Antero Midstream Q1 2023 Earnings Call Transcript

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April 27, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Antero Midstream First Quarter 2023 Earnings Conference 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. It is now my pleasure to introduce your host, Justin Agnew, Director of Finance and Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Good morning. Thanks for joining us for Antero Midstream's Q1 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 I would also like to direct you to the homepage of our website at www.anteriormidstream.com, where we've provided a separate earnings call presentation that 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 measure. 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 Interment Street.

Speaker 1

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

Speaker 2

Thanks, Justin. I will start my comments on Slide number 3 titled Increasing Lateral Lengths, Enhancing AM Economics. The left hand side of the page illustrates the increase in lateral lengths of completed wells over the last several years. In 2023, the average lateral length for completed wells It's expected to be approximately 13,500 feet. During the Q1, longer laterals and higher Completion stages per day drove a 41% increase in freshwater delivery volumes year over year.

Speaker 2

This was despite servicing only 2 additional wells year over year. As shown on the right hand side of Page, longer laterals improve AM Economics by approximately $1,700,000 per well For every 1,000 feet of incremental lateral, given that there is no additional WellConnect capital required. Since 2017, lateral lengths have increased by approximately 4,000 feet on average. This has resulted in nearly $7,000,000 of incremental revenue per L, assuming an EUR of 2.0 Bcf per 1,000 feet. The longer laterals in addition to incremental locations Are a result of AR's consistent organic leasing program.

Speaker 2

During the Q1, AR invested $72,000,000 on organic leasehold, adding the equivalent of over 50 drilling locations. With AM servicing 23 well completions during the Q1, these organic leasing efforts Replenish the wells completed and added 27 more locations. Now Let's move to slide number 4, titled Operational Performance at AR. This slide highlights the operational efforts at AR that resulted in record performance at AM. Supported by AM's water business, AR averaged 11 completion stages per day, which In addition, AR set a new daily company record of 16 stages per day from 1 completion crew, which is an incredible achievement.

Speaker 2

Importantly, we continue to be very encouraged by the well productivity we are seeing on AM This operational performance and well productivity helped To drive record throughput and earnings at AM well ahead of expectations, these achievements are only possible with AM's integrated water system which has not missed or caused a delay in completions since AM acquired the business in 2015. Lastly, I want to highlight AR's Differentiated liquids strategy on Slide number 5. For the last decade, AR's strategy He has been to develop low cost, liquids rich locations in Appalachia and avoid local basis. As Depicted on the top half of the page, AR sells 100% of its gas outside of Appalachia and approximately 75% of its gas to the LNG fairway. This allows AR to avoid Volatile local basis in Appalachia, particularly in the shoulder season.

Speaker 2

The bottom half of the slide illustrates the liquids As a result of its diversified product mix, almost half of AR's revenues While we expect this downward cycle in gas prices to be shorter than prior cycles, these two characteristics insulate AM from any significant development risk. In summary, our operational performance during the Q1 allowed us to generate record results and increase our guidance ranges for the year. With that, I will turn the call over to Brendan Krueger. Brandon?

Speaker 1

Thanks, Paul. I'll start my comments by briefly highlighting the year over year results on Slide 6, titled Strong Start to 2023. During the Q1, low pressure gathering and compression volumes increased by 8% and 11%, respectively, compared to the prior year quarter. This year over year growth was driven by both organic throughput growth and a full quarter contribution from our bolt on acquisitions. This allowed us to generate adjusted EBITDA of $242,000,000 which was a 16% increase year over year and a new company record.

Speaker 1

Capital expenditures declined by 64% from the prior year quarter to $34,000,000 this quarter. This decline was driven by AM Completing a majority of its core infrastructure projects, supporting volumetric growth in 20222023. As a result of increasing EBITDA and declining capital, we transitioned from a $38,000,000 outspend during the prior year quarter to generate $46,000,000 of free cash flow after dividends this quarter. This was a company record for AM and this cash flow was used to pay down debt. As we look to the remainder of the year, we forecast investing approximately 60% of our capital budget in the second and third quarter, which we expect to result in lower free cash flow during those quarters before picking back up in the 4th quarter.

Speaker 1

I'll finish my comments on Slide 7, titled Operational Performance, Drives Increased Guidance for 2023. Driven by the exceptional operational Results in the Q1 Paul discussed in his remarks. We increased our adjusted EBITDA guidance by $20,000,000 to a range of $950,000,000 to 9 This was a result of both an acceleration in the completion schedule that will drive slightly higher throughput in the back half of the year and encouraging well productivity. From a freshwater delivery timing perspective, it will result in modestly lower freshwater delivery volumes The second quarter as a result of those budgeted volumes accelerated into the Q1. Trueing up our capital for the Q1 results, continued efficiency gains and the deferral of 1 capital project into 2024, we are revising our capital budget down $15,000,000 to a midpoint of 190,000,000 Higher EBITDA and lower capital result in a $35,000,000 increase to our free cash flow before dividends to $570,000,000 at the midpoint of guidance, which reflects an attractive 12% free cash flow yield at today's prices.

Speaker 1

Lastly, we expect to generate $140,000,000 of free cash flow after dividends at the midpoint of guidance. This free cash flow will be used for continued debt reduction Throughout 2023 as we make progress towards our 3x leverage target in 2024. Importantly, as we look ahead to 2024, We expect free cash flow after dividends to continue to expand north of $200,000,000 driven by de risked EBITDA growth as the low pressure gathering rebate expires at the end of this year. Before concluding my remarks, I would also like to highlight that AR Received a positive ratings outlook from S and P this morning on a BB plus corporate rating. With a further upgrade from S and P, AR would achieve Given the investment grade rating at Fitch already.

Speaker 1

In summary, AM continues to block and tackle and deliver strong operations quarter after quarter. Our strategy of enhancing our organic growth by integrating strategic bolt on acquisitions or third party business continues to pay dividends for our shareholders. As we look ahead, we will continue to grow our free cash flow generated by our highly visible, high return projects that deliver shareholder value for the decades ahead. With that, operator, we are ready to take questions.

Operator

Thank you. At this time, we will be conducting our question and answer session. Our first question is coming from the line of Colton Bean with Tudor, Pickering, Holt. Please proceed with your question.

Speaker 3

Good morning. So just wanted to start off on your capital allocation priorities for 2024. I think based on the guidance update this year and the roll off of Rebate framework that you mentioned, it seems likely to hit that leverage target heading into next year. So as we sit here today, can you just frame what Priorities might be as you achieve that leverage target, whether that's further debt reduction, return to distribution growth or ramping share repurchases?

Speaker 1

Yes. Great question, Colton. I think as we look to 2024, we'll certainly evaluate where we're at, at that point. I think if We're at the same price we are at today from a share price perspective. Share repurchases would certainly be an attractive option to us.

Speaker 1

We've talked about it in the past, but AR continues to add organic inventory, which is all dedicated to AM, so that inventory and length of inventory which just makes the share repurchases that much more attractive as you look at just the implied valuation of AM relative to the price today. So, As we look out, share repurchases would be at the top of the stack, but we'll continue to evaluate as we get closer to that 3 times target.

Speaker 3

Great. And then shifting to operations, I think Q1 saw a bit of a step up in gathering OpEx. Do you view that as a new run rate for the business? Or was there anything specific Q1, which might result in lower unit OpEx through the balance of the year.

Speaker 1

No. We did have some heavy maintenance that slid into Q1 on some of our compression. So Would not expect that to be a consistent run rate number going forward. Should see some of that come off. Perfect.

Speaker 1

Appreciate the time.

Speaker 2

Thanks. Thanks, Paul.

Operator

Thank you. Our next question is coming from the line of Mark Solisito with Barclays. Please proceed with your question.

Speaker 4

Hi, good morning. So you mentioned the acceleration of completion activity in well performance driving the upward revision in 2023 EBITDA guidance. Wondering if you could just comment on the carry forward into 2024 or the 4Q 2023 exit rate heading into next year And ultimately, whether the anticipated timing again into your leverage target has perhaps been pulled forward at all?

Speaker 1

Yes. I mean, I think overall, we've We still expect to hit that 3 times target in 2024. So no change on that. We'll make good progress this year With the free cash flow after dividends expected at $140,000,000 and that will all go to debt pay down. You'll move down nicely from our 3.7x leverage at year end, but still expect to achieve that 3x target in 2024.

Speaker 4

Got it. And maybe just to clarify, I think before was later in 2024. Any acceleration there?

Speaker 1

Yes, you may see a quarter acceleration just due to the increase that we've seen this year and the updated guidance.

Speaker 4

Got it. Appreciate the time.

Speaker 2

Sure. Thanks. Thank you.

Operator

Thank you. Our next question is coming from the line of Sunil Sibal with Seaport Global Securities. Please proceed with your question.

Speaker 5

Yes. Hi, everybody. So I just wanted to touch upon the acquisitions that you completed last year. I I was curious how is that integration gone? And then how is the Crestwood assets contributing All contributed to the Q1 results.

Speaker 1

Yes. No, the integration has gone terrific so far. We have 2 acquisitions, Crestwood and then a small acquisition from EnLink on the compression side, fully integrated now. And from contribution standpoint, roughly $8,000,000 to $9,000,000 from those acquisitions in the quarter. So nice contribution from those assets and we'll look to continue with those assets going forward.

Speaker 5

Thanks for that. And then could you remind us how much is your 3rd party business? Has that changed in any significant way with this Acquisitions, I know EnLink assets are all handling Entero's volumes.

Speaker 1

Yes, no change there. They were nice, as we've talked about, nice fold in acquisitions just given that AR was the primary and sole Customer on those assets driving all the volume. And so very comfortable with the volume projections on those assets moving forward.

Speaker 5

Understood. And then one broader question with regard to your 3x leverage. I was kind of curious, You're trying to hit certain credit ratings also when you look at 3x leverage or how do you kind of 0 in on a 3x Leverage number, when you think about this conceptually?

Speaker 1

Yes. I mean, I think if you look at the mid Stream landscape, 3x leverage would certainly put you kind of ahead of the pack relative to where others are at. I think We've certainly had conversations with the rating agencies. We talked about the upgrade That AR did receive from S and P in terms of the ratings outlook this morning. And so I think from the AM standpoint, Continuing to reduce the debt there should pay off from a rating standpoint down the road as well.

Speaker 5

Got it. Thanks for that.

Operator

Thank you. Our next question is coming from the line of Ned Baramov with Wells Fargo. Please proceed with your question.

Speaker 6

Hey, thanks for taking the questions. One on CapEx. So in light of the lower CapEx budget in 2023 and some of the efficiencies and lower materials costs, could you maybe talk about Any potential reductions in the cumulative CapEx backlog through 2027, I believe that's at 950,000,000

Speaker 1

Yes. So from that standpoint, I think we'll continue to evaluate and I think you've seen that every single year at AM where capital has come in Lower than what we've guided. I don't think we have a change in the 5 year right now. But as you've seen, we are always working to lower that capital We've talked about it on past calls, but the acquisitions did come with some Incremental compression, that's certainly been helpful in terms of being able to reuse that compression and avoid further build out of compression down the road. We'll look to continue to optimize the assets as we move forward and would look to hopefully bring that number down over time as we have historically.

Speaker 6

That makes sense. And then one housekeeping item. How much of the 3 point 1.7 Bcf per day of low pressure gathering volumes were from Crestwood. And I guess similar question on the high pressure volumes Or what was the Crestwood Marcellus share in the 2.8 Bcf per day of high pressure volumes?

Speaker 1

Yes. So the Crestwood is really just a low pressure in And so it's about $200,000,000 a day is related to the Crestwood assets.

Speaker 6

Great. Thank you. That's all I had.

Operator

It appears we have no additional questions at this time. So I'll pass the floor back over to Mr. Agnew for any additional concluding remarks.

Speaker 1

Thanks, operator, and thanks to everybody for joining today's call. If you have any further questions or follow ups, please feel free to reach out.

Operator

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

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