Q3 2022 Antero Midstream Corp Earnings Call

Greetings and welcome to the Antero Midstream pre Q2 thousand 22 earnings conference call.

This time, all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

I'll now turn the conference over to your host Dan Katzenberg Finance director.

Again.

Thank you for joining us for Antero Midstream third quarter Investor Conference call to spend a few minutes going through the financial operating highlights and then we'll open it up for Q&A.

Also like to direct you to the homepage of our website at Antero Midstream Dot Com, where we have provided a separate earnings call presentation that will be reviewed during today's call.

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, and Antero Midstream, Brian Kruger CFO Vince here.

Our midstream and Michael Kennedy CFO of Antero resources, and director of Antero Midstream with that I will turn the call over to Paul.

Thanks, Dan.

First and foremost the third quarter was one of the more momentous corridors for Antero midstream since our IPO in 2014.

During the quarter, we generated $30 million of free cash flow after dividends and began paying down debt.

We've been talking about this critical inflection point for several quarters and it has finally arrived.

Second we announced our first organic acquisition of gathering and compression assets in the Marcellus shale, which are highly complementary to our current assets.

This acquisition is not only a strategic fit for a M. It further enhances our free cash flow profile as Brendan will discuss in his remarks.

Let's take a closer look at the acquisition I will direct you to slide number three titled Marcellus Bolt on acquisition.

We closed the there's 205 million dollar acquisition from Crestwood earlier this week and we have started integrating the asset at a number of former Crestwood employees into the a M platform.

As you can see on the map the primarily dry gas gathering and compression system is highly complementary to aam's existing footprint in the core of the Marcellus shale.

The acquisition increases Antero midstream compression capacity by 20% and gathering pipeline mileage by 15%.

Importantly, the assets have significant available capacity for growth without material capital investment.

As we look at the asset.

Today, we have identified over $50 million of discounted future capital avoidance.

Through connecting the system to Aam's assets and rerouting the volumes to fill underutilized compression capacity.

Okay.

They also plan to move and reuse underutilized compressor units into the liquids rich midstream corridor similar to the reuse opportunity we discussed on last quarter's conference call.

This results in both capital and operating expense synergies.

Importantly, the acquisition includes approximately 425 undeveloped drilling locations held by a or that will be dedicated to am for gathering and compression.

I think it's important to reiterate reiterate theres significant undeveloped value add optionality.

Which extends aam's underlying inventory well into the 20 <unk>.

In addition to this acquisition year to date Antero resources has added approximately 60 locations through its organic leasing program.

He says effectively replenish the underlying inventory at a M for all the wells completed in 2022.

When you combine these 60 locations with the 425 undeveloped locations on the acquired assets.

This 485 additional locations represents an incremental six to seven years of highly visible economic well connects four a M.

Importantly, a ars organic leasing program is predictable repeatable and cost effective.

The ability to consolidate acreage in close proximity versus acquisitions that often add scattered locations dedicated to other midstream companies.

<unk> significant capital efficiencies and long term visibility for a M.

This characteristic is unique to a M and one of the reasons, we continue to generate peer leading returns on invested capital in the mid to high teens.

Okay.

Now, let's move on to slide number four titled milestone capital projects completed.

This slide illustrates the major compression and high pressure gathering projects that we've constructed over the last 18 months highlighted in green.

During the second quarter, we completed phase one of the castle peak compressor station, which added a 160 million cubic feet a day of compression capacity in the liquids rich midstream corridor in Tyler and Wetzel counties.

Phase, two which will reuse underutilized compressor units will add another 80 million cubic feet a day of capacity in 2023.

During the third quarter of 2022, we finished construction on a 20 mile high pressure pipeline from Tyler and Wetzel counties that delivers liquids rich gas to the Sherwood and Smithburg processing complexes.

With these milestone projects now complete the stage is set for highly visible throughput growth from the liquids rich midstream corridor that drives EBITDA growth at a M for the next several years.

In addition, Aam's capital budgets will continue to decline, which will drive expanding free cash flow and declining leverage.

In summary, we generated significant momentum at a M. During the quarter further derisked the business model and crystallize the output outlook over the long term.

Capital budgets will continue to decline driving an expanding free cash flow profile.

Our unparalleled long term visibility it gives us tremendous confidence in the.

Delivering this plan and continuing continuing to generate shareholder value.

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

Thanks, Paul I'll start my comments by briefly highlighting our ESG achievements and then move on to the quarterly results and outlook at an <unk>.

Slide five illustrates our ESG achievements.

First Antero midstream was recently named to the top 100, best ESG companies by Investor's business daily highlighting the significant strides we have committed to on the ESG front.

Moving to our high safety standard last year represent represented the seventh straight year without an employee lost time incident.

We're incredibly proud of our employees and our relentless dedication to the health safety and wellbeing of our workforce.

This year, we also added scope one scope two GHT emission to our net zero goals.

We anticipate achieving a 100% reduction and pipeline emissions by 2025, and net zero scope, one and scope two emissions by 2050.

Increasing operational efficiencies carbon reduction initiatives and the purchase of carbon offsets.

I'll finish my ESG comments with some impressive statistics from Aam's water system and operations, which is the largest in Appalachia.

In 2021, we re used a recycled 87% of the water used in completions.

This along with our integrated freshwater delivery system allowed us to eliminate 16 million truck miles and 34000 tons of Cotwo Evelyn compared to trucking water.

This approach is not only environmentally friendly but reduces the impact to our local communities and it's incredibly cost efficient.

Now, let's move onto the quarterly results on slide six titled year over year.

During the third quarter Aam's low pressure gathering volumes were nearly three Bcf a day.

3% increase year over year.

Russian volumes were two eight Bcf a day, a 1% increase year over year the year over year volume growth was driven by the gross production growth from the drilling partnership.

Looking ahead, we expect mid single digit sequential throughput growth in the fourth quarter compared to the third quarter driven by two months of contribution from the acquired assets.

From there we expect further acceleration of volumes in the first quarter of 2023 to drive mid single digit throughput growth in 2023 as compared to 2022.

Moving on to the water side of the business freshwater delivery volumes in the second in the third quarter averaged 103000 barrels per day with 18 well service.

In addition to serving servicing 18 wells for AAR, we sold approximately 5000 barrels per day to a third party that generated approximately $2 million in revenues.

We continue to look for third party business opportunities such as these to complement the steady and predictable cash flows from our primary customer.

I'll finish my comments on slide seven titled Free cash flow inflection point.

During the third quarter, we generated $30 million of free cash flow after dividends with am trending towards the lower end.

Our capital budget guidance, we're now expecting to be at the top end of the free cash flow guidance range.

Looking to the years ahead, we expect to generate increasingly positive free cash flow. After dividends. This is driven primarily by declining capital as we recently completed some of the key growth projects all discussed in his remarks.

This declining capital profile allowed us to pay down debt during the quarter and gave us the confidence to finance the Crestwood acquisition on our revolving credit facility and.

In addition, as a result of the acquisition we are trending above the high end of the five year free cash flow targets, we will look to provide more formal.

Updates to the long term targets when we rollout our 2023 budget.

Importantly, and consistent with our prior expectations pro forma for the acquisition, we still expect to achieve the three times leverage target in 2024. Once we achieve this target we will be in a position to evaluate are there return of capital strategies.

In summary, I'd like to Echo Paul's earlier comments, it was a tremendous quarter from a strategic and financial standpoint.

We acquired strategic bolt on assets that add several years to the underlying inventory dedicated to am and we derisked the business model by transitioning to generating consistent repeatable free cash flow after dividends.

With that operator, we are ready to take questions.

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One moment, please while we poll for questions.

Our first question comes from the line of Mark <unk> with Barclays. Please proceed with your question.

Hi, good morning, so with the shell ethane crackers, starting up in August curious your views around whether that potentially allows for a modest acceleration in drilling activity in the northeast with more ethane coming out of the residue gas stream and how that potentially affect your outlook for next year if at all.

Yeah, I mean, I think when you if you break it down in terms of overall incremental capacity for gas in the northeast.

It's about.

250, a day of incremental capacity, so not really material in our view to the overall macro environment.

Environment on gas supply.

Got it and then recognize it might be a bit early for this but with the reference capital savings as part of the recent bolt on acquisition on last quarter, you identified some capital saving associated with compressor relocation. So just wondering if there's any context you can provide around the capex outlook for next year.

Yeah, I think well certainly provide more formal guidance I don't think from program to provide earlier I think 215 to 225 was the earlier guidance.

Hopefully some some tailwind behind that but we'll certainly come out with more formal guidance.

As we as we get further along in the year.

Got it and then maybe if I could just squeeze one last one in here.

Like third party water revenues ticked up in <unk>, just wondering if you could elaborate on that would you expect that to continue or and or are there more opportunities out there.

No that was that was a great opportunity I think where I am we certainly are looking for additional opportunities like that.

Operators that have had a pad in the vicinity.

Where we can deliver freshwater volume after that so we'll certainly look to continue.

I think given our large.

A large contiguous acreage position out here, there's not a lot of third party water opportunities, but we will certainly continue to look for some of those.

Got it appreciate the time.

Okay.

Our next question comes from the line of John Mccabe Goldman.

Goldman Sachs. Please proceed with your question.

Hey, everyone. Thanks for the time I want to start on 'twenty two guidance, maybe and I know you guys don't typically update kind of annual numbers quarter to quarter. Just wondering now with the close of the deal.

Are you looking at any offsets for EBITDA. This year, maybe on the Opex side that would kind of leave you in the current range or is the kind of original range intact. And then we think of you know any deal contributions this year just on top of that.

Yeah, I think we you know we didn't we.

We did not update the range, but we do expect to get those additional contributions.

And as we've talked about do you expect.

So the sequential growth was as a result of of that acquisition. So no change to the guidance but.

Certainly what had the incremental contribution of on top of the guidance we provided.

Got it okay. Thanks for that and then.

Maybe just looking forward I don't know maybe one one in the weeds here sorry, just on the Smithburg too.

Sale or a reimbursement or whatever you want to call it.

Is that at a broader change in how you guys are thinking about this JV or is it really just a reflection of the fact that you know, we're probably not going to.

You see much more from your guys capital in that direction I'm, just trying to figure out if there's a bigger thing going on here.

No nothing bigger I think that was it was it was there.

Equipment related to <unk>, we still have all the sites available.

Should we elect to.

To move forward with another plant down the road, but this was one as you look at the outlook with IR to maintenance capital plan and just don't need that plant. The other plants can run at about 110% of capacity and so you've got incremental capacity should you need it without without the need for some FERC too. So it was nonproductive capital and Ams balance sheet.

So I was trying to get that reimbursement.

Of that capital in the quarter.

Cool, Okay that makes sense I'll leave it there. Thank you.

Thanks, John .

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

Hi, good morning.

Hi, Jeremy good morning.

Just wanted to kind of.

Figure some stuff out maybe at a high off the base and we're hearing about a number of I guess midstream issues in the quarter in prep impacting a number of producers and just wondering is there any impact on on your system that happened this quarter or might be happening in.

In the future and are there any mitigation plans upsell or just any color I guess in general in the midstream outlook for the basin is it downstream issues that might impact you.

No I think you know a lot of the issues that we've certainly heard about has been more related to the gathering and water side of the business and basin.

We're very unique in a strong distinction with am and its primary customer <unk> is having that integration between the two parties, we have not seen any of those issues.

We have not.

<unk> never had to defer a well as a result of AAM being late with infrastructure. So very unique that we can continue to predictably operating them and deliver I think the development plans that we've laid out.

You are seeing a lot of.

Issues with others that have.

I have more difficult to put a nicely I think relationships between the upstream and midstream operator.

[laughter] sorry.

So just just to clarify then as far as Theres no like NGL pipelines downstream of your system no issues on any of those assets that might impact your outlook.

No no waiver that we haven't had issues there.

We did have one day or in early October that we referenced in the E. R. But I was just a 20 hour downtime that may be why you're.

Yeah.

10 million a day or so.

Got it that's helpful. Thanks, and then pivoting I guess to the balance sheet to the conversations with the agencies here just wondering if you could update us a little bit on outlook, there and you know aam's rating vis vis where a R is and if they are getting to a net cash position.

How might that impact there a road to IGN Ams, our credit outlook as well.

Yes.

Syed.

Get a fitch to investment grade rating recently in early September .

We.

On the S&P and Moody's front.

Continuing to push there for the Iga, writing as well so.

Depending on when you get an upturn.

Right. There you should see some follow through at the item level.

But it certainly is difficult to predict.

Predict when Youll get those rating upgrades from S&P and Moody's, but when do you expect that to happen at some point you just don't know when that timing will all occur.

Got it and just a last one if I could with the the lawsuit deal loss. So just wondering any color.

Color there timeline going forward.

Yeah, No update from what we've provided before is just waiting on.

Feedback from the court at this point.

Okay I'll leave it there thank you.

Thanks, Jeremy.

Our next question comes from the line of Michael There's a model with Pickering Energy Partners. Please proceed with your question.

Hi team. Thank you for taking my questions I just wanted to start if you can comment on how the a our completion schedule that I believe it was accelerated in the fourth quarter stats.

<unk> run rate into 'twenty three.

Yes.

<unk> pads and <unk> talked about accelerating.

And in the fourth quarter, so really it's about a month.

Yeah, I want to move off and.

When that would be place to say also youll see some sequential growth further sequential growth in the first quarter than what you have.

What about otherwise.

Okay got it and then one follow on on the Spitsbergen too can you comment on where the buyer intends to use that equipment in staying in basin or is it.

Somewhere else.

Or another basin.

Yeah, I don't think we can comment on where that's going.

Particular.

Alright, that's all from me. Thank you all.

Thanks, Michael.

And our next question comes from the line of Michael Ms. Li with Tudor Pickering Holt. Please proceed with your question.

Hey, good morning, guys just on the Opex front now that you all spoke on the call around the expectation that unit costs should come down in Q4 and into 2023 as variable costs related to power and fuel normalize a bit.

Want to get your thoughts on how much of a pullback in these kind of costs you are expecting at the a M level over the next couple of quarters and whether we should think kind of as Q1 as a good reference point as we looked at Q4 or if we could see something kind of more in between the Q1 and what we've seen over Q2 and Q3.

Yeah, I think overall at a on the Opex has been relatively consistent so I would expect what you've seen in Q3.

You've maintained into Q4 is.

More driven by commodity prices driving and sealed air.

I would just assume consistency from from Q3 going forward.

Okay got it and then just following up on Michael's question.

On the Incrementals are pad that you're expecting is there any possibility that those freshwater volumes could at least partially hit in Q4 or would you expect to substantially all to materialize and in Q1, just given the late December timeframe.

Yeah, I mean, I think a lot of those volumes you already add coming out in Q4. So you may see a little bit of incremental in Q4, but not in a material manner. You were you were going to complete most of those those wells during Q4 to begin with it's just being accelerated.

Right.

Okay got it thanks for all the time.

Okay. Thanks, Michael.

And our next question comes from the line of with Wells Fargo. Please proceed with your question.

Hi, and thanks for taking the questions maybe one on cash taxes I believe in the past you have stated you do not expect to be a cash taxpayer until the.

Twenties thirties. So can you provide your updated timeline in in light of the 15% alternative minimum corporate tax provision in the inflation reduction Act.

Yeah, I mean, it's always given our targets out through 2026 and continue that to not expect to be a material cash taxpayer over that time period and I guess.

As we continue to roll forward targets.

Well provide more update no expected material cash taxes as a result of that change have you won't do it would be below that billion dollar thrashed.

Threshold anyway, so no expectation for that to be applicable to them for the A&P threshold.

Got it and then and then a quick question on <unk>, maybe if you can talk about the.

Expected synergies from the acquisition of Crestwood as Marcellus assets. So.

How much of the 50 million of net present value is capex avoidance I think Paul's comments noted that all of this is capex avoidance, but I thought there was maybe some operating synergies embedded in there and also what is what is the timeline for the realization of the full suite of synergies.

Yeah.

The $50 million a vast majority of that is capex avoidance, not having to build a compressor station as a result of our compression capacity that we're acquiring here and being able to connect to Aam's current system, and then theres a little bit in terms of just opex savings as a result of being able to.

Shut down.

Some of the capacity that was running and direct elsewhere. So.

Of the 50 call it 10% Opex, 90% capital.

Avoid it.

Got it thank you.

Thanks.

And we have and we have reached the end of the question and answer session now I'll turn the call back over to Dan Katzenberg for closing remarks.

Thank you everyone for joining us on the call today.

If you have any further questions. Please reach out and have a good afternoon.

And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

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