Q4 2022 Antero Resources Corp Earnings Call
Greetings and welcome to the Antero resources first quarter 2022 earnings 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.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Brendon Kruger Vice President of Finance for Antero resources. Thank you you may begin.
Good morning, Thank you for joining us for Antero <unk> fourth quarter 2022, 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 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 .
Taking a long ago senior Vice president of liquids marketing and transportation and Justin Fowler Senior Vice President natural gas marketing and transportation I will now turn the call over to Paul.
Yeah.
Thank you Brendan.
I'd like to start by highlighting the significant transformation that antero underwent during 2022.
Let's start with slide number three which summarizes the consistent and repeatable results.
We delivered throughout the year.
The top of this slide illustrates our continued focus on debt reduction.
During 2022 we reduced our total debt by approximately $1 billion.
Since the beginning of our debt reduction program in the fourth quarter of 2019, we have now reduced debt by over two and a half million dollars.
Because of this conservative approach to debt reduction, we were able to shift our capital allocation towards increasing cash returns to our shareholders.
As you can see on the bottom of this slide we purchased over 25 million shares representing 1% of the total shares outstanding.
To expand on Antero is consistent and repeatable business model.
Let's discuss our land acquisition strategy on slide number four titled organic land acquisitions.
The last few years, we witnessed an increase in both public and private corporate M&A as commodity prices increased.
Meanwhile, Antero and remain focused on our core acreage footprint with a particular emphasis on organic lease acquisitions.
As to both as a part of those two larger transactions that can dilute our equity and absolute debt.
Our strategy has been focused on organically acquiring acreage within our core position in Appalachia.
This has allowed us to dollar cost average across commodity cycles and to acquire acreage near our proven well results.
During 2022, and Taro is organic leasing program added approximately 80 drilling locations at an average cost of less than $1 million per location more than offsetting our maintenance capital plan that assumes an average of 60% to 65 wells per year.
Yeah.
Now, let's turn to slide number five to discuss Antero has differentiated strategy.
The chart at the top highlights our absolute debt reduction since 2019 compared to our peers.
Our disciplined corporate strategy of prioritizing debt reduction differentiates antero versus peers that have increased their absolute debt levels, primarily as a result of corporate M&A.
With our debt initial target already achieved we are well positioned to maintain a balanced debt reduction and return of capital program going forward.
This is important especially in light of the recent pullback in natural gas prices.
The chart in the middle of the page illustrates the percentage of natural gas sold out of the basin.
So 100% of our natural gas outside the Appalachian basin, including 75% into the LNG fairway, where we capture premiums to Nymex.
The majority of our peers have significant exposure to local markets that trade at levels as low as $1 25 back of Nymex.
These markets are particularly at risk in times of increasing storage levels, where price is the only mechanism to forced shut ins.
The chart at the bottom of the page highlights our diversified product mix with nearly half of our revenue coming from liquids production.
The uplift we received from our liquid sales combined with our premium priced natural gas provides better stability and predictability and financial and operating results through the different commodity cycles.
Now to touch on the current liquids and NGL fundamentals I will turn it over to our senior Vice President of liquids marketing and transportation, Dave Pamela Campbell long ago for his cabinets.
Thanks, Paul.
Despite recent headwinds for liquids prices overall macroeconomic factors are pointing to price improvement and the recovery of fundamentals through this year.
Main demand driver will be China's reopening, which is taking place faster than originally expected due to the relaxing of the October zero policy.
In addition growth in PTH capacity points to a stronger U S. Exports in 2023 at the same time that U S supply forecast revisions womb with recent reductions in natural gas and oil prices setting up a potential bullish picture exiting this year and into 2024.
U S. Propane exports are expected to increase 10% year over year to one 5 million barrels per day in 2023 shown on slide number six titled U S propane exports rebounded.
The additional export volume will be more than met by an additional 46 VLCC carriers that will be added this year.
This is a recent record high in VLCC fleet development back to 2016.
Turning to slide number seven titled Global LPG exports and NGL production.
On the left highlights at the marginal LPG exports has been the United States.
The trend is expected to continue as increasing petrochemical and restaurant demand will need to be met with U S exports.
U S propane export terminals utilization rates are expected to remain elevated but adequate as witnessed already in Q1 2023 to satisfy the call on U S. LPG.
Antero is anchor position on Mariner East will allow us to continue to play an active role in supplying this global LPG pool as the largest U S producer export.
The chart on the right shows that while the rest of the world NGL supply growth will be relatively flat. The U S is expected to increase production year over year by 6% in 2023 and 5% in 2024.
However supply growth forecast could be influx, especially considering the recent lower associated natural gas prices.
Domestic economic factors in China point to expected recoveries in the property and pet care markets that should drive demand from suppress levels seen during the enactment of their coke zero policies.
Dth Buildout and increasing utilization are expected to be seen as early as the end of Q1 2023.
Steadily declining LPG refinery yields in China will also have buyers increasingly looking to imports for their barrels.
Turning to the next slide playing PTH build out in China and other key markets is set to add approximately 700000 barrels per day of increased feedstock demand exclusively for propane.
Notably the demand ramp would be first seen in 2023 compared to the relatively slow demand uptick that we've seen in PTH capacity through 2022 as some of these facilities started to come online and others were delayed into this year.
I'll end my remarks with the recognition of the 2022 had some unexpected headwinds starting in the spring with extended pandemic related lockdowns inflation, and it's a cooling effect on the global economic stability and growth.
We maintain that long term trends show demand for LPG, increasing throughout the decade and beyond while prospects of sustainable supply growth appear unrealistic given challenges from underinvestment in hydrocarbons and depleting for U S shale inventory with that I will turn it over to Mike.
Thanks, Dave.
I'll start on slide number nine titled absolute debt and leverage reduction.
Following the successful debt reduction program over the last several years and Taro is now in the strongest financial position in company history with total debt below $1 2 billion and leverage down to just four times.
Assuming todays strip prices, we still expect to generate over $500 million of free cash flow and our leverage remains comfortably under one times at year end 2023.
This compares to our peers, where leverage can fluctuate materially as a result of higher absolute debt levels.
In alignment with our lower debt strategy, we continuously look for ways to optimize our business and enhance our margins during.
During the first quarter of 2023, we executed an early settlement of our 2020 for Nymex gas swaption for approximately $200 million.
These hedges were put in place several years ago and covered approximately 20% of our 2020 for natural gas production at $2 77 per M.
In addition, we also terminated a contract related to an unutilized firm transportation commitment to local Appalachian markets for $24 million.
The termination of this contract was completed as a discounted value to commitments through 2025.
And reduces net marketing expense by approximately $13 million annually.
To provide some additional color on the natural gas macro views and our thought process around the hedge settlement.
Let's turn to slide number 10, titled free cash flow breakeven.
This slide provides a look at the natural gas peer group and the required Nymex Henry hub price for each of the peers to achieve an unhedged free cash flow breakeven position in 2023.
And today shale three point O World.
We believe there's no investor appetite or excess capital available for companies to operate with the cash flow deficit.
As illustrated on this page as a result of higher maintenance capital costs limb.
Limited liquids revenue uplift and widening basis differentials on natural gas, we estimate that most haynesville companies are not able to generate free cash flow in today's pricing environment why is this important.
With Appalachia pipelines near maximum capacity and Permian associated gas being dictated by oil prices. The Haynesville is now the marginal natural gas producing region.
The other notable takeaway from this slide is it interros free cash flow breakeven price for natural gas is at the lowest end of the peer group.
The drivers behind this low breakeven price or the significant contribution of liquids to our revenue base as shown in the chart on the top left in our premium natural gas pricing, we receive as evidenced by the chart on the bottom left.
Further dive into the macro story on gas, let's turn to slide number 11 titled expected decline in activity from the Haynesville.
The chart on the top of the slide illustrates the relationship between natural gas prices in the basin drilling activity.
Since 2011 every time Nymex Henry hub prices fell below $3 rig counts and activity in the Haynesville noticeably declined.
While we have kept the line at $3 on this chart. This is fair to say.
Today's inflationary environment, the old $3 level is likely now closer to $3 50 to $4.
The chart on the bottom left highlights the change in rig count each time natural gas dropped below $3.
On average rigs declined 60% or 42 rigs through the last three cycles.
With the Haynesville now as the marginal supplier of natural gas and activity expected to fall significantly in the months ahead.
It is important to review the decline profile of the Haynesville.
As displayed on the chart on the lower right hand side of this page the estimated annual base decline rates in the haynesville are materially higher than that of Appalachia.
With this being the first downward price cycle in which the Haynesville is the marginal supplier. This would suggest a more rapid supply response, following an expected decline in rigs.
In closing the successful execution of Antero has differentiated business strategy positions us to excel across many commodity price cycles.
Increasing NGL demand through the reopening of China provides a positive backdrop to NGL and propane prices as we move through the year.
While it is difficult to predict natural gas prices moving forward, we do expect moderated activity to lead to significant volatility in pricing as natural gas demand grows materially in 2024 and beyond with a second wave of LNG export facilities coming online.
With a peer leading balance sheet and product diversification, we are well positioned to deliver on our maintenance capital plan, while continuing to pay down debt and return capital to shareholders.
With that I will now turn the call over to the operator for questions.
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Our first question comes from the line of Neal Dingmann maturity Securities. Please proceed with your question.
Morning, all.
Paul My first question, just really on D&C activity sensitivity I'm, just wondering obviously prices by price can be quite volatile it as well as you know even caused two degrees. So I'm just wondering given more I'm assumed expectation of both volatility on the <unk>.
And cause side, you know, how how fluid would you anticipate.
Your plan B.
Well for 2023, Neil this is Mike and beyond where it maintenance capital, which is a three rig program in two completion crews.
And with our kind of unconstrained nature, you know the product diversification that we have the transport out of the base in the Nymex hub.
And then you throw in our balance sheet, but the first two.
Really allows us to kind of have the lowest breakeven from a free cash flow level. So.
Even at our maintenance capital today in a low commodity price in the natural gas side, you know, we're generating over a half a billion dollars of free cash flow. So.
It is very unlikely that you would ever reach levels, where we would be with low or our maintenance capital level from a cash flow from operations. So we just don't see any real commodity price scenario, where.
Any realistic one where we would go below our three rig and two completion crews development program.
Thanks, Mike and then just could you or Paul just I know occasionally in the past I mean, not even long ago, you'll occasionally go up and drill a utica pad or two could you just talk maybe about.
Not just maybe the cadence, but specifics on it is that will that continue to be the case or you continue to focus those three rigs are kind of where they've been here. The last couple of months.
Yes. Its generally you know as you know 90% focused on Marcellus, though we have about one pad a year and are in our plan going forward in the Utica.
That just gives the Marcellus infrastructure, a little bit of breathing room, and then also fills our rex capacity and the Utica.
Very good thanks, Mike.
Yep.
Thank you. Our next question comes from the line.
With the benchmark company. Please proceed with your question.
Okay.
Hey, Paul Good morning.
What what do you think about now I guess here.
Share buyback capacity and appetite, yeah, obviously, given commodity prices, but also I guess you know some of this one off stuff with the swaption and it may be a stronger lease spend.
Yeah. So you know right now we have 50% dedicated and return of capital that's based on that over half a billion of free cash flow.
The first call on that free cash flow was two.
$200 million of the swaption early termination of the swaps and then the $24 million of the transport commitments. So that's $225 million of it and then we did have quite a facility dropped drawings 35 million at year end two boss. So that's $260 million. So that's kind of the first call.
And then the amounts above that or really what what are are there for return of capital so depending on where commodity prices are.
It could be that 50% it could be more than 50%.
We'll just have to see how the cat the free cash flow generation occurred throughout the year.
Okay got it and on the swaption, So I think there's still.
This was an early termination theres still a contract out there.
Are you looking to possibly or can you even terminate those.
We don't have any hedges left that was the last of the contracts you may be referring to what we have from our V. P P or the override the sixth street, but those arent, although we consolidate them on our balance sheets are really not on our account there for the.
The P P P buyer and override buyer.
You are correct I was I was mistaken it would be great. Thank you.
Yeah no problem.
Thank you. Our next question comes from line of.
<unk> with Goldman Sachs. Please proceed with your question.
Hi, good morning, and thank you for taking my questions.
First packs of shedding of thoughts on the macro I wanted to follow up on your thoughts around the and on the propane markets and and butane market.
It sounds like you are expecting a pretty decent rebound in demand this theater and.
So next year with inventory levels high for propane how are you thinking about when when when that actually translates into a price action.
And and and then I have a follow up on the natural gas side as well.
Yeah. Thanks Margaret.
What we've seen so far to go back to our last earnings call you got oil prices down about $10, but propane down about two cents a gallon from that time.
So overall propane prices or are doing quite well in the environment, especially given in December . We were you know really the top of the five year range on historical inventories as we move through the first quarter, you've seen very strong U S. Exports, we expect that to continue but.
But at minimum through the balance of the quarters, we've moved back down to that five year range. Both on an absolute level on a days of supply level. When we model out the balance of the year, we see our inventories as we enter the fall returning to five year historical norm on an absolute level and obviously lower than that on a days of supply.
Basis. So you know that kind of summarizes our fundamental view on why we believe propane pricing will improve relative to other commodities.
Without the year.
But again, if you look at what's just exporting so far here in the first quarter arbitrage is open export volumes are high.
One thing that we called out is the are the increase in VLCC capacity, which has reduced freight levels.
About 35% from December to where we are here today, and we expect that to continue into the summer, which will even tightened the differential between U S prices in Mont Belvieu and international markets.
Alright, Thats really helpful. I guess, the follow up on the natural gas macro and more on the pricing side of the equation. How what are you seeing some of the hubs kind of trade with the lower activity, what you're expecting in the Haynesville when you see other Don and some premium pricing.
I mean do you took it down to like 10 20 cents recently, what do you see a premium emerge if that plays out.
But we could see that play out generally you know, we get Nymex Henry hub pricing and didn't have a btu improvement because we leave a lot of the ethane in the gas stream. So that's kind of a 10 to 20 is kind of generally around 10% premium to whatever the nymex prices.
So if it's you know $2 50 to $3 Nymex you would expect.
20, <unk> type of differential.
With that so that's why it's come off from last year's premium, but you know we saw last summer a lot of premium pricing on the pipes that we actually sell because a lot of it's more on the kind of the eastern side of the Gulf and that tended to get premium pricing.
Compared to other areas. So we'll continue to see how it goes but our transport does go to the to the really strong pricing hubs in the summer so hopefully that but the trend we saw in 'twenty. Two will also occur in 'twenty three.
Yeah. Thank you.
Mhm.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of David.
With Cowen and company. Please proceed with your question.
Thanks, Paul and Mike I appreciate the questions.
Mike I guess from your prepared remarks, you're not going to be entering the haynesville anytime soon.
Uh Huh [laughter].
That would probably be correct.
Yeah.
Fair enough.
I wanted to ask just on the land spend I know you know maybe it's 15% of your budget. I think previously was thought you guys had had a little bit more success than you had intended in 'twenty two.
I know half of that twenty-three budget is loaded into the first quarter is that more carryover from activities. You were pursuing last calendar year or you know is there kind of like a renewed view that.
There is more opportunity for you is with the organic leasing program.
Well, it's both I think when we noted there is gonna be Oh that 150.
A disproportionate amount occurred in the first quarter and that is that carryover that you referenced David but in addition to that I think we've found that we were having more and more success the barriers to entry in this area of the Marcellus are very high you have to have the midstream you have to have to transport. It is liquids you have to have the processing. So.
So what we found is that we're having more and more success and we are the operator of choice for the land owners out in West Virginia kind of the hometown team. So we continue to find success and its really just acreage right next door. We're currently developing in the past acreage we have in that Tyler Wetzel County, Marcellus liquids.
Core where the wells continue to be terrific and with high Btu content.
Thanks, Mike second one for me.
Hum.
As you think about 23 in the guidance.
What are you assuming in terms of you know the shell cracker in terms of uptime and timing there that's implied in your numbers.
There's a little bit of risking around that I think it's the shell performance has improved quite dramatically in the first quarter versus the fourth quarter. So.
We'll see if that risking as has merit or not but we did read risks at a pretty healthily for 'twenty three as a reminder, it won't have an economic impact there are kind of minimum volume commitments around that so from.
Our cash flow standpoint, it's really not material, but from a volumes. We did risks the ethane volumes just allow shell to continue to improve their performance.
Thank you guys best of luck.
Thanks, David.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Cooper for any final comments.
Yeah. Thank you for joining us on today's call. Please reach out if there are any further questions.
Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.