Antero Midstream Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 6 speakers on the call.

Operator

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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Justin Agnew, Director of Finance. Thank you. Please go ahead.

Speaker 1

Good morning, and thank you for joining us for Antero Midstream's 2nd quarter investor conference call. We'll 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 measures. Please refer to our earnings press release for important disclosures regarding such Including reconciliations to the most comparable GAAP financial measures. Joining me on the call today are Paul Rady, Chairman, CEO 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.

Speaker 2

Thanks Justin. Antero Midstream delivered another terrific quarter building upon the momentum generated in The Q1 of 2023. In my comments, I will discuss the operational and capital efficiencies at both AM And they are. Brendan will then walk through the financial results that have put us on track to achieve our 20 I'll start my comments on Slide number 3 titled Drilling and Completion Efficiencies at After a record breaking Q1 operationally, AR has continued success during the Q2. As shown on the top left portion of the page, during the Q2, AR completed over 11 stages per day.

Speaker 2

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 outs averaged 4,250 feet per day during the Q2, a 9% increase compared to 2022 And a 50% improvement compared to 2019. These two factors have resulted in 65 These cycle times reflect the number of days it takes to drill, complete and place a pad to sales. Shorter cycle times equate to better capital efficiency and returns at AR, which drives the ability to consistently develop its acreage

Speaker 1

Now

Speaker 2

let's move to Slide number 4 titled Optimizing compression and processing utilization. The top half of the page illustrates our compression capacity, Including organically built compression in green and acquired compression capacity in blue. Historically, we have consistently maintained high utilization rates as a result of our just in time capital investment philosophy. The recent acquisitions have increased our compression capacity by over 1 Bcf a day, including underutilized capacity that will support capital efficient future development. Importantly, we valued our acquisitions in 22 on a PDP only basis, so any development on the systems or reuse of underutilized assets is upside for AM.

Speaker 2

The bottom half of the page illustrates our joint venture processing capacity in the Marcellus Shale. During the Q2, our JV processing capacity of 1.6 Bcf a day was 100% utilized As a result of growth in the liquids rich Marcellus Shale. As a reminder, we can generally run 10% above nameplate processing capacity, providing additional runway for growth. One of the under recognized aspects of Antero Midstream's business model is the coordinated planning effort with Antero Resources. For example, AR will be drilling 2 pads in the Ohio Utica Shale later this year.

Speaker 2

This will help manage overall infrastructure and provide attractive Chicago pricing in the winter months for AR. Lastly, I want To touch on our compression capacity relocation efforts on Slide number 5. These relocation efforts result in Capital savings for AM and peer leading returns on invested capital. During 2022, we Successfully relocated 4 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 8 units on the East Mountain Station Over to our Grey's Peak station, colored in blue.

Speaker 2

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 poured the foundations for the additional units That will be relocated to this station. 8 of the 12 units at the Grays Peak station will be relocated units from East Mountain, Resulting in 120,000,000 cubic feet a day of initial capacity. In summary, both AR and AM are displaying Credible operational and capital efficiencies in 2023. This supports a stable outlook and gives us confidence

Speaker 1

Thanks, Paul. I'll start my comments by briefly highlighting the year over year results on Slide number 6, titled Operational Success During the Q2, low pressure gathering and compression volumes increased by 11% and 17%, respectively, compared to the prior 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 Crestwood acquisition that closed in the Q4 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% from the prior year quarter to $49,000,000 this quarter.

Speaker 1

As a result of increasing EBITDA and declining capital, We generated $139,000,000 of free cash flow before dividends and $31,000,000 of free cash flow after dividends. This was the 4th straight quarter of generating positive free cash flow after dividends and the 2nd highest quarterly free cash flow after dividends behind the Q1 Now let's move on to slide number 7, titled 10% Year Over Year EBITDA Growth to walk through the drivers of the EBITDA growth at AM. All right. Our gathering and compression EBITDA is shown in green. Our processing fractionation and Stonewall joint ventures are shown in purple And our water business is illustrated in blue.

Speaker 1

As depicted on the slide, our gathering and compression business increased by $22,000,000 year over year and 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 GMP business, which continues to be a larger and larger percentage of our overall business. In the Q2 of 2023, Our gathering and processing business made up approximately 86% of our EBITDA and we see that growing towards 90% over next several years as the cash flow from this business continues to grow. While making up just 14% of our overall EBITDA, our water business Still have some of the highest project economics. This is a function of the short payback period of our PAD Connect capital investment, particularly as the cycle times in AR continue to improve.

Speaker 1

I'll finish my comments on Slide number 8 titled AM Checking All the Boxes. The first half of twenty twenty three has 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 have 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 de risked the business by transitioning to generate consistent free cash flow after dividends, which has totaled $77,000,000 year to date.

Speaker 1

This has allowed us to reduce absolute debt and drive our leverage down to 3.5 times We believe these best in class attributes, checking all of the boxes to be a premier midstream company, position AM to increase our return of capital to shareholders 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.

Operator

Thank you. The floor is now open for questions. The first question is coming from Brian Reynolds of UBS. Please go ahead.

Speaker 3

Hi, good afternoon, everyone. Quick question on just the guidance between the Antero families. It seems like AR raised its production by 100 mcf per day, and that seemed to be related to some noise around ethane and some cracker downtime, but was curious if you could explain if this is no impact to AM And whether some of that was captured in AM's 1Q quarterly EBITDA guidance update? Thanks.

Speaker 1

Good question, Brian. Overall, to your comments, AM did increase guidance in the Q1. AM was comfortable with the gross wellhead volumes, which is what drives its EBITDA increasing. But for AR, as you're probably aware, they guide on a net equivalent production basis. And so with the ethane volumes Being risked further, they wanted to wait another quarter before providing an update on guidance.

Speaker 1

So no change overall. I will say it is positive for AM in the sense that AR did guide to higher volumes and also talked about the fact that 2024 Would be maintained at those higher volumes. So that is a new piece of information, I think, that would drive AM's 2024 volumes.

Speaker 3

Great. Super helpful. Thanks. And then just a follow-up on just return to capital opportunities into 'twenty four. You have a potential investment upgrade at the AR level, which could read through to AM.

Speaker 3

So just kind of curious as we think about potential Financing of those 26 to 29 bullet maturities and how that could potentially impact the return of capital that works, that is As AM trends below 3x leverage next year. Thanks.

Speaker 1

Yes. No, I think as we look at the balance sheet for AM, You've got a couple of attributes there. You have the declining leverage to the 3 times level, which will be positive for its own Balance sheet and investment ratings and then you have, as you mentioned, the AR credit rating. To That AR gets upgraded, AM would automatically get upgraded. And then that combined with the momentum with the leverage reduction Should improve the overall credit profile at AAM.

Speaker 1

So we'll continue to be patient, watch the market on the bonds and we'll be opportunistic in terms of refinancing those bonds as they come Those bonds as they come

Operator

Thank you. Thank you. The next question is coming from Jeremy Tonet of JPMorgan. Please go ahead.

Speaker 4

Hey, everyone. This is Eli Jocelyn on for Jeremy. Just hoping to get a little guidance for well completion Cadence for the rest of the year across the water business. How should we be thinking about that in the near term?

Speaker 1

Yes. So I think overall, we gave guidance for the year, which was 75 to 80 wells serviced by the water business. You're at 45 ish in the first half. There are 2 or 3 wells that you'll see most of that impact. It started we base it on when you start the completion.

Speaker 1

You'll see most of that water impact though in the Q3 for 2 to 3 wells. And then the remainder of that 75% to 80% 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.

Speaker 4

Got it. That's helpful. Thanks. And then maybe moving to kind of CapEx through the rest of the year. I know you guys are guiding to a midpoint of about 190 and I know there's probably a little over 100 left.

Speaker 4

Maybe just some more color on what's on the docket for the spend there? Any specifics would be helpful. Thanks guys.

Speaker 1

Yes. I think in line with historical levels, typically, you do you're able to invest more capital and build out in the summer months with better weather. So you typically see Q2 and Q3 being the higher capital levels and then see that trend off in the Q4. So I'd put that in the same ballpark this year In terms of how you get to the midpoint of capital guidance.

Speaker 4

Great. Thanks. I'll leave it there.

Speaker 1

Thank you. Thanks.

Operator

Thank you. The next question is coming from Ned Bromonov of Wells Fargo. Please go ahead.

Speaker 5

Hey, good afternoon. Thanks for taking the questions. Just building on the previous question, can you talk about the impact to AM from AR's improved well productivity. I presume that will result in some capital efficiencies on the midstream side too, but Appreciate any additional details you can provide on your 2024 and 2025 CapEx program at AUM.

Speaker 1

Yes. No, it's a great question. I think as you look at the capital program for AM, you have the benefit of the Efficiency gains at AR, which leads to lower well connect capital needed on the AM side. You continue to have larger Higher lateral feet per well on average each year, so that's beneficial to Aon's capital program. And then the second piece We've talked a little bit on past calls.

Speaker 1

It's just related to compression reuse. So you're starting to see more of that benefit. You'll see that play out particularly in 2024 with about $15,000,000 of incremental savings Related to that compression reuse that Paul talked about in his prepared remarks. So Excited about the capital program going forward. You should see 24 Capital lower than 23 Capital.

Speaker 1

And then on the volume side, just as a reminder again, The fee rebates are falling away on the AM side in 2024. When you combine that with the fact that AR is Maintaining production at the higher levels, it equates to nice single to high single digit EBITDA growth at AM as you move into 2024. Great spot to be in for AM to have consecutive years of strong EBITDA growth and capital declining. Good spot to be in as we look

Speaker 5

forward. Got it. And then the $15,000,000 of CapEx savings on compression reuse, is that really the savings from compression relocation Where versus the cost of building new compression?

Speaker 1

Well, it depends on how much how many units you're relocating. So Next year, you'll see $15,000,000 Overall, we've talked about a total number in the $50,000,000 level On 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 see us update those numbers moving forward, but the total number is $50,000,000 and $15,000,000 of that you'll see in 2024.

Speaker 5

I guess as a rule of thumb, can you provide a number of what's the cost of relocating equipment versus the cost of building new equipment?

Speaker 1

So we're relocating call it 120 a day of compression capacity and saving 15,000,000. So I think that's probably a fair ratio to assume moving forward.

Speaker 5

Yes. Got it. Very helpful. Thank you. That's all I had.

Speaker 4

Sure.

Operator

Our next question is coming from Gregg Brody of Bank of America. Please go ahead.

Speaker 2

Good afternoon, again guys. Just was wondering, I know you've had your disclosures on the Clearwater facility litigation. It's Pretty clear, but I'm just curious if you could talk about how much what you think the time frame is for this resolving? I know there's appeals, possibilities, but Wondering if you could frame it for us.

Speaker 1

Yes, Greg. Unfortunately, we can't really comment on the pending litigation outside of what we've already disclosed in the So I'll just direct you to the 10 Q for our disclosures there.

Speaker 2

I appreciate the limitation. Thanks guys.

Speaker 1

Thanks.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Agnew for closing comments.

Speaker 1

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

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.

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