over year and joint venture processing volumes were one five Bcf a day, which reflects a 1% increase year over year volume growth in the quarter was driven by the strong well performance that Paul discussed in his remarks.

Looking ahead, we expect throughput to be approximately flat in the third quarter and then a slight increase as we exit 2022.

This allows us to generate momentum into 2023, where we expect mid single digit throughput growth on an annual basis moves.

Moving on to the water side of the business freshwater delivery volumes in the second quarter averaged 110000 barrels per day with 15, well serviced as a reminder, on the first quarter earnings call. We discussed a seven well pad that was utilizing simultaneous completions in late March this.

This resulted in wells that started completion operations in the first quarter, but had water volumes primarily delivered in the second quarter.

Year to date, we have serviced 36 wells compared to our guidance of 75 to 80 wells are just under half.

The second quarter also marked a critical inflection point for App, which I will highlight on slide number seven during the second quarter, our free cash flow before dividends was over $100 million and our free cash flow after dividends was breakeven.

Looking to the back half of the year and beyond we expect to generate increasingly positive free cash flow after dividends.

This is driven primarily by declining capital as we completed some key growth projects such as the Castle peak station in the first half of the year.

This allows us to begin paying down debt and reducing our leverage towards our three times target.

Looking to 2023, we expect the EBITDA growth and declining capital to result in significant free cash flow. After dividends. This trajectory is expected to continue further into 2024 and beyond as volume grows.

Fee rebate with AAR expires and capital declines.

The increase in free cash flow after dividends will result in increased debt paydown and reducing our leverage towards our three times target.

We expect to achieve this three times leverage target in 2024 at which point, we will evaluate further return of capital strategies.

In summary, the future franchise midstream is very bright.

Paul touched on in his remarks, we believe we have one of the most derisked business profiles in the midstream industry, we have unmatched visibility and two attractive volume and cash flow growth supported by a multi decade drilling inventory and the lowest cost gas basin in North America.

Our transition to generating consistent free cash flow after dividends, we will continue to strengthen our balance sheet and credit metrics our primary customer.

<unk> has paid down over $2 billion of debt over the last two years had leverage of just <unk> six times and is quickly nearing investment grade ratings.

AAM is well positioned as the first leg customize midstream solution for a producer with the greatest exposure to LNG export facilities in the U S with a significant role U S. LNG is expected to play in the world over the coming years and decades and a step change expected in Antero midstream is free cash flow position in the near to medium term.

We believe Antero midstream offers one of the most attractive risk reward opportunities in the midstream space.

With that operator, we are ready to take questions.

Thank you, Sir we will now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if you would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing any sarkies.

One moment, please while we poll for any questions.

Our first question comes from the line of John Mackay with Goldman Sachs. Please proceed with your question.

Hey, everyone and thanks for the time today I wanted to start on some of the AAR comments about just improving well performance is there is there an impact we should think about.

Does that mean.

Our capital intensity going forward really just talk about some of maybe the puts and takes coming out of that thanks.

Yes, I think certainly that's conceptually right.

The build out costs to a pad is X amount, it's finite and so if you have.

More volumes.

Particularly substantially more volumes then that's fine.

Yes, just to improve the return on the assets so.

Where we're at an uptrend and as Mike described.

Grabbed and.

Our earlier call. We're in just some really good rock in a really good fairway. So.

We've got the.

The process down in terms of inter lateral distance and completion.

Style and technique so.

Good things going on the growth and in.

At the same amount of capital on the midstream in exactly good points fall and I would also add they are also alter.

Alters their development plan like you saw we put on our Utica pad.

In the second quarter, just to make sure we're as efficient as possible on the midstream and <unk>.

It does.

Develop pads here and there to take advantage of open capacity on midstream and not.

Have am overbuild in certain areas. So that's a terrific attribute for antero midstream as well.

Okay, maybe is it a little too early to quantify what the potential decrease in gathering capex could be for am.

If these well results continue.

Yes, I think right now.

A little too early but we will certainly follow up as we get into 2023 capital guidance and further updates on our five year plan John .

Alright, maybe just last one on that theme can you talk a little bit more about.

Is there more on the compression side you can do you talked about the $20 million.

<unk>.

Is that kind of early stages could we see more after that.

I think this is an exciting exciting <unk>.

Ananda the Iam business I think as we mentioned both in the press release and then the prepared remarks.

This will be the first pad, where we're reusing a can.

We've historically run at high utilization rates and so we didn't have this opportunity as certain legacy assets that were put in place five plus years ago.

<unk> start to decline from a utilization. It gives you that ability to reuse. So we've touched on the $20 million I think we've identified.

$50 million in total over call it the five to seven year period and.

And as mentioned it is early stage here. So this is something that we're certainly spending a lot more time on from a company perspective and are looking for additional opportunities there.

Great I appreciate the color. Thank you.

Thanks.

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

Hey team Thanks for taking my question.

Just taking a high level.

Level.

M trades at the same price or evaluation that did in mid 'twenty one.

Over three accidents that same period.

Obviously commodity prices drove a lot of that but.

I guess would that being said like how do you think about cash allocation between the two entities like do you benefit from having the separate entities today.

And at what point do you think about it.

The cash generation at AOR today at what point does that potentially look to buy in AAM or.

It's just too cheap today to where that makes sense I'm. Just wondering how you are thinking about that today.

The updated thoughts there.

Yes, good question.

It's gone up three times actually metrics.

<unk> continued to trade down it's still at a mid 20% free cash flow yields almost three times EBITDA.

It's a PDP PV <unk>.

<unk> I mean, it just continues their multiples compress.

So, whereas am I think as you know.

Terrific company, but it's been in this.

Year or two period, where it was relatively flat with a dividend free cash flow.

After dividends was relatively neutral it's about ready to go into a phase of.

EBITDA growth and declining capital so that's not going to be the case in 'twenty three 'twenty four so we do look for am to.

I appreciate that and the trade better but they are right now it's definitely just focus on buying and its own shares and trying to capitalize on that the disconnect in its valuation.

Okay.

Got it that's helpful. Thank you that's all for me thanks.

Thanks, Michael Thanks, Michael.

As a reminder, if you'd like to ask a question. Please press star one.

Our next question comes from the line of Michael Ansley with Tudor Pickering Holt. Please proceed with your question.

Hey, guys. Thanks first one for me is just on the water side of the business. You noted you had service 36 wells year to date versus the 75 to 80 guide.

Any color you can provide on the quarterly cadence kind of as we look through the balance of the year.

Yes, I think right now as we look at it you'll have you'll have.

Roughly $55 to 45% 55 billion and third quarter, 45% fourth quarter, but certainly you can have some movement there so.

Now a little bit more on the in the third quarter and then well.

A bit of a fall off just going into the winter.

As is typical in the fourth quarter.

Okay got it and then I guess, just pivoting to the gathering and compression side of things.

Like high pressure volumes as a percent of low pressure has historically been pretty sticky around that 98% Mark just over the last few years, but this quarter. It looks like it dropped down to 95% or so was it similar downtick on the compression side.

Is that just driven by drilling in areas with less existing compression capacity and should we expect a high pressure and compression volumes to rebound as a percent of blood pressure kind of as capacity is optimized.

It relocate these legacy compressor units.

Yes. This was just related to a couple of pads that had a third party dedication.

It was really unique to one just trade that we did related to some some acreage so going forward you should not see any impact.

That disconnect that we saw.

This period. So you should have the same relationship as if you take second quarter as the U.

At the point now you should have that same relationship going forward as it relates to volume difference between the two.

Okay awesome. Thanks, Thanks for the time.

Thank you.

Thank you at this time there are no further questions now I'd like to turn the floor back over to Justin for any closing remarks.

Thank you operator, and thank everybody for thank you everybody for joining today, 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 and have a great day.

Okay.

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