Antero Midstream Q4 2023 Earnings Call Transcript

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February 15, 2024

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Antero Midstream Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Justin Agnew, Director of Finance and Investor Relations for Antero Midstream.

Operator

Thank you. You may begin.

Speaker 1

Good morning, and thank you for joining us for Antero Midstream's 4th 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 and A. I would also like to direct you to the homepage of our website atwww.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 measures. Please refer to our earnings press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures.

Speaker 1

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

Speaker 2

Thanks, Justin, and good morning, everyone. In my comments, I will discuss the financial and operational success at Antero Midstream Since our IPO in 2014, I'll also discuss the 2024 capital budget and the capital efficiency of our primary customer Antero Resources or AR. Brendan will then highlight our 2023 results, 2024 guidance and long term outlook and Antero Midstream's capital allocation strategy. I will start my comments on Slide number 3 titled A Decade of Success since our 2014 IPO. In 2023, we generated a company record $981,000,000 of EBITDA and an 18% return on invested capital.

Speaker 2

Additionally, since The IPO in 2014, EBITDA has grown by an impressive 18% compound annual growth rate. This is a testament to AM's world class assets, operational success and the visibility it has into the development plan of Antero Resources, who is one of the premier E and P operators in North America. Looking ahead to 2024, we are guiding to a midpoint of $1,040,000,000 of EBITDA based on a maintenance Capital Program at AR. This program is expected to generate high teens ROIC in the 2024 as well as later our capital head as our capital budget declines in EBITDA increases. Now let's dive into AM's 2024 capital budget By turning to slide number 4 titled Unparalleled Capital Flexibility.

Speaker 2

2023, our capital expenditures were $185,000,000 which was at the lower half of our guidance range and a 30% reduction compared to 2022. Looking ahead to 2024, we had budgeted 150 $170,000,000 of capital, substantially all of which is invested in the Marcellus liquids rich midstream corridor. This is below our previous target of flat year over year capital in 20 24 and the flexibility of our capital budget to changes in the development plans. At the midpoint, this represents a 14% decrease compared to 2023. The right side of the page depicts the breakout of the capital budget by segment.

Speaker 2

As you can see our compression capital declines year over year. This is driven by our compression what we call relocation and reuse savings and the completion of our Grays Peak compressor station, which will add 160,000,000 cubic feet of compression capacity in the second quarter. In addition, Antero's midstream fresh water delivery and water blending capital declines in 24 as a result of modestly lower activity levels and the completion of a main water pipeline artery in the liquids rich Marcellus Shale. On a quarterly basis, it is worth noting that AM expects to invest approximately 60% to 65% of its full year capital budget in the second and third quarters during the summer months, which are more favorable for infrastructure build out. One of the foundations of AM's flexible and capital efficient investment approach is the visibility it shares of the natural gas peer group.

Speaker 2

Based on expected 2024 drilling and completion capital budgets relative to its production, AR will have the lowest capital per unit of production of the peer group at just $0.55 per Mcf equivalent. This is 40% below the natural gas peer average of 62% per Mcf This measure is important when comparing the asset quality and operational efficiency of such company of each company. In the case of AR, the quality and depth of the inventory along with its operational efficiencies achieved in 2023 provides tremendous ability for AM's long term operations. I'll finish my comments on slide number 6 titled AR benefiting from liquids pricing improvement. The left hand side of the page depicts year to year propane inventories relative to 2023 and the 5 year average.

Speaker 2

As a result of strong exports and winter weather, inventories have declined by more than 45,000,000,000 barrels since October. Just a few months, propane stocks have moved from the high end of the 5 year range to 5 year average levels. This return of propane inventories to the historical average has tightened the market and driven bullish sentiment from Mont Belvieu propane prices as a percent of WTI increasing from 43% last fall to 57% today as prices have risen above $0.90 a gallon. This pricing uplift uniquely benefits AR due to its productivity, diversity compared to traditional dry gas producers. Approximately 50% of AR's 2023 revenues were derived from liquids including NGLs.

Speaker 2

To put a dollar value on the pricing uplift, each dollar per barrel change in C3 plus NGL pricing results in approximately $40,000,000 of incremental free cash flow for AR since AR will produce about 40,000,000 barrels of C3 plus NGLs. Pricing improvement combined with the reduced maintenance capital at AR more than offsets the impact from the decline in natural gas prices and supports the stable development plan at AR that underpins AM's 2024 guidance. With that, I'll turn the call over to Brendan.

Speaker 1

Thanks, Paul. I will begin my comments on Slide number 7 titled 2023 Highlights. During the Q4, we generated a company record $254,000,000 of EBITDA, which was a 10% increase year over year. We also generated $156,000,000 of free cash flow before dividends and $48,000,000 of free cash flow after dividends during the quarter. These financial achievements were a direct result of Antero Midstream's organic growth strategy and operational success.

Speaker 1

During the Q4, low pressure gathering and compression volumes increased by 10% 14%, respectively, compared to last year. Both throughput measures set company records for Antero Midstream. As Paul mentioned, full year 2023 EBITDA was 989 a 12% increase compared to 2022. Full year free cash flow before and after dividends were company records at 587,000,000 and $155,000,000 respectively. Free cash flow after dividends was at the top of our updated guidance range of $145,000,000 to $155,000,000 and nearly 50% above our initial guidance range.

Speaker 1

This free cash flow was utilized to reduce absolute by approximately $150,000,000 in 2023 and resulted in leverage declining to 3.3 times at year end 2023. Now let's discuss our 2024 outlook by turning to Slide number 8, titled 2024, EBITDA Increasing and Capital Declining. For 2024, we are forecasting over $1,000,000,000 of EBITDA or 5% growth in 2023 at the midpoint of guidance. The EBITDA growth is driven primarily by flat to low single digit throughput growth, the expiration of the LP gathering fee rebates with AR and annual inflation adjustments to our fixed fees. As Paul discussed earlier, We are also forecasting $160,000,000 of capital investment at the midpoint of our guidance, which represents a 14% decrease from 2023.

Speaker 1

This is the 2nd year in a row with EBITDA growth and capital declining by double digits and illustrates the significant operational leverage of our assets. This 2024 plan allows us to generate over $250,000,000 of free cash flow after dividends or a 65% increase compared to 2023. Slide number 9 illustrates our capital allocation strategy for 2024 with sources on the left and uses on the right. Starting at the top, we are forecasting $190,000,000 of interest payments at the midpoint of guidance, which is a 13% reduction year over year and is driven by lower absolute debt levels and interest savings from the successful senior note issuance in January of this year. Next to the highly economic walking and tackling capital investments that are the foundation of our capital allocation strategy, A peer leading return on capital supports our return of capital to shareholders.

Speaker 1

In 2024, we plan on maintaining our stable $0.90 per share dividend, which represents an attractive 7% yield at today's share price. The remaining discretionary cash flow will first be allocated towards debt reduction to achieve our 3x leverage target in 2024. Thereafter, we plan to utilize any excess cash flow for further debt reduction and opportunistic share repurchases under our new $500,000,000 open market share repurchase program. We believe this balanced approach to reducing both the debt and equity components of the capital structure is the most efficient way to accrue value to our shareholders. I'll finish my comments on slide number 10 titled Delivering on 5 Year Outlook.

Speaker 1

Our transition to sustainable free cash after dividends over the last several years has allowed us to reduce absolute debt and leverage, execute accretive bolt on acquisitions and now announce a sizable $500,000,000 share repurchase program. Looking ahead, despite the volatile commodity price Antero Midstream remains on track to achieve its previously disclosed 5 year targets from 2023 through 2027. Our highly economic organic project backlog of $900,000,000 to $1,000,000,000 is expected to continue to drive high teens return on invested capital and generate $1,000,000,000 to $1,300,000,000 of free cash flow after dividends. Excluding our 2023 actual results, Our $500,000,000 share repurchase program represents approximately 50% of our remaining $1,000,000,000 of free cash flow after dividends 2024 through 2027. This program will allow AM to supplement its stable dividend with flexible and opportunistic share repurchases order to maximize value for our shareholders.

Speaker 1

Importantly, GAAP reduction will continue to be an integral part of our overall capital allocation to maintain a strong balance sheet, provide flexibility and de risk our business. The goal of this balanced capital allocation strategy is to ultimately provide the highest risk adjusted return profile for our shareholders. In summary, 2023 was a fantastic year for and financially. We have been discussing our inflection point of expanding free cash flow and we are now delivering on that plan in 2024 and beyond. Our balance sheet strength combined with multiple avenues to return capital to shareholders positions AM as one of the most unique investment opportunities not only in the midstream industry, but in the domestic mid cap investment universe.

Speaker 1

With that, operator, we are ready to take questions.

Operator

Our first question comes from the line of Jeremy Tonet with JPMorgan Chase. Please proceed with your question.

Speaker 3

Hi, good morning.

Speaker 1

Good morning.

Speaker 3

Thanks for all the color today. Looking forward to Just want to dive in, I guess, a little bit more on volume trajectory expectations as it relates to, I guess, AR's activity into 'twenty four and what that could maybe look like going into 'twenty five? And also want to dive in, I guess, for the drilling partnerships, The changes in working interest there for AR and I guess just overall impact and what it means for AM volumes?

Speaker 1

Yes. I mean, on the AR side, AR came out with its guidance, which was overall production flat, maintenance capital plan overall. At AM, again, we do have the drilling partnership with QL. AR talked about gas volumes being down slightly, but again with the drilling partnership, we'd expect more flat volumes at AM. And then as noted, I think in the prepared remarks, we have the fee rebates rolling away, which is about $53,000,000 and then CPI adjustments as well, which is another, call it, dollars 10,000,000 to $15,000,000 increase year over year.

Speaker 1

So that's what drives the 5% outlook on EBITDA in 2024. And then I think AR talked on its call as well On 2025 outlook, which was again maintenance capital levels. And so AM is well positioned again to service AR in the 2025 at that maintenance capital level.

Speaker 3

Got it. Thank you for that. And then moving over to the buybacks, just wanted to be clear, I guess, on how timing of that could unfold. It looks like when leverage hits 3 or lower, that would be an option on the table. Just wondering how you see, I guess, Timeline for that playing out?

Speaker 3

And with this would you look at more open market purchases or from AR? Just any thoughts in general would be helpful. Yes.

Speaker 1

No, I mean, just to get your latter point, I think that the open market repurchases, I think AR has stated in the past, it certainly enjoys its ownership in AMs, open market repurchases. And from a timing, we did have the previous target out there on free cash flow after dividends. It was $1,150,000,000 at the midpoint and that was for 2023 through 2027. So That's now $1,000,000,000 after taking out the 2023 results, so $1,000,000,000 over the next 4 years, dollars 500,000,000 share repurchase program. It's about 50% of that $1,000,000,000 of free cash flow after dividends that we'd look to put to work once you hit that leverage of 3 times over the next several years here.

Speaker 3

Got it. And sorry, just to be clear on the point, the buybacks wouldn't start ahead of Hitting 3, right? You'd wait for that to materialize and then the buybacks Yes.

Speaker 1

We're very committed to hitting that 3 times leverage. So to the extent you said, I saw some sort of big dislocation You had high visibility to 3 times. You certainly could potentially take advantage of that like we have in the past, but we're pretty committed to that 3 times before we really go in a big way on Cherry versus.

Speaker 3

Got it. That's helpful. I'll leave it there. Thanks.

Operator

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

Speaker 4

Hi, good morning everyone. Maybe to follow-up on some of the buyback commentary, but more through the lens of just flexibility and use of cash. Over the past few years, it's been pretty consistent. But with the flexibility going forward, just kind of curious how maybe perhaps some accretive M and A could compete with buybacks? Are there any metrics that you're looking at just given that there does seem to be a few more assets out there that could compete with buybacks?

Speaker 4

Thanks.

Speaker 1

Good question, Brian. I mean we look we try to look at everything through the lens of just return on invested capital. And The benefit that AM has and I think we've talked about this on past calls is the high visibility that it has into its capital plan for not only the next few years, but really the next couple of decades with AR's development plan. And so That allows us to have a pretty strong view of what our equity should trade at. So when we look at bolt on acquisitions, we can look at return on invested capital for those acquisitions relative to what we could be buying our stock back at and what the return we'd expect on that.

Speaker 1

So we'll certainly be thoughtful between bolt on acquisitions that could be attractive versus share buybacks versus further debt pay down. This just allows us to have another tool in the toolbox I think as we continue to generate more and more free cash flow after dividends moving forward.

Speaker 4

Right. Makes sense. And then maybe as a follow-up on the EBITDA guide, I think you're ending the year at, call it, $9.90 and you kind of talked about the bridge of where your base guide is with the rate relief and the CPI. So maybe if you can just help sensitize maybe the lower end of the guide. I mean, does that really just kind of imply limited to no activity?

Speaker 4

Because it seems like kind of your base outlook given where AR came out today seems like you'll be trending towards the high end of that guide at this point? Thanks.

Speaker 1

Yes. I think the guidance is really around I mean we're in a certainly a volatile gas price environment and AR has got strong liquids prices We've talked about, but I think the low end is just to provide for the extent you had any further reduction because commodity prices have come off even further an AR pullback completion that would likely be the low end of the guide. But I think your point is fair. We feel pretty good about the activity Given AR's strong balance sheet, liquids focus and the capital efficiency gains that AR's had, they pulled back capital over 25% and generating free cash flow despite gas prices being at kind of a 25 year low outside of COVID. So Feel pretty good about the outlook today, but the low end reflects potential slightly lower activity.

Speaker 4

Fair enough. I'll leave it there. Enjoy the rest of your morning.

Speaker 1

Thanks, Brent. Thank you.

Operator

Thank you. Our next question comes from the line of John McKay with Goldman Sachs. Please proceed with your question.

Speaker 5

Hey, good morning. Thanks for the time. Maybe just to pick up one on the gas macro there. I'm pretty sure I know what the answer is going to be, but just so we can kind of talk through it. We do need to see production kind of roll over somewhere in the U.

Speaker 5

S. On the gas side given where we sit right now. Just curious to hear your high level thoughts on kind of Where you think that would hit? What any impact at all you could see on AM? And I know it's kind of answered on the AR call a little bit, but maybe just go through that again for us.

Speaker 5

Thank you.

Speaker 1

Yes. Good question. I mean, I think, again, if you think about where it should come from, on the AR front, Given the liquids focus, liquids is driving the economics as we see other basins out there. And so Let me step back. Liquids is driving the economics and even at AR, you have gas volumes declining 3%.

Speaker 1

And so to the extent you had similar producers take an approach, I think that AR is you'd have a significant decline in production on the gas side. And so I think we view producers that have dry gas focused basis challenges, high declines, high capital intensity areas, those should all come down, which essentially is all the other gas basins if you don't have a liquid I think today. So we'd expect kind of an allocation across gas basins to see activity. You've seen some of that come out already with And we'd expect more of that as we move forward through the earnings season here.

Speaker 5

I appreciate that. And Look, you guys I guess second question, you guys give a lot of guidance on the forward look. So I'm not trying to pick apart too much. But I guess Last year, you guys kind of gave the forward look to 'twenty seven. This year, your kind of forward look didn't roll over a year.

Speaker 5

Is there anything special about 27 or 2028? Or is this kind of you've gotten into a pretty steady EBITDA outlook, pretty steady CapEx outlook, you'd generally expect that to hold through past the 27, I guess is the crux of the answer. Is that fair?

Speaker 1

Yes, that's well said. I mean, There's no material change to our outlook. And I think you can look at the remaining years and come to an average in terms of free cash flow after dividends and there's nothing in particular that would change that as you move into 2028 and beyond. We're executing on the plan we put out there. And to the extent something changed over time, we'd certainly update.

Speaker 1

But I think we continue to Expect those expectations. And AR has got plenty of inventory. Yes, there's over 20 years of inventory. I think 22 years was the number that they talked about on their call. And so plenty of inventory, like I said, multi decade inventory at AR.

Speaker 1

So no impact from an inventory. It's just a matter of There's no real material change beyond 'twenty seven and so did not really feel the need to go out another year just to extend the years that we've already put out there.

Speaker 5

That makes sense. 27 is far enough array already. I appreciate the time. Thank you.

Speaker 1

Thanks, John.

Operator

Thank you. Our next question comes from the line of Zach Van Eberyn with TPH. Please proceed with your question.

Speaker 1

Hey, guys. Thanks for taking my question. Just want to circle back on the production side to help me think through that. I believe AR mentioned 1% declines on total volumes 3% like you guys had mentioned on gas. So maybe just a refresher on that drilling partnership, are they just more incentivized to keep volumes flat around your system based on contracts or just any kind of clarity there would be helpful?

Speaker 1

Yes. So just a reminder, the drilling partnership is at all of the wells that AR drills during the year. And so with AR declining, AM gathers gross gas of course, gross wellhead gas. So AR's net gas volumes are not really reflective of the gross operated wellhead volumes. So with the gross operated wellhead volumes, which include QL and other non op interest owners which is a small component.

Speaker 1

That's where you get to Flat gross wellhead volumes year over year, which is what we talked about. Okay. That makes sense. And then just one on the I probably mispronounced this, but the Veolia lawsuit, I know in 2023, it was kind of going back and forth. Any date there on when that might come through and what you might do with that cash if it does?

Speaker 1

Yes. No update outside of what we've in the 10 ks, so always hard to pinpoint timing on those things and no update there. In terms of none of the guidance we put out there includes the To the extent the cash comes in, we'll certainly just evaluate like we do with our regular free cash flow and what's the best return on that cash flow to the extent it comes in.

Operator

Our next question comes from the line of Ned Baramov with Wells Fargo. Please proceed with your question.

Speaker 6

Hi, thanks for taking the question. It seems you'd continue to pay down debt even after hitting your 3 times target later this year. So what is the ultimate leverage metric you would like to get to at AM? Yes.

Speaker 1

I mean, again, I think we put out the 3 times. I don't think we're necessarily saying we're going to pay down more than the 3 times leverage. I think we're just saying we'll evaluate Once we get to that level, what makes the most sense between share repurchases, asset bolt on acquisitions, further dividend increases, I mean, I think we'll evaluate once we get to that point. As we sit here today, share repurchases certainly make a lot of sense, which is why we came out with our $500,000,000 share repurchase program, but we'll just continue to evaluate. And if you need to re up the share repurchase If you get through it over the next few years, then you'll do that.

Speaker 1

But no magic to that and no identified further leverage target beyond the 3 times right now.

Speaker 6

Got it. And then a quick clarification on Slide 10. Does the 2025 through 2027 outlook for free cash flows after dividends, does that reflect the impact of Share repurchases?

Speaker 1

That is before share repurchases. So you'd have slightly different after share repurchases.

Speaker 6

Okay, understood. And then a housekeeping item, if I may, just on some of the drivers for the water business. It seems that you're looking for fewer wells to be serviced in 2024. However, lateral length is now longer and I presume the barrels per foot is essentially unchanged, but net net my math seems to indicate that total water volumes should be pretty much unchanged in 'twenty four relative to 2023. Am I thinking about this correctly?

Speaker 1

No, they should be down. So The guidance we gave was about 20 fewer completions and lateral feet are up 2,000 feet. So you're down about 180,000 And so volumes are down about 15% to 20% overall, which is part of the guidance that we gave.

Speaker 6

Understood. Thanks for that. That's all I had.

Speaker 2

Thanks, Dan.

Operator

Thank you. Ladies and gentlemen, that concludes our question and session. I'll turn the floor back to Mr. Agnew for any final comments.

Speaker 1

Thank you everybody for joining today's conference call. Please feel free to reach out with any further questions.

Operator

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

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Key Takeaways

  • In 2023, Antero Midstream generated $981 million of EBITDA (18% ROIC) on a record operating performance and is guiding to a midpoint of $1.04 billion of EBITDA in 2024.
  • Capital expenditures declined to $185 million in 2023 (30% below 2022) and 2024 capex is set at $150–170 million (14% lower), highlighting unparalleled capital flexibility in its Marcellus liquids-rich corridor.
  • Free cash flow after dividends hit a record $155 million in 2023, leverage fell to 3.3×, and 2024 is targeting over $250 million of free cash flow after dividends with a strategy to maintain a $0.90/share dividend (7% yield), reduce debt to 3.0×, then execute a $500 million share buyback program.
  • Antero Resources, the primary customer, is forecast to deploy just $0.55/Mcfe of capex—40% below peer average—driving flat to modest throughput growth, high-teens ROIC on organic projects, and long-term visibility for AM’s backlog.
  • Propane inventories are down over 45 million barrels since October, lifting C3+ NGL prices to 57% of WTI and delivering a significant liquids pricing uplift that supports AR’s free cash flow and underpins AM’s stable 2024 guidance despite lower natural gas prices.
A.I. generated. May contain errors.
Earnings Conference Call
Antero Midstream Q4 2023
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