Q3 2022 Antero Resources Corp Earnings Call
Greetings and welcome to Antero Resources' third quarter 2022 earnings conference call.
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.
It is now my pleasure to introduce your host.
Brittany Kruger Vice President of finance. Thank you you may begin.
Thank you operator thank.
Thank you for joining us for Antero <unk> third quarter 2022, Investor Conference call I'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 resources Dot Com, where we have provided a separate earnings call presentation that will be reviewed during today's call.
Today's call may 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 already chairman CEO and President Michael Kennedy CFO , Justin Fowler Senior Vice President of gas marketing and transportation and David get along.
Senior Vice president of liquids marketing and transportation.
We will start today's call off with some initial comments from Mike.
Thank you Brendan before we get into a more prepared quarterly remarks.
We thought it was important to start by discussing the consistency in our financial performance highlighted by Antero progress year to date on our return of capital efforts and debt reduction program.
Slide number three summarizes the consistent and repeatable results. So you can expect from Antero.
As we continue to deliver on our stated goals of having a best in class balance sheet.
While also returning significant cash back to our shareholders.
The top of the slide illustrates the increasing return of capital through each quarter. This year.
Because we began focusing so aggressively on reducing that several years ago. We are now in position to return higher percentages of our free cash flow to our shareholders.
This isn't an important distinction compared to many of our peers, who will need to continue taking a balanced approach between debt reduction and cash return in order to improve their balance sheets.
As you can see on the top of the slide we have purchased 21 and a half million shares for a total of $730 million.
During the first nine months of this year.
At the bottom of the slide you see we continue to aggressively reduce debt, including more than $400 million in this quarter alone.
This brings our year to date debt reduction total to nearly $1 billion.
Since the beginning of our debt reduction program in the fourth quarter of 2019, we have now reduced debt by $2 $6 billion.
From $3 8 billion to less than $1 2 billion at the end of the third quarter.
Just yesterday, we announced a $1 billion increase in our share repurchase program, bringing the total program to $2 billion.
This increase highlights the confidence we have in the predictability of Interros business and our continued ability to repurchase a significant amount of shares in 2023.
With that I will now turn the call over to our chairman CEO and President Paul Randy.
Thanks, Mike.
This repeatable business model that Mike just discussed incorporates our strong balance sheet scale.
Scale with a diverse product mix and access to premium priced markets utilizing our firm transportation portfolio.
Also important to delivering predictable result is a large core inventory position with low breakeven cost.
Let's turn to slide number four titled largest low cost inventory.
This chart is based on a recent.
Yes.
Analysis it ranks Appalachia producers by the amount of Marcellus inventory that they have with breakeven costs below $2 per Mcf.
As you can see Antero has the greatest amount of low cost inventory in the basin more than 800 future locations, which will continue to drive our consistent performance well into the future.
Now to expand on Antero is predictable business model lets discuss our inventory depth.
Turning to slide number five titled.
Organic land acquisitions, we see that across the oil and gas industry. We've seen an increase in both public and private corporate acquisitions over the last couple of years, including several large transactions during the third quarter alone.
These larger acquisitions were close to $5 million per location.
Over this time, we have continued to maintain our focus on our core acreage footprint with a particular emphasis.
Spending capital on organic lease acquisitions.
As opposed to larger transactions that could dilute our equity create a large overhang on the stock.
And lever our balance sheet, we have preferred to pick up smaller more tailored acreage packages within our core liquids rich position in West, Virginia, where we continue to see tremendous well results.
As an example during the quarter, we spent $46 million on land a portion of which was used to add 25 additional drilling locations at less than $1 million per location.
During the first nine months of 2022, and Taro is organic leasing program has added approximately 60 drilling locations at an average cost of less than $1 million per location essentially offsetting our maintenance capital plan that assumes an average of 60 to 65 wells per year.
We believe this organic leasing program is the most cost efficient approach to extending our core inventory position.
This approach added another layer to the predictability of our business strategy and it lessens any need to make a large M&A transaction.
Now to touch on the current natural gas fundamentals and how they directly favor antero I'm going to turn it over to our senior Vice president of the gas marketing and transportation Justin Fowler.
Thanks, Paul.
Nothing demonstrates ensures predictable business more than our our firm transportation portfolio.
Let's turn to slide number six titled Antero, pure leading exposure to premium markets.
This slide highlights <unk> unique ability to avoid the pitfalls of regional capacity constraints and wide basis discounts, which we saw once again during the third quarter.
Antero owns two three Bcf per day of firm transportation to the U S. Gulf Coast LNG fairway into the mid Atlantic Cove point.
<unk> terminal, which represents approximately 75% of antero as total natural gas production.
This firm transport oil at Antero to achieve a 49 per Mcf premium to Nymex Henry hub in the quarter. Despite the wide basis differentials realized by the industry.
Looking ahead to 2023, we expect regional basis differentials in Appalachia, the Permian basin, and the Haynesville to remain wide with deeper discounts due to the pipeline capacity constraints.
In the Permian, we do not expect basis improvement or meaningful supply growth region markets until the third quarter of 2023, when the incremental pipeline capacity is expected to be completed.
This Permian basin Raki pipeline outlets was highlighted this week through the negative absolute wall, our cash price the lowest price in two years.
The Haynesville is in a similar constrained position over the next nine to 12 months as it awaits incremental pipeline capacity.
Having the firm transport capacity is as important and avoiding the price volatility from regional basis blowouts.
However, equally as important as having access to the premium priced hubs.
Slide illustrates that the primary hubs that antero. So this gap into have all seen basis improvement over the last two years.
Conversely, you can see that the local negative pricing differential that many of our Appalachian peers. So their gas into has deteriorated by 38 cents to approximately $1 below Nymex Henry hub.
As additional LNG trains and terminals are completed we expect that the pricing hubs, where we saw the majority of our gas will see larger and larger positive basis premiums to Nymex.
With the expected increase in LNG exports, both on an absolute and relative percentage of our overall U S. Supply. We believe these premium harvest, we will see price increase more dramatically than Nymex as they linked directly to international prices.
This environment will provide further support to antero strategic position today accessing LNG markets.
Looking ahead, we continue to believe that the labor and equipment tightness, along with infrastructure constraints will make natural gas growth challenging.
Historically, low coal storage, leading to the inability for switching and a wide global arbitrage spread suggest LNG exports will remain at about maximum utilization. This winter supports our positive outlook for natural gas prices going forward.
With that I will turn it over to our senior Vice President of liquids marketing and transportation, Dave handle long ago for his comments.
Thanks, Justin.
Over the past few months liquids pricing has been volatile as the market ways macroeconomic concerns against continued supply uncertainty and elevated geopolitical risk.
Oil prices have retreated from the high seen this spring immediately following the invasion of Ukraine, largely due to China's Covid zero policy supply chain bottlenecks and high levels of inflation impacting GDP growth and currency values worldwide.
UFC three plus NGL prices have mirrored the drop in oil over the past two quarters looking.
Looking at propane, specifically slide number seven entitled Propane market fundamentals showed of the propane inventory saw sizable injections during the third quarter and are now in line with the five year average levels. However, we will note that the rate of stock builds has leveled off in recent weeks as we are entering startup winter demand season and importantly.
The days of supply remains 13% below the five year average.
Turning to slide number eight titled Global NGL production versus LPG export.
Looking on the supply side of the graph on the lower left highlights the growth environment for U S. NGL production compared with stagnant to declining production expected in the rest of the world Indus.
Industry forecasts show U S. NGL production growing 8% year over year from 2022 to 2023, while anticipating a 2% decline in supply from the rest of the world over that same period with.
With additional downside risks from further OPEC plus cuts.
Taken together the anticipated decline in supply of Ngls and the rest of the world and the normalization of demand growth expected in the market paint a bullish picture for U S NGL pricing.
Continuing on slide number eight the graph on the right shows the relative weakness in export levels observed doing during second quarter and third quarter. This year that fueled the strong injection season for propane however.
However, we anticipate a return to healthier export volumes over the next several quarters and years as we eventually return to a more normalized demand environment globally.
Turning to the macroeconomic economic side the graph on the left of slide number nine shows China's quarterly year over year GDP levels and illustrates that economic growth has been curtailed for much of 2022 due to the impact of the nationwide Covid zero policy. These GDP growth levels are likely to.
Improve over coming months and quarters as restrictions will eventually be lifted.
There are also promising signs that supply chains are normalizing potentially creating some near term tailwind for NGL markets.
The graph on the right hand side of the slide shows that the New York Fed Global supply chain pressure index is showing a trend back towards historical norms, albeit still somewhat elevated today. It is important to note that this metric has normalized so that a zero value indicates a supply chain pressure is at average levels.
The strong positive value seen.
Lately in this data show how many standard deviations. This metric was above its average level, which was representative of this severe supply chain constraints global markets experienced.
Unresolved challenges such as Lockdowns or congestion and logistical disconnect has provided raw materials from getting the consumers as finished products putting pressure on petrochemical production margins.
This resulted in lower petrochemical production, reducing the demand for Ngls substantially recent supply chain data suggests the bottlenecks volumes at other inefficiencies are being alleviated, which is a net positive for the petrochemical industry NGL demand and prices.
With over 50% of our NGL volumes being exported and all of our NGL volume currently unhedged Antero is well positioned to benefit from this increasing NGL demand over the longer term.
With that I will turn it back over to Mike.
Thanks, Dave, Let's turn to slide number 10, titled Antero free cash flow profile.
And terrorism, the strongest financial position in company history. During the third quarter, we generated approximately $800 million in free cash flow, which was used to reduce debt by over $400 million in the purchased $380 million stock as I mentioned in my opening remarks.
Following the completion of our $300 million tender offer during the third quarter, we're now targeting greater than 50% of free cash flow to be used through the share repurchase program.
As shown on the chart and Taro is 2022 development plan is expected to generate just over $2 billion of free cash flow in.
In 2023, we expect free cash flow to be similar to 22, despite the backward dated strip prices as the vast majority of our hedges roll off by January one of 2023.
Based on today's commodity prices, we do not expect to pay cash taxes in 2023.
First cash taxes being paid in 2024.
This substantial free cash flow enable us to continue returning capital to our shareholders. While also continuing to pay down debt.
Turning to slide number 11 lets discuss the continued progress on our ESG initiatives.
During 2022, we took significant steps towards our achieving our 2025 climate targets.
We have now reduced our methane leak loss rate by 65%, surpassing our initial 2025 target of a 50% reduction.
Our scope one ghd intensity has been reduced by 39% well ahead of our initial 2025 target of 10%.
And lastly, we remain on track to be net zero on both scope, one and scope two THC emissions by 2025.
With a 36% reduction to date driven by operational initiatives.
Turning to slide number 12, you can see that Antero has ranked number one for lowest ghd intensity among our peers.
While we are incredibly proud of these accomplishments to date, we look forward to maintaining our peer leading ESG position in the years ahead.
With that I'll now turn the call over to the operator for questions.
Thank you.
Now be conducting a question and answer session if you'd like to ask a question you May 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 would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star K.
Our first question comes from the line of Neal Dingmann would truest. Please proceed with your question.
Good morning, Thanks for the time.
Yes, you've done a good job you all referenced I think very accurately to constraints, we've seen in the haynesville.
As well as in the northeast. So I'm, just wondering would it be safe to say I guess looking at slide six particularly would it be safe to say that you all are expecting.
Higher differentials or your guide into maybe higher differentials as we turned into 'twenty three.
Higher differentials for the industry, but for us.
It'll be very similar to what we experienced in 'twenty two.
Yes, that's what I was getting at and that is exactly right. I guess your point is for you all.
That would be the same or could we see an improvement based on you know would be would there be any change of takeaway or are you thinking.
Just more of the same which is obviously has been quite good for you all.
Yes more of the same.
B a premium I think our this year or in the.
Third quarter was 49 premium would be similar in the fourth quarter.
Next year on $5 gas I would assume.
More than a 25 cent.
Premium to Nymex.
Great. Thanks, Mike and then.
Paul obviously this new environment now that the market has been in our E&P spend enough for quite some time you guys have done a good job embracing it with this obviously fantastic.
Buybacks going forward.
When you.
I look at your inventory you all hubs.
Accurately describe havent materially a mileage.
Any thoughts about maybe given the high returns.
Gas continues to move back up maybe accelerated production the 23 or is it still the focus.
With this type of buyback potential just more of the same.
Yeah, I would say more of the same Neal that.
Yeah, you're right that we do have a very impressive.
Inventory that we can go to but we're pretty committed to our maintenance capital level.
To go higher than that creates quite a few more commitments commitments say in processing fractionation all along the line. So we're really happy at this level and have.
A clear path to the debt paydowns and share buybacks. So that's.
That's pretty much our strategy for the near term.
Great to hear thanks for the time.
Thank you.
Our next question comes from the line of Sebastian genre.
Benchmark. Please proceed with your question.
Okay. Thank you, yes slide 10.
Maybe ask for some detailed there or some color there.
With the free cash flow outlook.
Any color on Capex and.
We've had some peers here you know talk about.
20% type inflation for next year.
So if you had any thoughts on that and then on Opex.
Which of the Opex items, you might consider sticky.
Versus a.
Variable.
Alright, Thanks <unk>.
We don't see that 20% level I think we see more around the 10% level.
Our inflation in 'twenty three versus 22.
And then on the Opex, we do have some variable components really theyre based on natural gas prices.
Just the fuel needed to compress our gas and transport it on the long haul pipe.
Adds a little bit of a variable cost.
So you know I think you saw that in this third quarter costs from the G. P. N T were up approximately 20.
<unk> and production taxes, when gas went to eight to $9, but those costs come off are.
Going into the fourth quarter and a $6 level.
Those will retreat back to the level, we saw in the second quarter. So.
It seems to be about 10%.
<unk> component based on every dollar of natural gas prices.
Okay excellent.
And then on you.
Uses of free cash flow, yes. Some companies I think as you know expressed a formula you guys haven't oh, but even I guess in the formula they're still looking at some level of cash hoarding for lack of a better term, but how.
How do you think about you know.
Going back stock and you've expressed your debt repurchase ambitions.
Ambitions, but then finally in terms of just stockpiling cash or do you feel any need to do that.
No no we tried not to stockpile cash, we'd rather use it to pay down debt or buy back shares every quarter. We take a look at what our free cash flow estimates are going to be and design our program around maximizing the use of that free cash flow by first paying down debt and buying back shares.
Now that we're down the $1 1 billion of debt those reverse now it's more of.
The majority going towards buying back shares and then whenever we can find in the open market.
We try to execute.
Execute on those debt reduction transactions as well.
Okay, great. Thank you.
Sure Josh.
Our next question comes from the line of Iran de around with J P. Morgan. Please proceed with your question.
Yeah good morning.
Mike maybe start with you I was wondering if you could provide any kind of soft.
Guidance or commentary on 2023.
We heard your comments on now expecting no cash taxes, but I wanted to get your thoughts on you know thoughts on maybe capex.
Land spend.
And just general volume thoughts.
For next year.
And then we talk about capital with a 10% inflation versus 22, and then land.
We've been much more successful than we thought this year, which has been terrific and adding those locations are great land spend this year.
Probably the first think we won't be quite as successful next year, so probably lower.
But hopefully we could have a repeat of this year, but right now not expecting that.
Got it and that would be largely for a maintenance type program.
Yeah maintenance capital three rigs two completion crews okay.
I hate to use one of my bullets. Some hesitation in terms of my questions, but like you did post stay our hedge portfolio slide on your deck last night. So I just wanted to give us a sense of how the V. P. How should we be accounting for the hedges on the V. P Pes and the O R. R. I.
Yeah the override.
Those were obviously entered into 2020 and they've put on hedges.
At that time frame for the length of those transactions. So the override goes through.
23, and the V. P. P goes through 'twenty, seven or 'twenty 'twenty seven.
So they put hedges in place those hedges are on their account, but we consolidated in our results. So going forward you should model those hedges.
When you get our estimates in and drive our estimates you should include the hedges and those estimates.
Great Thanks for that Mike.
Hmm.
Our next question comes from the line of you mean Chonburi with Goldman Sachs. Please proceed with your question.
Hi, good morning, and thank you for taking my questions.
My first question was on cash cost I wanted to follow up on that comment on sticky cost versus variable cost.
Especially as it relates to gathering processing and transportation cost what.
Portion of the cost increase do you believe will be sticky next year, which is linked to I guess multiple CPI and then can you give us a kind of a read through as to how we should think about when you see cost structure.
Cash cost structure is a.
Given all the moving pieces on gas spaces diesel prices and the CPA numbers.
Yeah, so the cash cost will come down in 'twenty three.
There'll be more similar to I think policy in the fourth quarter.
Because it's around $5 gas and $40 Ngls.
But we do have.
About three years to 4% of our.
Costs are variable I would say when it comes to fuel transport and compression and then it's about 4.5% on production taxes versus realized price that's variable as well.
And then Sherwood in Smiths Burger the largest crossing processing facility in North America, and the greatest consumer of electricity in the state of West Virginia. So we do have exposure to electricity cost.
There as well so.
Yeah, not all up like I said, it's about a 10 cent per dollar variable cost of for natural gas prices.
But it should come down in 'twenty, three just due to lower commodity prices I hope it goes up because that means you know gas would go higher and we're unhedged starting January 1st and it would be terrific. If natural gas prices continue to be at these elevated levels, but.
Should come back down to more of a Q2 level.
Starting here in Q4.
Got it that's really helpful.
And then as you think about 2023 right like I'm, just trying to understand the path you know production, which they'd given you are accelerating after would be in the fourth quarter.
Should we expect.
To be lower next year at a similar to the 60 to 65 levels.
In 2023.
I'm just trying to understand all the moving pieces when it comes to active would be in production.
<unk>.
Following the change in the order Uh huh.
Ending this year.
Yes, the same level.
There was a pad accelerated into late this summer, but that's really just can contribute to production in 2023.
I have a couple of percent growth in Q4, and then we'll have similar amount of growth into Q1 as these wells continue to come on.
So we call that maintenance capital level, but it's flat to up going forward.
Got it thank you.
Mhm.
Got it.
Our next question comes from the line of Kevin Mccarthy with Pickering Energy Partners. Please proceed with your question.
Hey, good morning, Thanks, guys for taking my question.
Just to follow up on that I Wonder if you could talk a little bit about your decision to add that activity and pull it forward into the fourth quarter instead of.
Completing those wells in the first quarter of next year.
Yeah, well you know throughout the year. We've what we've noted is in order to keep our three rig and to completion.
Crew.
Development program moving forward, we had to sign long longer term agreements with our with.
With the with the rigs and the completion crews and in doing that.
It just made sense to continue to drill and complete the wells and not have our typical holiday normally you know in November and December around completion, so with our new rig contracts and completion crew contracts that are signed up for the entirety of 'twenty two 'twenty three.
Very efficient just continue to have them running in you know with our development program.
And with our Antero midstream.
Terrific service of our wells and our ability to get wells on it seems like that's a particular competitive advantage for us. So we continue to enjoy that we'll continue to bring on wells as efficiently as possible.
So if I'm reading that right that kind of implies that production will be a little bit higher into 2023 than it otherwise would've been.
How does that pad when it come on in January you're saying, maybe getting a months of extra production, but yes, 23 production should be higher than 22 production.
Great and as a follow up any liquidity limitations on your buybacks ending forwards or do you expect that you can kind of do a similar amount roughly that $400 million each quarter heading forward.
It will depend on the free cash flow, but the majority of the free cash flow will be buying back shares.
Our stock's actually very liquid so there are no liquidity constraints around that's buying it back.
Great. Thanks, guys.
Yeah.
Thanks, Kevin.
Our next question comes from the line of David <unk> with Cowen. Please proceed with your question.
Good morning, guys. Thank you.
Hi, David I wanted to just ask a quick confirmation could you give any guidance on how many incremental ethane barrels youre expecting in the fourth quarter should we be sort of modeling.
I guess just in regards to the commissioning of the shell cracker.
Yeah, the commissioning is going fairly well.
We should have right now it looks like you know we're around 55000 barrels of ethane in the third quarter that <expletive> approached 75000 barrels a day for the fourth quarter.
Okay, perfect and then just.
Revisit a I think it's your earliest or next debt issuance that you can call us in 2024.
Given where.
The debt is now at roughly a $1 billion is it fair to say that you are.
Kind of done with your debt reduction goals over the next couple of years.
Obviously, the majority of it because we paid down the vast majority of the debt, but we will continue to try to be opportunistic David.
Really looking at the open market, if it's available to even transact there.
We're not very liquid so the ability to get those and going forward is limited.
But we'll continue to see if there is any opportunities for us but.
Our thoughts are that.
Are they going to be more weighted towards buying back shares.
And then maybe this is a this is a.
A little bit more difficult question to answer, but when you looked at some of the land spend this year.
Do you view, a better use of capital picking up some of those additional locations on a valuation basis or repurchasing your own shares.
All of the land still.
The land you know each stick I think we looked at it at today's prices were $30 to $40 million. So.
If you're spending $1 million per location and it generates after drilling and net of all of the costs $30 million to $40 million at best we can do and it's right in the heart of our development area. So it's as efficient as possible capital you can spend and we have all the midstream there we have all the infrastructure Ela transform at the processing and it just.
Lengthens that inventory so.
We continue to prioritize that that's the best capital we can spend.
Got it and so I guess the suggestion you wouldn't be able to necessarily replicate that spend in 'twenty. Three that's yeah I doubt, we'll guide to that but hopefully we can achieve 22 results.
Thanks Scott.
Thanks, David.
Our next question is a follow up question from Soubirous Chandra. Please proceed with your question.
Yes, two questions first on the cash tax commentary.
No it's out there, but what sort of scale of cash taxes do you expect maybe based on strip in 'twenty four.
It comes to us for close to a full I mean, you're obviously it can deduct.
Capital and deduct.
Stock comp expense and you have some other deduction, but.
It comes close to that 20%.
Got it okay and.
Just.
Clarification on the shell commentary those were gross sales.
Oh gross can sell and hopefully.
Ethane for US you talked about 5000 barrels and gone to 75.
Of course, that's not.
Net okay, alright terrific. Thank you.
Sure.
Okay.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Yes. Thank you for joining today's call. Please reach out with any further questions.
Good day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.