Q4 2022 Antero Midstream Corp Earnings Call

Hello, and welcome to the Antero Midstream fourth quarter 2022 earnings conference call and webcast. If anyone wants to go acquire operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded its now my pleasure to turn the call over to you.

Host Justin Agnew. Please go ahead Justin.

Good morning, and thank you for joining us for Antero Midstream fourth quarter Investor Conference call, we'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 midstream Dot com, where we've 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 Brendan Kruger CFO of Antero Midstream and Michael Kennedy CFO of Antero resources, and director of Antero midstream with.

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

Yes.

Thanks, Justin.

2022 was an exceptional year for Antero midstream.

Despite the inflationary environment, we delivered capital expenditures below guidance and EBITDA.

High end of guidance, we completed two bolt on.

Free cash flow accretive strategic acquisitions that extended our dedicated underlying inventory.

Two over two decades with these achievements antero midstream is in the strongest financial position since its IPO with a very attractive five year outlook.

I'll begin my formal remarks on slide number three titled delivering consistent returns on invested capital.

In our 2020 to capital expenditures, we were at $265 million below our guidance range of $275 million to $300 million.

And approximately flat year over a year.

This is a tremendous achievement by our midstream planning and procurement teams to deliver these results in the inflationary environment that we're in today.

I'd also like to highlight the midstream operations team that maintained asset uptime availability of over 99% in 2022.

It's exemplary performance contributed to our strong financial results for the year and allowed us to return to deliver a return on invested capital of 17% in 2022.

The consistency of our operations and returns on our invested capital support our dividend and balance sheet strength.

Now, let's move to slide number four titled capital declining in 'twenty to 'twenty three.

The chart on the left hand side of the page illustrates the decline in the high pressure trunk line capital depicted in Orange that drives much of our capital reduction in 2020 three.

All of our 'twenty to 'twenty three capital budget, approximately 90% will be invested in the Marcellus shale in the liquids rich midstream corridor.

We expect this declining capital trend to continue beyond 2023, while still delivering EBITDA growth.

Okay.

Lastly, I want to finish my comments on the strength of a R and the stability of its development program.

On slide five titled Premier customer in Appalachia.

As shown on the left hand side of the page a R has paid down over $2 $6 billion of debt over the past three years.

This has resulted in leverage at year end 'twenty two 2022 of just 0.4 times as conservative debt reduction strategy as to Bose as opposed to initiating a dividend policy or adding absolute debt through acquisitions positions. They are.

To maintain low leverage throughout commodity cycles.

Importantly, while other e&ps have seen their leverage and debt reduction targets extend due to the decline in commodity prices.

A R has already achieved its initial debt reduction target as a result, a or does not expect a change in its development plan to drive growth at a M.

This is driven by a number of strategic and competitive advantages that a R has.

First hey ourselves, 100% of its gas production out of basin and approximately 75% of its gas to the LNG fairway.

This results in premium pricing relative to Nymex and more importantly for a M. The ability to avoid volatile on a local basis in Appalachia. It could result in shut in volumes at certain times.

Second area is one of the largest NGL producers in North America with exposure to the liquids pricing uplift in tailwind from China reopening.

Based on consensus consensus estimates for 2020 three years liquids as a percent of total revenue was approximately 45% versus the peer average of just 22%.

Lastly, they are only needs two to three rigs and one to two completion crews to deliver gross volume growth on a m's assets.

And inflationary environments like today. It is a competitive advantage to operate in Appalachia, where development costs are roughly half of what you see in other gas basins Steve.

Steeper decline rates geologic complexity and increased competition for rigs and completion crews all contributed to the higher development costs outside of Appalachia.

This will likely lead to reductions activity in these other basins and impact midstream providers that are active in these areas.

In summary.

M is well positioned to deliver on its five year targets supporting a premier customer with low debt and a competitively advantaged basin.

With that I will turn the call over to Brendan.

Thanks, Paul I'll start my comments by briefly highlighting the fourth quarter results and then move on to our 2023 guidance and updated five year outlook through 2027.

Starting on slide number six titled year over year midstream throughput growth.

<unk> low pressure gathering volumes were three one Bcf a day over 3% of all natural gas volumes gathered in the U S.

Compression volumes during the fourth quarter were $2 nine Bcf a day.

A 4% increase year over year.

The year over year volume growth was driven by the gross production growth from the QL capital partners drilling partnership and approximately two months of contribution from the acquired Crestwood assets.

Moving on to the water side of the business freshwater delivery volumes in the fourth quarter averaged 111000 barrels per day with 22 well service.

For the year AAM service serviced 76, well completions in line with our guidance.

Slide seven titled EBITDA growth and declining capital illustrates our 2023 outlook, which is a truly pivotal year for antero midstream.

Before we get into the outlook I would like to note that our 2023 guidance and long term outlook does not include any impact from the damages awarded to Antero midstream relating to the clear water treatment facility.

As noted in our 10-K in January of this year. The district court found that AAM prevailed and its claims for breach of contract and fraud <unk>.

Including the prejudgment interest these damages totaled approximately $309 million.

Given that this process is still ongoing and the damages award is subject to appeal, we will be unable to answer any questions regarding that specific matter.

Now onto the guidance for 2023, we are budgeting, 7% annual EBITDA growth and a 23% decline in capital at the midpoint of guidance. The EBITDA growth is both a function of organic growth from the Q out capital partners drilling partnership and a full year contribution of our recent acquisitions.

As Paul discussed this capital is highly visible non spec gambling speculative capital investments supporting production operated by Antero resources.

These investments tend to have superior project, economics, and lower risk compared to projects and higher growth higher competition in higher risk shale place.

In addition, the ability to generate EBITDA growth with declining capital is truly unique in the midstream space and illustrates the significant operational leverage our asset tab. This plan allows us to generate over $500 million of free cash flow before dividends $100 million of free cash flow over $100 million of free cash flow after dividends and <unk>.

Our leverage to three and a half times or less by year end 2023.

Slide number eight titled expanding free cash flow and lower debt illustrates just how far we've come as a company over 10 years after outspending cash flow during the high growth era of the shale Revolution, we transition to a more sustainable business model that has been approximately free cash flow breakeven after dividends for the last two years.

This transition to internally finance, both our capital investments and return of capital to shareholders significantly Derisked, our business model and allowed us to maintain a flat leveraged position while successfully integrating bolt on organic acquisitions.

Looking ahead, we expect our free cash flow after dividends to more than double in 2024, driven by organic growth exploration of the fee rebate program and a further decline in capital.

This allows us to continue to pay down absolute debt and achieve our leverage target of three times or less by year end 2024.

Importantly over the five year period from 2023 through 2027, we are now targeting 3.15% to 345 billion of free cash flow before dividends and one to $1 3 billion of free cash flow after dividends, assuming a flat 90 cent dividend on an annual basis. This.

Substantial amount of expected free cash flow after dividends will be used for continued debt reduction and once our leverage target of three times has achieved an increased return of capital to shareholders.

I will finish my comments on slide number nine.

This slide illustrates our truly unique AAM is not only in the midstream industry, but in the broader S&P 400 universe of those 400 companies.

The S&P 400, only approximately 250 generate free cash flow after dividends and only 200 have less than four four times leverage and generate free cash flow after dividends.

That subset 11 are forecasted to generate EBITDA growth greater than 5% with capital declining more than 10% over the next two years. The only company in the S&P 400, with all of those attributes that also pays an attractive dividend greater than 6% as antero midstream, which again highlights how true truly unique our business model is.

In summary, I would like to Echo Paul's remarks that 2022 was an exceptional year, both operationally and financially our derisked organic growth model, along with highly strategic bolt on acquisitions position us to deliver this expanding free cash flow story, making am one of the most unique investments in the midstream industry with that operator.

We are ready to take questions.

Thank you well 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 you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one.

One one moment please while we poll for questions. Our first question is coming from Jeremy Tonet from Jpmorgan. Your line is now live.

Hey, guys.

Hey, Jeremy just start off but they are kind of transitioning to a maintenance plus return of capital model I'm curious around your guys' thoughts around metrics, we should watch for when thinking about antero midstream reaching.

Reaching a return of capital.

Positive inflection point.

Yeah. So I think I think we tried to cover that in the prepared remarks, but overall.

We were at a free cash flow break even in the last two years with the build out of the infrastructure and as we as we get into 2023.

Expect to generate nice free cash flow.

Before dividends of over $500 million and after dividends of over $100 million.

As we move forward through the years do continue to expect capital to decline and further EBITDA growth should exceed that free cash flow after dividends expanding nicely.

As we noted.

<unk> over doubled.

While we would expect in 2023 on free cash flow after dividends, so nice trajectory for AAM.

As the capital continues to come down and we have nice growth with the drilling partnership.

The fee rebates expiring in 2024.

Got it makes sense and then wanted to pivot a bit with shell's cracker in the northeast wanted to get your guys' thoughts.

On competitive landscape for Ngls and processing within the region.

Yes, I think overall, we've got a dedicated processing facility with our largest in the in.

In North America, with Sherwood and Smithburg complex is so we've got plenty of capacity for a R to develop in and that'll flow through to them of course with the joint venture with MPLX.

So very well positioned as it relates to the liquids both on the processing side and then and then also on the takeaway side.

You noted the shell shell cracker that that really does not have an effect from an am perspective.

The Ams not a participant in that in that facility and Theres no no incremental volumes in terms of fee related.

For perspective, as a result of that facility so no impact there.

Got it thanks for the car color I'll leave it there.

Thanks, Jeremy.

As a reminder, that star one to be placed in the question queue. Our next question is coming from John Mccain from Goldman Sachs. Your line is now live.

Hey, Thanks for the time I wanted to maybe start on just the.

Small bolt on from from Enlink.

It looks like a lot of capacity and a decent amount of kind of current throughput.

Versus what you paid for it so maybe if you could just kind of frame up for us maybe what the eventual kind of capex savings versus your initial plan could be and if there's any upside potential on on these assets are you are you acquired.

Yeah no it was.

While it's a smaller acquisition 10 million overall, but certainly a very strategic we had the crestwood deal earlier in the year. This is another asset that really fit.

Fit the mould.

There was a compression activity servicing a ars production over in the Utica.

<unk> does have a couple of pads.

That will all continue to feather in over the Utica over time so.

From an investment standpoint, you know most midstream assets typically take six to seven years from a pay out. This this there'll be two to three years from a payout perspective, just with the development we have planned.

So great asset over there and.

Top of that you do have the unutilized compression capacity that certainly could be deployed to other areas as we've as we've shown thus far in 2023 with the first reuse of compressor stations. So we're excited about that despite it being small it's a it was a great transaction transaction for AAM and just built on top of that Crestwood transaction as well.

That makes sense, maybe on that last piece just be you know you've talked through a couple different opportunities you've had to save capex. So far on the compression side you know you.

Talked about a little bit of that on the Crestwood deal you have this one you found some of your own kind of opportunities internally.

Wondering if you can just kind of frame all of that up for us and maybe talk about what that means for the other 23 or maybe 'twenty four capex.

Versus what your original plan would have been let's say.

Two years ago, maybe just altogether kind of putting together the magnitude of that in terms of overall capital savings.

Yeah, and I would say that the comments on game. So some of this we continue to evaluate and so you you you did.

We'd like to think there'll be additional opportunities, but in terms of what we've identified already will have about $50 million of capital savings over five years as a result of.

Reuse.

Near term call. It 23, and 24 is about $20 million of that of that 50.

But again, we will continue to evaluate and look for opportunities Youre able to buy these assets at attractive values to us.

The unutilized piece kind of comes with that.

So we're always looking to just redeploy in.

And best capital in the most efficient manner, we can.

Understood. Thanks for the time.

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

No. Thank you for the time today, please reach out if theres any further questions. Thank you.

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.