Antero Midstream - Earnings Call - Q4 2019

Transcript

Speaker 0

Greetings. Welcome to the Antero Midstream twenty twenty Fourth Quarter 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. Please note this conference is being recorded.

At this time, I'll turn the conference over to Michael Kennedy, Senior Vice President of Finance. Mr. Kennedy, you may now begin.

Speaker 1

Thank you for joining us for Antero Midstream's fourth quarter and full year twenty nineteen 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 and A. I'd also like to direct you to the homepage of our website at www.anteromidstream.com, where we provided a separate earnings call presentation that will be reviewed during today's call. Before we start our comments, I'd first like to remind you that during this call, Antero management will make forward looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Antero Resources and Antero Midstream and are subject to a number of risks and uncertainties, many of which are beyond Antero's control.

Actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements. 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 and Glenn Warren, President and CFO of Antero Resources and President of Antero Midstream. With that, I'll turn the call over to Paul.

Speaker 2

Thanks, Mike. I'd like to start by discussing the twenty twenty outlook and development plan at AR that supports Antero Midstream's 2020 capital budget and financial guideline. Yesterday, Antero Resources announced a drilling and completion capital budget of $1,150,000,000 that is expected to generate 9% net production growth in 2020 as compared to 2019. AR's 2020 capital budget utilizes an average of four drilling rigs and three to four completion crews consistent with 2019 levels. This development program is approximately free cash flow neutral at AR and results in leverage trending toward the mid two times range assuming execution of its previously announced asset sale program.

For those that were able to listen into the AR call that we just finished, I highlighted that we remain focused on achieving our cost reduction strategies and achieving our asset sale target at AR. The ability to continue growing production in the current commodity price environment is supported by AR's continued capital efficiencies, liquids rich focus and industry leading hedge portfolio. Let me move to Slide three in our investor presentation titled Marcellus Well Cost Reductions, which illustrates the significant momentum in well cost reductions at AR. Last quarter, AR announced a well cost savings initiative that targeted a 15 to 18% reduction in well costs on a per lateral foot basis or approximately 1,700,000.0 to $2,100,000 per well. The left hand side of the page illustrates AR's January 2019, so a little over a year ago, well cost of $970 per lateral foot that was assumed in AR's 2019 capital budget.

During the 2019, AR's actual well costs were $840 per lateral foot. This was driven primarily by lower costs for flowback water as AM implemented flowback water blending and localized storage operations. The coordinated effort between AR and AM allowed us to quickly and successfully execute our blending program and deliver savings ahead of schedule. For 2020, AR is targeting total well costs of $795 to $825 per lateral foot, driven by expanded flowback water services provided by AM, drilling efficiencies achieved in 2019 and lower freshwater usage and completions that is included in AM's 2020 budget. These savings allow AR to continue actively developing in today's commodity price environment and drive high margin, stable gathering and processing cash flow growth for AM.

Now let's move to Slide four titled Well Protected from Near Term Gas Pricing Weakness. Antero Resources has a long track record of hedging and selling production forward, generating $4,700,000,000 of hedge gains since 02/2008. This has resulted in development program stability that we expect to continue in the future. Looking to 2020, Antero AR has hedged 94% of its expected natural gas production at $2.87 per MMBtu or 42% above current strip pricing. AR is also well hedged in 2021 with 93% of expected natural gas production hedged at $2.8 per MMBtu.

In addition to the natural gas hedges detailed on this slide, Antero Resources is 100% hedged on its crude oil and pentane production at approximately $56 per barrel or 10% above current strip prices. Moving to Slide five titled 2020 Capital Budget. This details AM's capital budget for 2020. As depicted on the map on the right hand side of the page, in 2019, we built the backbone of our midstream infrastructure in Tyler County, West Virginia that supports the majority of AR's development over the next several years. In 2020, we optimized our capital plan to focus on the highest rate of return locations at AR that are also in close proximity to existing gathering and water infrastructure.

This resulted in a capital budget of 300,000,000 to $325,000,000 in 2020 or more than a 50% reduction compared to 2019. Since we released our original 2019 capital budget and 2020 target one year ago, we have eliminated or deferred almost $400,000,000 of capital in those two years combined. This speaks to the just in time nature of our investments, visibility into AR's development plan and AR's success in consolidating acreage through acreage trades that minimize the geographic footprint of AM's infrastructure. Our capital budget for 2020 is focused primarily in the Marcellus and includes our first processing plant at the Smithburg processing complex located just West of Sherwood or Smithburg I. As a reminder, the joint venture with MPLX placed Sherwood plants twelve and thirteen online during the fourth quarter of twenty nineteen.

These plants added 400,000,000 cubic feet a day of additional processing capacity, increasing the joint venture's total processing capacity to 1.4 Bcf a day. Including the 200,000,000 a day of additional capacity from Smithburg I, the joint venture will add 600,000,000 cubic feet a day of processing capacity to support liquids rich production growth for Antero Resources. Looking more granular into 2020, we expect to invest approximately two thirds of our capital budget in the first year first half of the year and the remaining one third in the second half of the year. AM's capital flexibility in addition to its visibility into AR's development plan, is a competitive advantage for AM. It gives us confidence in the volumetric growth and ability to maintain high asset utilization rates that drive peer leading returns on our invested capital.

Slide six titled Consistency of Returns and Capital Resiliency illustrates our track record of disciplined capital investment that drives our peer leading returns on invested capital. The top right chart on the slide depicts our asset utilization with blue illustrating our compression utilization and gray illustrating our joint venture processing utilization. As you can see, the utilization rates have continued to improve every year since our IPO and we set company records in 2019 for compression and processing utilization rates of 8898% respectively. This is a testament to our integrated planning efforts and appropriately sized infrastructure to match AR's visible production growth profile. This just in time philosophy has proven to be very resilient over the last several years where AM has generated an average return on invested capital or ROIC of 12% since its IPO in 2014.

In 2019, our ability to defer $130,000,000 from our original capital budget allowed us to again deliver a 13% return on invested capital. Looking ahead to 2020, we expect our ROIC to improve further into the mid teens range. As a company, we remain highly focused on ROIC, but also leverage per share cash flow growth and safety, all of which are metrics in our management and employee compensation plan. Our focus on these metrics, along with our C Corp structure and independent board puts AM at the governance forefront of the new midstream infrastructure model. With that, I'll turn the call over to Mike.

Speaker 1

Thank you, Paul. I'll begin my AM comments by highlighting the recently announced AM cash dividend of $0.03 $0.75 per share for the fourth quarter. The dividend at AM was the twentieth consecutive distribution or dividend paid since the IPO of Antero Midstream Partners in 2014. In addition, during the fourth quarter, we purchased 19,400,000.0 shares from AR. To date, we have repurchased 22,900,000.0 shares for $125,000,000 resulting in $175,000,000 of remaining capacity under our $300,000,000 share repurchase program.

Now let's move on to the fourth quarter operational results, beginning with Slide seven titled Year over Year Midstream Throughput. Starting in the top left portion of the page, low pressure gathering volumes were 2.6 Bcf per day in the fourth quarter, which represents a 1% increase from the prior year quarter. Compression volumes during the quarter averaged 2.4 Bcf per day, a 9% increase compared to the prior year. Our fifty-fifty JV gross processing volumes averaged 1.2 Bcf per day, a 51% increase compared to the prior year quarter. Processing capacity was 92% utilized during the quarter.

Joint venture gross fractionation volumes averaged 31,000 barrels per day, a 63% increase from the prior year. Freshwater delivery volumes averaged 148,000 barrels per day, a 9% increase over the prior year quarter. Moving on to financial results. Adjusted EBITDA for the quarter was $2.00 $3,000,000 a 6% increase compared to the prior year quarter. Distributable cash flow for the fourth quarter was $159,000,000 resulting in a DCF coverage ratio of approximately 1.1x.

Capital expenditures during the quarter were $125,000,000 or $30,000,000 below the midpoint of our revised guidance range. As a result, full year capital investments totaled $646,000,000 or $130,000,000 lower than our original capital budget at the 2019. This highlights the capital flexibility Paul mentioned in his comments. Moving on to the balance sheet and liquidity. As of December 3139, Antero Midstream had $960,000,000 drawn on its $2,100,000,000 revolving credit facility, resulting in $1,200,000,000 of liquidity.

Additionally, AAM's net debt to LTM adjusted EBITDA was 3.5x at year end. I'll finish my comments on Slide eight. It summarizes how far we've come as a company since our 2014 IPO. In 2019, we took significant steps to improve our corporate structure and governance, eliminating the GP and IDRs and converting to a C Corp with a Board comprised of a majority of independent directors. Looking ahead to 2020, we look to continue to deliver on our organic growth strategy.

Despite natural gas prices declining over 50% since 2014, our 2020 adjusted EBITDA guidance of $850,000,000 to $900,000,000 represents over 1200% increase since our IPO, highlighting the significant growth underpinned by Antero Resources. Our capital budget for 2020 of $300,000,000 to $325,000,000 is 44% lower than our 2,004 capital expenditures as we leverage our existing infrastructure and drive capital efficiencies. Based on the midpoint of the adjusted EBITDA and capital budget ranges, we expect to generate over $400,000,000 of free cash flow before return of capital in 2020. We expect to transition away from the MLP model, paying out a majority of the cash flows generated to the C Corp model, generating free cash flow after dividends over the next several years as we grow our EBITDA and reduce future capital expenditures. The output of this growth profile and capital discipline is an improving return on invested capital into the mid teens or higher in the future.

This consistent return on invested capital supported an increase in our return of capital to shareholders by 242% since our IPO while still maintaining a strong balance sheet with leverage in the mid-3x range and $1,200,000,000 of liquidity. In summary, we remain highly focused on capital discipline and generating free cash flow. During sustained periods of low commodity prices, this results in lower AM capital budgets and non speculative short cycle time investments that still generate high asset utilization rates. This capital flexibility results in an attractive cash flow profile that should drive shareholder value. With that, operator, we're ready to take questions.

Speaker 0

Thank you. At this time, we'll be conducting a question and answer session. Our first question is from the line of Jeremy Tonet with JPMorgan. This

Speaker 3

is James on for Jeremy. Just looking at the high pressure gathering fees, they're both a step down sequentially and year over year. Maybe I missed this in the K, but what's the driver there for that?

Speaker 1

The high pressure fees stayed the same at $0.21 We just had some prior period adjustments that we caught up in the fourth quarter. So that's the reason it shows a decline, but the $0.21 is still applicable to high pressure fees.

Speaker 3

Okay. So for 2020, dollars $0.02 1 would be a good Yes. Dollars 1. All right. Great.

And then just moving to CapEx. What was really the driver for the coming under budget in 4Q twenty nineteen? And then looking out to 2020 as well, what were kind of the biggest cuts in terms of segments for just lower CapEx there?

Speaker 1

The lower capital in 2019, we just continue to defer projects and focus on Ontario's current development plan, which has become more concentrated in Tyler County, which is where our infrastructure build out occurred earlier in the year. So just leveraging existing infrastructure, that continues in 2020. On that map, it showed, you know, deferring the Westville build out. It's really just focusing on that Tyler County in 2020 and then 'twenty one and 'twenty two, having the capital associated with the WEXL build out.

Speaker 3

All right, great. Thanks. That's it for me.

Speaker 0

Our next question is from the line of Greg Brody with Bank of America. Just

Speaker 4

a few questions for you. Your share repurchase program, how are you thinking about that today And sort of the cadence of what we should expect this year in terms of how much you think about buying back?

Speaker 5

Yes. So there's still $175,000,000 of purchasing power authorized by the Board at AM, just as a reminder. And AM has certainly expressed an interest in repurchasing shares from AR. So that's kind of an ongoing dialogue subject to coming together on price. I wouldn't anticipate anything in the near term there at these prices.

But assuming you buy in shares, obviously, you eliminate those dividends and it's great for AM. So I think AM will execute on that throughout the year in one fashion or another. It may buy some in the open market as well.

Speaker 4

Got it. I think so an an AR presentation showed some incremental gathering, processing, transportation improvements since the December. Just wanted to clarify. Was was any of that at AM or or was it all incremental third party, not really the third party?

Speaker 1

In 2020, that $48,000,000 of it was AM. There's an additional $27,000,000 with a total of 75,000,000 from that GP and T that were third parties.

Speaker 4

Third party. And that's some of that was realized after you made the December 9 announcement?

Speaker 1

No, that was all December 9.

Speaker 5

The December 9 announcement was $350,000,000 total over four years, and $250,000,000 of that $350,000,000 was is AM, is anticipated to be from AM rebates. The rest is other third parties.

Speaker 4

Got it. So there was there any just maybe I'm I know this is an AM call, but was there anything on AR that was incremental then?

Speaker 1

There was nothing incremental on that.

Speaker 4

And then it looks like you changed your targeted year end leverage metrics for year end. Actually, they're improving a bit versus what you provided on December 9. It's just a slight change. What's driving that?

Speaker 5

I think the mid-3s is where we

Speaker 1

were in December. There hasn't been a material change from that. EBITDA is exactly as we expected and capital is at the same levels too. So I don't see any change to the announcements that we had in December.

Speaker 4

I'm probably being just too literal with the language. So that's helpful. All right, guys. Thank you for the time. I appreciate it.

Speaker 2

Sure. Thanks, Greg.

Speaker 0

Our next question is from the line of Sunil Sibal with Seaport Global.

Speaker 6

A couple of questions for me. First, on the cost reduction side. You guys have done a pretty good job so far on the AM cost side. I was wondering if there are more levers available to pull for bringing that down further and how should we be thinking about that?

Speaker 2

I would just say, Sadeel, that we've got a lot of things always working. They're incremental things, and we just continue to push things lower as we get better and better at all parts, at logistics, at sand supply, at the drilling and so on, completions, the rate of completions. So it's pretty much the laundry list that you've heard of already, but just continue to make improvements in all of that.

Speaker 5

We think there could be more to come at AR. And as far as AM goes, it's really just getting more efficient about planning and logistics and where we're spending capital in front of the drill bit. As Mike mentioned earlier, it's a bit of concentrating the drill bit more and utilizing existing infrastructure. So that's really what's going on there. I mean, try to certainly get everything out and try to improve on construction costs and all that, but I think this is really more about building what was really needed and could be highly utilized.

Speaker 6

Okay, got it. And then one kind of broader question, you highlighted the returns on invested capital as an important criteria. I was kind of wondering if you talk can talk a little bit about your, you know, broader capital allocation policy. And, obviously, it seems like, you know, leverage will tick up a bit in 2020 considering all that's going on. You know?

What is the kind of leverage target that you guys have in mind ultimately for AM?

Speaker 1

Yeah. It's a mid threes leverage target. Our our leverage doesn't inflate going forward. We have, EBITDA growth every year in the high single digits. So you've got cash flow growth and your capital continues to come down.

So the leverage stays flat in the mid-3x range.

Speaker 6

And then on the broader capital allocation side, obviously, equity markets don't seem to be rewarding for the dividend payouts. And how do you think about that in terms of your broader capital allocation philosophy?

Speaker 1

Yes, similar. Like I mentioned, you've got growing cash flow. Capital coming down, came down over 50% this year. So your leverage is staying flat in the mid 3x. It's very attractive for a midstream company.

And so at today's dividend rate, assuming holding it flat, you're at 1.1x. That grows over the next year to 1.2x. And in a couple of years, you actually have cash flow, free cash flow before return capital in excess of the dividend. So we don't see any reason right now that the dividend isn't sustained at today's levels. We think the equity market will come

Speaker 5

back to the dividend, so to speak. So no need to have a knee jerk reaction over the last few quarters.

Speaker 0

Our next question is a follow-up from the line of Jeremy Tonet with JPMorgan. Just

Speaker 7

wanted to see on the processing JV side, it seems like the CapEx pulled back a bit there or it's a bit lighter, I guess, going forward at this point. And just wondering if you could refresh us as far as what you expect kind of any cadence to new plants or what type of activity for future CapEx we should expect there?

Speaker 1

Yes, we have $30,000,000 in the budget for 2020. Paul mentioned we just put onshore with $12 and 13,000,000 in the fourth quarter. So kind of a prebuild and grow into those processing plants in the in the first part of the year, and then Smithburg one comes on and, utilize that in the back half of the year. So we only have $30,000,000. So that's a lot in those processing plants, and now we have the ability to fulfill them and then just fill out a plan or two each year from here on out.

Speaker 7

So that still is the current plan then, I guess, building a plan or two per year going forward?

Speaker 1

Yes. That's correct.

Speaker 7

Got it. And then maybe I'm looking at this too finally here, but it looks like on a for AR's lateral length, it had been kind of coming in recently and was a bit shorter in subsequent quarters over the course of 'nineteen. And I think the guide laid out here talks about 12,000 foot lateral. So just wondering if there's any kind of shift here that you would expect?

Speaker 1

No, there's no shift. I mean, just when you look at the 'twenty plant for Antero, the completions average 11,400 feet. The drilling average is over 12,500 feet or around that. So it's just timing. There's still trying to drill longer laterals and our tight well of 12,000 foot lateral well.

Speaker 7

Got it. Great. And maybe just the last one, if I could. It sounds like the current dividend level you're looking to sustain here, didn't have a knee jerk reaction to the market. But is there a certain length of time where things don't change, you might kind of reevaluate the approach here given kind of the elevated yield?

Or any other thoughts that you could share on that?

Speaker 5

Yes. No thoughts to share on that. That's something the Board discusses over time, but no inside thoughts there.

Speaker 0

Next question is from the line of Ned Baramov with Wells Fargo.

Speaker 8

Hi, thanks for taking the question. Just one for me. Could you maybe provide an update on your discussions with Veolia regarding the idled Clearwater facility? And then as part of that, are there any other expenses related to the idling of the plant expected in 2020? Thank you.

Speaker 2

What we can say is that discussions continue with Veolia, and that's about all we can say. We can't comment further. And then on

Speaker 1

the No material expenses going

Speaker 2

No material expenses. It's been mothballed.

Speaker 8

Thank you.

Speaker 2

Yes. Thank you, Ned.

Speaker 0

Thank you. At this time, I'll turn the floor back to management for further remarks.

Speaker 1

Thank you for joining us on our conference call today. If you have any further questions, please feel free to reach out to us. Thanks again.

Speaker 0

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.