Antero Midstream Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Antero Midstream Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you, Justin Agnew, Director of Finance.

Operator

Thank you, Justin. You may begin.

Speaker 1

Good morning, and thank you for joining us for Anterra Midstream's 3rd quarter investor conference call. We'll spend a few minutes going through the financial and operating highlights, And now we'll open it up for Q and A. I would also like to direct you to the homepage of our website at www.anteromidstream.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 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, CEO and President of Antero Resources and Antero Midstream Brendan Krueger, CFO of Antero Midstream and Michael Kennedy, CFO of Antero Resources and Director of Antero Midstream.

Speaker 1

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

Speaker 2

In my comments, I will discuss the Multi decade inventory dedicated to AM and the AR capital efficiency achievements in 2023. Both of these attributes support the attractive and derisked long term outlook at AM. Brendan will then discuss our 3rd Quarter financial results, repeatable free cash flow business model and 2022 ESG highlights. Going to start my comments on Slide number 3 titled Consistent Growth and Large Low Cost Inventory Dedicated to AM. This slide highlights the throughput growth at AM and drilling inventory for the natural gas peers at a 2.7 $0.05 breakeven NYMEX gas price.

Speaker 2

During the Q3, AM once again delivered double digit Year over year throughput growth. With gathering volumes well over 3 Bcf a day, AM now gathers roughly 3 Leasing program investing $340,000,000 in land capital since 2021. The result is over 22 years of inventory dedicated to AM based on the 2023 development pace as So while Antero Midstream's gathering volumes have increased nearly 15% since 2021. AR has more than replenished the multi decade inventory that drove the throughput growth Over that timeframe, this organic leasing strategy is not only cost effective for AR, but incredibly capital efficient at AM. A majority of the land capital is invested to extend laterals, fill in acreage positions And block up AR's already contiguous acreage position.

Speaker 2

This results in more production and reserves per well for AM as well as more Now let's move to slide number 4 titled Most Capital Efficient Customer in Appalachia. This slide illustrates the year over year change in production on the y axis and the year over year change in drilling and completion capital On the x axis, while targeting a maintenance capital program, AR's Q3 2020 Production actually grew 9% year over year. This growth combined with the contributions from the bolt on acquisitions and drilling partnership translated to a 13% year over year increase in gathering volumes at AM. Conversely, When AR's peer group attempted to target a maintenance capital program, their volumes actually declined year over year. When you compare the production growth to the drilling and completion capital invested to deliver this growth, AR has been far and away the most capital efficient operator in Appalachia over the last year.

Speaker 2

For reference, AR is Consistently running 2 to 3 rigs and 1 to 2 completion crews, which is a very manageable and balanced development program for 1 of the largest natural gas producers in the U. S. This peer leading capital efficiency combined with Strong balance sheet at AR underpins the consistent development program that drives repeatable results at AM. In summary, we continue to be one of the most capital efficient midstream companies in the industry. The multi decade Repeatable low cost inventory dedicated to AM combined with our unparalleled visibility These peer leading returns on invested capital, further supported by AR's peer leading capital efficiency, Continue to drive value for AM shareholders.

Speaker 2

With that, I turn the call over to Brendan.

Speaker 3

Thanks, Paul. I will begin my comments on Slide number 5 titled Operational Success Drives Earnings Growth. During the Q3, we generated a company record $251,000,000 of EBITDA or over $1,000,000,000 on an annualized basis, which was a 12% increase year over year. We also generated $138,000,000 of free cash flow before dividends and $30,000,000 of free cash flow after dividends. This free cash flow is utilized to reduce absolute debt and resulted in leverage declining to 3.4 times, which is a reduction from 3.7x@yearend 2022.

Speaker 3

These financial achievements were a direct result of Antero Midstream's growth strategy and operational success. During the Q3, low pressure gathering and compression volumes Increased by 13% 17%, respectively, compared to the prior year quarter. Both throughput measures set company records for Antero Midstream. Of the 13% growth in low pressure gathering volumes, approximately 6% was organic growth on our legacy assets and 7% was attributable to the Crestwood acquisition that closed in the Q4 of last year. The outperformance in AM's Gathering and Compression business, Which drove the increase in our EBITDA guidance was a result of outperformance on wells turned to sales in 2023, as Paul discussed, as well as the acceleration of completion throughout the year.

Speaker 3

Now let's move on to Slide number 6, titled Transition to Repeatable Free Cash Flow After Dividends. This quarter was our 5th straight quarter of generating free cash flow after dividends. Year to date, free cash flow after dividends has totaled 107,000,000 which is above our original full year guidance midpoint of $105,000,000 and we have achieved this in just Antero Midstream's 2023 free cash flow has benefited from a combination of outperformance in our base business, realizing synergies from our bolt on acquisitions and optimizing our capital budget. Looking back at the Crestwood and EnLink acquisitions, We were well positioned to put both acquisitions on the balance sheet given our leverage position and visibility over the near term. To put it into context, We expect to essentially pay off both of these acquisitions with just 6 to 7 quarters of excess free cash flow after dividends.

Speaker 3

At the same time, we expect our leverage to decline by almost a turn over that period. This is an incredible feat and highlights just how strong AM's base business is, as well as demonstrating how free cash flow accretive those acquisitions were. Before finishing up our prepared remarks, I wanted to briefly touch on our 2022 ESG achievements on Slide number 7. The data on this page was just recently published in our annual ESG report. In In 2022, we delivered a methane leak loss rate of just 0.031%, one of the lowest in the midstream industry.

Speaker 3

Our integrated water system, the largest in Appalachia, allowed us to reuse or recycle 86% of our wastewater and eliminated over 12,000,000 miles of truck traffic in our local communities. Importantly, while we have delivered significant growth over the last year, We have delivered it safely. 2022 marks the 8th straight year without an employee lost time incident, which is an incredible achievement Something we are very proud of here at Antero Bigstream. We also had a 59% reduction in the total recordable incident rate in 2022 further highlighting the corporate focus on safe and efficient operations. I'll finish my comments on Slide number 8 Title Antero Midstream Checking All the Boxes.

Speaker 3

The 1st 3 quarters of 2023 have been incredibly successful from an operating and financial standpoint, which is reflected in the 2nd guidance increase this year. The outperformance in our base business and successful integration of our complementary acquisitions Keep us on track to deliver a peer leading ROIC in the high teens again in 2023. We have significantly derisked The business by transitioning to generate consistent free cash flow after dividends, which we now expect to total $145,000,000 at the midpoint of guidance, which is almost 40% above our initial guidance of $105,000,000 As we look to 2024, we expect a further meaningful increase in free cash flow after This will position AAM well to achieve our 3 times leverage target and increase our return of capital to shareholders. In summary, we continue to build on our track record of delivering on our stated guidance and financial targets. More importantly, we deliver these With that, operator, we are ready to take questions.

Operator

Thank you, sir. We will now be conducting a question and answer A confirmation tone will indicate that your line is in the question And the first question comes from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Speaker 4

Hey, this is Noah on for Jeremy. I wanted to touch on your leverage target of achieving 3 times by 2024. I guess just what how should we think about your Capital allocation priorities after achieving this?

Speaker 3

Yes. I think we've talked about this on some past calls as well. I mean, I think overall, As we get closer to that target, we'll certainly evaluate where we are from an equity perspective and we'll look Whether share repurchases or further debt pay down or increases to the dividend makes sense. I think as we've talked about in the past, having this visibility significant visibility into the long term Business of AM through the integration with AR gives us a lot of perspective in terms of the underlying equity value. And as we sit here today, I think Share repurchases continue to make a lot of sense for that further return of capital, but we'll certainly look at all of those as we approach that leverage target.

Operator

Thank you. And the next question comes from the line of Brian Reynolds with UBS. Please proceed with your question.

Speaker 5

Hi, good afternoon, everyone. Maybe to look ahead to 2024, given some of the recent 'twenty three outperformance, I was just kind of wondering if you could kind of characterize some of the tailwinds going into 24, just given the growth that should flow through, some of the rate relief that will go away And then the CPI inflator, should we kind of characterize this as mid single digit EBITDA growth or could we get into the low teens next year? Thanks.

Speaker 3

Yes. Good question, Brian. I think you kind of broke it down nicely. There's really the 3 components. So the fee rebates rolling off It will be about $48,000,000 next year.

Speaker 3

So that's roughly 5% growth on the midpoint of our guidance This year, the CPI, it's measured June to June, so we know that number already. It was a 3% CPI number and then you take 55% of that, so you're, call it, 1.5%. So I guess that's 6% to 7% Overall EBITDA growth and then if you look at the drilling partnership and what AR said, The benefit is that AR has continued to improve with well performance acceleration and completions. And so the production number NAR is up over $200,000,000 a day from year end 2022 to year end 2023. And so depending on what they run from a maintenance capital plan will drive kind of that third component of growth At AM.

Speaker 3

So you can be anywhere, call it, in the 6% to 7% up to that low double digit number that you talked about just depending on the development plan We see at the AR level and NAM is well positioned just from a capital standpoint to be able to meet those levels.

Speaker 5

Great. Makes sense. Appreciate all the color. Maybe as my follow-up, let's look even a little further ahead to 2025. The drill co with AR is expected to end, which could impact the water volumes at AM in 2025.

Speaker 5

So just given where AR's balance sheet is relative to where it was a few years ago And then the call for natural gas, given the LNG supply demand that's coming online and the call for gas from Natgas Basin, just kind of curious How we should think about maybe AR volumes picking up some of the DrillCo activity that ultimately flows through to Antero Midstream on the water side? Thanks.

Speaker 3

Yes. Thanks. I think overall, as you look to 2025, I mean, the benefit for Just looking at it from an ARA perspective here is the gross wellhead volume. You've got the infrastructure in place from a gross wellhead volume perspective. And so once the drilling partnership rolls off, that's very it's very efficient to grow from a net perspective at AR into That infrastructure capacity that you already have from a processing, from a firm transport, from a gathering perspective.

Speaker 3

If the prices hold with what the strip entails, I think that'd probably be a fair assumption that you maintain that gross wellhead volume At the AR level, and that will flow through to AM, of course.

Speaker 5

Great. That makes sense. Appreciate all the color this afternoon. Have a great rest of your

Speaker 3

Thanks, Brian. Thanks, Brian.

Operator

And the next question comes from the line of Zach Van Everin with Tudor, Pickering, Holt.

Speaker 6

Perfect. Thanks for taking my question. Just one on the processing and frac side. I see you guys are running at or above nameplate for both of those. Have you looked into expanding that capacity deal?

Speaker 6

And if so, what would the CapEx

Speaker 3

Yes. No, I mean, I think the benefit on the processing side is you typically can run about 10% above nameplate. So if you look just net to the JV at the 1.6 Bcf a day, that'd be another 160,000,000 of ability to grow. In addition to that, obviously, you've got the Utica, which there'll be a couple of pads that will be turned on At AM's gathering in the Utica and the benefit in the Utica from an AM perspective is a lot of that infrastructure is already built out. So I think there There's plenty of levers that can be pulled in terms of where development occurs plus the ability to run above nameplate on the processing side.

Speaker 3

And then on the dry side, you've also got the assets we acquired from Crestwood, which give you the ability to move over there. So you've got Utica dry assets in And the ability to run above the nameplate capacity and processing.

Speaker 6

Got it. That makes sense. And then on the Frac side, can you also run above that capacity or is that pretty limited?

Speaker 3

The benefit on the frac side is that The last frac that was there anyways is essentially unutilized. So you've got full capacity. It's just our frac 4. We elected to Participate in the 4th fractionation unit, the 5th one, Opdivo 5, we elected not to participate and that one's essentially Pretty empty. So you've got the ability to grow from an AR perspective and move into that fractionation facility.

Speaker 6

Perfect. Thanks. That's all I had.

Speaker 2

Thanks. Thanks,

Operator

And the next question comes from the line of Gregg Brody with Bank of America. Please proceed with your question.

Speaker 7

I was trying to see if I can get back in within 30 minutes of the last call. But the just the one more M and A related question, but this one very specific to Antero Midstream. So we obviously returning capital next year is a possibility. How do you think about the M and A landscape for Entera Midstream Today and if you think there's opportunities out there and does it make sense?

Speaker 3

Yes. I mean on the AAM side, you saw us do The 2, what we call kind of cleanup acquisitions, which were EnLink and Crestwood assets Last year, those were nice fold in. AR volumes drove the asset cash flow there. So we'll look for other opportunities. There are a few opportunities out there probably smaller scale.

Speaker 3

And then you occasionally see some larger Opportunities with 3rd parties, and that's where you just need to get comfortable with a 3rd party perspective and can you derisk it enough relative to the Organic opportunities you have on the AR side, that's essentially how we look at M and A and how we'll continue to do that going forward.

Speaker 7

That's all I got. Thanks, guys.

Speaker 3

Thanks, Craig. Thanks, Craig.

Operator

There are no further questions at this time. And I would like to turn Floor back over to Justin Agnew for any closing comments.

Speaker 1

Thanks everyone for joining us today. Please feel free to reach out to any questions.

Operator

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Antero Midstream generated a Q3 record $251 million of EBITDA (annualized over $1 billion) and reduced leverage to 3.4×, supporting improved financial flexibility.
  • Throughput grew double‐digit year-over-year with gathering volumes above 3 Bcf/d, fueled by over 22 years of dedicated low-cost inventory from Antero Resources’ organic leasing strategy.
  • The partnership with Antero Resources drove peer-leading capital efficiency—AR’s 9% production growth on a maintenance capital program translated into a 13% rise in AM’s gathering volumes while peers declined.
  • AM achieved its fifth straight quarter of free cash flow after dividends, yielding $107 million YTD—surpassing guidance—and now expects $145 million in 2023, enabling debt paydown and potential share repurchases.
  • In 2022, AM delivered one of the industry’s lowest methane leak rates at 0.031%, recycled 86% of wastewater, and marked eight consecutive years without a lost-time incident, underscoring strong ESG execution.
AI Generated. May Contain Errors.
Earnings Conference Call
Antero Midstream Q3 2023
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