Q2 2023 Antero Midstream Corporation Earnings Call
Greetings and welcome to the Antero Midstream second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A brief 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.
Now my pleasure to introduce your host Mr. Justin Agnew director of finance. Thank.
Thank you. Please go ahead.
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.
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 already chairman CEO , and president of Antero resources and in German extreme Brendan Cougar CFO of Antero Midstream and Michael Kennedy CFO of Antero resources, and director and the chairman.
With that I'll turn the call over to Paul.
Thanks, Justin.
Antero midstream delivered another terrific quarter building upon the momentum generated in the first quarter of 2023.
In my comments I will discuss the operational and capital efficiencies at both AAM and our.
Brendan will then walk through the financial results that have put us on track to achieve our 2023 guidance.
I'll start my comments on slide number three titled drilling and completion efficiencies.
Yes.
After a record breaking first quarter operationally.
It has continued success during the second quarter.
As shown on the top left portion of the page during the second quarter, our completed over 11 stages per day.
This is a 40% improvement compared to 2022 and over a 90% improvement compared to 2019.
Drill outs, which are the process of drilling out the plugs in each stage of the horizontal portion of the well exhibited the same success drill.
Drill outs averaged 4200 50 feet per day during the second quarter, a 9% increase compared to 2022, and a 50% improvement compared to 2019. These.
These two factors have resulted in 65% shorter cycle times for AAR compared to 2019 as shown at the bottom of the page.
The cycle times reflect the number of days it takes to drill complete and place a pad to sales shorter.
Shorter cycle times equate to better capital efficiency and return today are which drives the ability to consistently develop this acreage position dedicated to pay out.
No.
Let's move to slide number four titled optimizing compression and processing utilization.
The top half of the page illustrates our compression capacity, including organically build compression ingrained and acquired compression capacity in blue here.
Storage.
Consistently maintained high utilization rates as a result of our just in time capital investment philosophies.
The recent acquisitions have increased our compression capacity by over one Bcf a day, including underutilized capacity that will support capital efficient future development.
Fortunately, we valued our acquisitions in 2022 on a PDP only basis, so any development down the systems or reuse of underutilized assets is upside for AAM.
Bottom half of the page illustrates our joint venture processing capacity in the Marcellus shale.
During the second quarter, our JV processing capacity of one six Bcf a day was 100% utilized.
As a result of growth in the liquids rich Marcellus shale.
As a reminder, we can generally running approximately 10% above nameplate processing capacity, providing additional runway for growth.
One of the under recognized aspects of Antero Midstream business model is the coordinated planning effort with Antero resources.
For example.
We will be drilling two pads in the Ohio Utica shale later this year. This will help manage overall infrastructure and provide attractive Chicago pricing in the winter months for a R.
Lastly, I wanted to touch on our compression capacity relocation efforts on slide number five.
These road relocation efforts resulted in capital savings for AAM and pure leading returns on invested capital.
During 2022 we successfully relocated four underutilized compressor units to our castle peak compressor station to support growth in that area.
Given the success of that relocation we are now in the process of relocating the remaining eight units on the East Mountain station over to a grey speak station colored in blue.
This station will be placed online in 2024.
As you can see in the picture on the top right hand portion of the page. We recently Ford the foundations for the additional units that will be relocated to this station.
Eight of the 12 units at the greatest peak station will be relocated units from East Mountain, resulting in 120 million cubic feet a day of initial capacity.
In summary, both E. R. M. A M are displaying incredible operational and capital efficiencies in 2023.
This supports a stable outlook and gives us confidence in achieving our long term targets.
With that I'll turn the call over to Brendan.
Thanks, Paul I'll start my comments by briefly highlighting the year over year results on slide number six titled operational success drives earnings growth during the second quarter low pressure gathering and compression volumes increased by 11% and 17%, 17% respectively compared to the.
Year quarter.
Of the 11% growth in low pressure gathering volumes approximately 5% was organic growth on our legacy assets and 6% was attributable to the Westwood acquisition that closed in the fourth quarter of last year.
This double digit throughput growth was the primary driver of our year over year adjusted EBITDA growth of 10%.
Capital expenditures declined by 31% in the prior year quarter to $49 million this quarter.
As a result of increasing EBITDA and declining capital, we generated $139 million of free cash flow before dividend and $31 million of free cash flow. After dividends. This was the fourth straight quarter of generating positive free cash flow after dividends and our second highest quarterly free cash flow after dividends behind the first quarter.
<unk> of this year.
Now, let's move on to slide number seven titled 10% year over year EBITDA growth to walk through the drivers of EBITDA growth at am.
Alright are gathering and compression EBITDA as shown in green are processing fractionation and Stonewall joint ventures are shown in purple and our water business as illustrated in Blue.
Depicted on the slide our gathering and compression business increased by $22 million year over year in our water business and joint venture distributions were approximately flat as a result, our 10% year over year increase in EBITDA was driven by our G&P business, which continues to be a larger and larger percentage of our overall business.
In the second quarter of 2023, our gathering and processing business made up approximately 86% of our EBITDA and we see that growing towards 90% over the next several years as the cash flow in this business continues to grow well.
While making up just 14% of our overall EBITDA our water business still sat still have some of the highest project economics. This is a function of the short payback period of our pad connects capital investment, particularly as the cycle times that continue to improve.
I'll finish my comments on slide number eight titled Am checking all the boxes.
First half of 2023, that's been incredibly successful both operationally and financially for am.
Over the last year, we expanded our business organically and through immediately accretive high visibility acquisitions importantly, these acquisitions not only added to our peer leading return on invested capital in the high teens as we integrate them into our asset base and drive additional synergies.
We have significantly derisked the business by transitioning to generate consistent free cash flow after dividends, which has totaled $77 million year to date.
This has allowed us to reduce absolute debt and drive our leverage down to three five times from three seven times at year end as we progress towards our three times target in 2024.
We believe these best in class attributes checking all the boxes to be a premier midstream company position AAM to increase our return of capital to shareholders in the future.
In summary, we have made tremendous strides over the past year to drive growth, while simultaneously derisking the business through absolute debt and leverage reduction.
We look forward to the next several years as our EBITDA continues to grow our free cash flow after dividends continues to expand and our leverage continues to decline.
With that operator, we are ready to take questions.
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The first question is coming from Brian <unk> of UBS. Please go ahead.
Hi, Good afternoon, everyone quick question on just the guidance between the Antero families seems like a raise its production by 100 Mcf per day.
It seem to be related to some noise around ethane cracker downtime, but was curious if you can explain if this has no impact.
Whether some of that was captured in a M <unk> quarterly EBITDA guidance update thanks.
Yeah. Good question, Brian you know overall CRT.
<unk> comments AAM did increase guidance in the first quarter.
I am comfortable with the gross wellhead volumes, which is what drives the EBITDA increasing.
As Youre, probably aware they guide on a net equivalent production basis and so.
With the with the ethane volumes.
Being risks further they wanted to wait another quarter before providing an update on guidance. So.
No change overall I will say it is positive for AAM in the sense that a good.
<unk> guide to higher volumes and also talked about the fact that 2024.
It would be maintained at those higher volumes. So that is a new piece of information I think.
That would drive Ams.
2020 for volumes.
Great Super helpful. Thanks, and then just a follow up on just return of capital opportunities in the 'twenty four.
A potential investment upgrade.
Our level, which could read through to a so just kind of curious as we think about potential refinancing of those 26 to 29 bullet maturities and how that could potentially impact. The return of capital that works that is expected to come out of the amtrust below three times leverage next year. Thanks.
Yes, no I think as we look at the balance sheet for AAM.
You've got a couple of attributes that you have the declining leverage to the three times level, which will be positive for it's its own balance sheet and investment ratings are and then you have as you mentioned the our credit rating to the extent they are gets upgraded am would automatically get upgraded.
And then that combined with the momentum with the leverage reduction should improve the overall credit profile and so we'll continue to be patient and watch the market on.
On the bonds.
We will be opportunistic in terms of refinancing those bonds as they come due.
Great I'll leave it there and enjoy the rest of your afternoon. Thanks.
Thanks, Brian .
Thank you. The next question is coming from Jeremy Tonet with J P. Morgan. Please go ahead.
Hey, everyone. This is Jonathan on for Jeremy.
Just hoping to get a little guidance for well completion cadence for the rest of the year across.
Across the water business.
How should we be thinking how should we be thinking about that in the near term.
Yeah. So I think overall, we gave guidance for the year, which was 75 to 80, well serviced by the water business.
You're at 45 ish in the first half.
There are two or three wells that youll see most of that impact. It started we base. It on when do you start the completion youll see most of that water impact, though in the third quarter for two to three wells and then the remainder of that 75 to 80 I would be in the second half so it works out to be about.
55% to 60% of the completions in the first half and 40% to 45% in the second half of the year.
Got it that's helpful. Thanks, and then maybe moving new kind of Capex through the rest of the year I know you guys are guiding to.
To a midpoint of about 190, and I know, there's probably a little over 100 left so maybe just some more color on what's what's on the docket for the spend there or any specifics would be helpful. Thanks guys.
Yeah, I think yeah.
In line with historical levels, typically you do youre able to invest more capital and build out in the summer months with better weather. So you typically see second quarter and third quarter being the higher capital levels, and then see that see that trend off in the fourth quarter. So I'd put that in the same St ballpark. This year in terms of how you get to the midpoint of.
Of our capital guidance.
Great. Thanks, I'll leave it there.
Thank you.
Thank you. The next question is coming from net problem now of Wells Fargo. Please go ahead.
Hey, good afternoon. Thanks for taking the questions just building on the previous question can you talk about the impact to <unk>.
And from a Ars improved well productivity I presume that will result in some capital efficiencies on the midstream side too but.
Any additional details you can provide on your 'twenty 'twenty, four and 2025 Capex program.
Yeah, No. It's a great question I think as you look at the capital program for a M.
You have the benefit of the efficiency gains that a R which leads to.
Lower well connect capital needed on the AAM side, you continue to have larger.
You know I hire lateral feet per well on average each year. So that's beneficial to Am's capital program and then the second piece.
We've talked a little bit on past calls is just related to <unk>.
Compression reuse, so youre starting to see more of that benefit and you will see that play out particularly in 2024.
With about $15 million of incremental savings.
Related to that compression reuse.
Paul talked about in his prepared remarks, so I'm excited about the capital program going forward, you should see 24 capital lower than the 23 capital and then on the on the volume side just as a reminder, again the fee rebates are falling away on the AAM side in 2024.
When you combine that with the fact that a ours.
Maintaining production at the higher levels.
It equates to nice.
Single to high single digit EBITDA growth today, and as you move into 2024, so a great spot to be in for a M to have consecutive years.
Strong EBITDA growth and capital declining.
Good spot to be and as we look forward.
Got it and then and then the 15 million of Capex savings on compression reuse.
Is that really the savings from compression relocation where versus versus the cost of building new compression.
Well it depends on how much how many units you're relocating so.
Next year, you'll see 15 million overall, we've talked about a total number in the $50 million level on our ability to reuse and that's something we're always evaluating.
In terms of reuse of underutilized compression capacity into areas that need it so you'll.
You'll see us update those numbers moving forward, but the total number is 50 and 15 of that Youll see in 2024.
I guess as a rule of thumb can can you provide a number of what is the cost of relocating equipment versus the cost of building new equipment.
So you know, we're relocating and call. It a 120 a day of compression capacity in saving 15 million. So I think that's probably a fair ratio to assume moving forward.
Got it very helpful. Thank you that's all I had.
Sure.
Once again that is star one if you have any questions at this time.
Our next question is coming from Gregg Brody of Bank of America. Please go ahead.
Good afternoon guys.
I was wondering I know it.
You've had that your disclosures on the on the Clearwater facility litigation.
It's pretty clear, but I'm just curious if you could talk about how you how much do you think the timeframe is for this resolve it I know there is appeals possibilities, but I was wondering if you could frame it for us.
Yeah, Greg Unfortunately, we can't really comment on the on the on the pending.
Litigation outside of what we've already disclosed in the 10-Q, so I'd just direct you to that to the 10-Q prior disclosures there.
I appreciate the limitation.
Yeah.
Thanks.
Thank you at this time I would like to turn the floor back over to Mr. <unk> for closing comments.
Thank you for joining today's conference call. Please feel free to reach out with any additional questions.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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