Antero Midstream Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to Antero Midstream First Quarter 20 24 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. I would now like to turn the conference over to your host, Justin Agnew, Vice President of Finance and Investor Relations.

Speaker 1

Good morning. Thank you for joining us for Antero Midstream's Q1 investor conference call. We'll spend a few minutes going through the financial and operating highlights, then 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

Speaker 2

that will

Speaker 1

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. 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 3

Thanks, Justin. Good morning, everyone. In my comments, I will discuss our capital projects completed in the Q1, operational efficiencies in our water business and AR's peer leading free cash flow breakeven costs. Brendan will then go through our Q1 results which set multiple company records. Let's start with slide number 3 titled Continued Asset Optimization.

Speaker 3

At the end of the Q1, we placed our Grays Peak compressor station in service as depicted in the light blue outline on the north part of our map. This station was the 2nd compressor station that utilized relocated compressor units, which resulted in approximately $15,000,000 in capital savings. Grays Peak has an initial capacity of 160,000,000 cubic feet a day and will support the future throughput growth in the liquids rich corridor of AR's acreage position. Importantly, Grays Peak was placed online slightly ahead of schedule and on budget. This exemplifies our just in time capital investment philosophy and integrated planning with Antero Resources.

Speaker 3

Looking ahead, you can see in the yellow highlighted box where the future expansion of the Grays Peak station will occur. Our visibility into the future development of our dedicated acreage allows us to phase in capacity over time as needed. This maximizes our project rates of return and drives our peer leading return on invested capital. In addition to our capital efficiencies, we had significant operational efficiencies on the freshwater side of the business highlighted on Slide number 4 titled 2024 Completion Efficiencies. During the Q1 Antero Midstream delivered 113,000 barrels per day of fresh water to AR, who was running 1.3 completion crews on average.

Speaker 3

The last time AM delivered a similar amount of water during a quarter, AR was running 2 completion crews on average. So this is a 35% improvement. As depicted on the left hand side of the page, AR averaged 11.3 This performance is partially due to AAM's integrated fresh water delivery system. This which significantly reduces congestion on our pad sites. In addition, an underappreciated aspect of our operations is the integrated planning between AR and AM.

Speaker 3

This starts with efficient pad design incorporating gathering and water lines and that there's consistent communication between upstream and midstream teams and the elimination of non productive time. To put our planning sets into perspective, since AM acquired the water business almost a decade ago, we have had 0 missed completions with our freshwater delivery system, which is an outstanding achievement. Adding to the development stability at AR is its premium natural gas price realizations highlighted on Slide 5 titled Not All Transport to the Gulf Coast is Equal. This map illustrates AR's firm transportation portfolio directly into the heart of the LNG corridor. With several new LNG facilities starting up over the next several years, we expect to see a widening spread between sales points near Henry Hub and sales points outside of the Tier 1 markets.

Speaker 3

The blue callout box highlights a recent quote from a research commodity team that emphasizes this view. They believe sales points within 100 miles of Henry Hub could see prices above $5 per while sales points outside of that range could price at $3 to $4 per MMBtu. Importantly, 75% of AR's firm transportation delivers gas to these Tier 1 markets, providing direct exposure to these premium priced markets. This solidifies AM's position as the critical first mile infrastructure to supply LNG across the globe. I'll finish my comments on slide number 6 titled AR as the Lowest Free Cash Flow Breakevens.

Speaker 3

We previously put this slide out highlighting that AR's breakeven natural gas price was $2.27 on an unhedged basis. As you can see on the left hand side of the page, AR generated approximately $10,000,000 of unhedged free cash flow in the Q1 of 2024 when NYMEX gas averaged $2.24 per MMBtu. In combination, AR's capital efficiency, liquids pricing uplift and premium natural gas price realizations results in development stability that underpins AM's consistency. As a midstream provider, we desire to service producers with the lowest overall breakeven costs and AR certainly meets that test. With that, I will turn the call over to Brendan.

Speaker 3

Thanks, Paul.

Speaker 2

I will begin my comments on Slide number 7 titled Q1 2024 Highlights. The Q1 of 2024 was a record breaking quarter, both financially and operationally. Antero Midstream's organic growth strategy delivered a 4% 6% increase in gathering and processing volumes, compared to last year. We delivered double digit EBITDA growth combined with double digit declines in capital year over year. The growing EBITDA and declining capital resulted in $182,000,000 of free cash flow before dividends and $74,000,000 of free cash flow after dividends, both of which were company records.

Speaker 2

All of this record free cash flow was utilized to reduce absolute debt during the quarter. In combination, our EBITDA growth and declining debt resulted in leverage declining to 3.1x from 3.3x@yearend2023. The strong first quarter results place us on track to achieve our full year as a result of AR reducing its completion crews to 1 in February, consistent with our full year guidance. I'll finish my comments on Slide number 8 titled Executing on Debt and Leverage Reduction Plan. This page illustrates AM's free cash flow after dividends and leverage since we announced our 3x leverage target in the on our Q4 2022 earnings release.

Speaker 2

As you can see, after the initial outspend to fund the drilling partnership growth in the first half of twenty twenty two, we transitioned to generate consistent free cash flow after dividends. The first quarter represented the 7th consecutive quarter of generating free cash flow after dividends, which totaled almost $270,000,000 on a cumulative basis. This has been used to reduce absolute debt and internally finance 2 highly accretive bolt on acquisitions. In summary, our business continues to operate as efficiently as any midstream company in the industry and delivers consistent returns through commodity cycles. We are on track to achieve our 3x leverage target in the back half of twenty twenty four, which is almost a year and a half ahead of our initial target laid out at the end of 2020.

Speaker 2

This positions AM to pursue incremental return of capital to shareholders.

Operator

Our first question comes from Naomi Murfasha with UBS. Please proceed with your question.

Speaker 4

Hi, good morning all. Thank you for taking my question. Maybe to start, if you could touch on the theme of increased demand for power related to AI and data centers. Just curious on the opportunity set that AM has and if you've taken any step to commercialize on the BI trend? Thank you.

Speaker 5

So on the data center, I don't know if you caught the AR call, but we went through how much demand is coming from that in our basin, but also went through our firm transport portfolio to the Gulf Coast and that's where we're going to be directing all of our gas. All competition is good. Gulf Coast, we think, will get the premium for that. So that's where AR is focused. And of course, that would underpin AM's investments and allow AM visibility decades worth of development of this asset.

Speaker 4

Thanks for the color. Maybe to switch gears to some ROC opportunities. AM did announce buyback authorization last quarter and indicated that buybacks to start hitting to start post hitting the 3 times leverage target. Since we're almost there, how should we think about the timing of buybacks and capital allocation priorities between M and A and buybacks?

Speaker 2

Yes. Thanks for the question. This is Brendan. I think as we've talked about on past calls as well, I mean, we look at everything in terms of return on overall capital. So as we approach this 3x leverage target, as we mentioned, second half

Speaker 3

of this year, we'll look to

Speaker 2

it will be positioned as well to buy back shares or pay down further debt or execute further bolt on acquisitions. We got the $500,000,000 program out there as you mentioned, and we do see attractiveness in our shares still today. So as we sit here today, share buybacks would continue to make a lot of sense, but we'll certainly evaluate that as we hit that 3 times target hopefully in the second half of this year.

Speaker 4

Thanks for the colors. Hope you guys have a great rest of your day.

Speaker 1

Thank you. Thank you.

Operator

Our next question comes from John McHugh with Goldman Sachs. Please proceed with your question.

Speaker 6

Hey, thanks for the time. Maybe we'll pick up that last one a little bit, maybe not to put words in your mouth, but it does it had sounded like the buyback was kind of clearly front of the line for capital allocation decisions. But I just maybe looking for a clarification on that last comment there. Are you guys seeing maybe more bolt on opportunities than you'd expected before that look a little more attractive? I guess just curious if that kind of stack has changed at all or maybe I'm just reading a little too much into your last comment there?

Speaker 6

Thanks.

Speaker 2

Yes. No, I mean, I think it's the same messaging we've been given over the last several quarters, which is share buybacks as we sit here today continue to make a lot of sense for further return of capital. To the extent we come across opportunities similar to past opportunities on the bolt on where you've got high visibility into the assets and we'll certainly look at those type of opportunities. But share buybacks do continue to make a lot of sense we look at return of capital today.

Speaker 6

Okay. No, that's absolutely clear. Thanks for that. Maybe just shifting gears. On the AR call, there's a comment around there's the one pad, I guess, in Q3 that could push to the right or be deferred a little bit given where dry gas pricing is right now.

Speaker 6

Maybe if you could just kind of frame up for us what that could mean for AAM volumes back half of the year. Imagine it's a relatively small impact, but maybe just tie that together for

Speaker 5

us. Yes, this is Mike. It would not come on this year, so it would have no impact on AM volumes.

Speaker 6

You just comment on the water side then?

Speaker 5

Just on the water side.

Speaker 6

All right. Got it. Thank you. Appreciate the time.

Speaker 3

Thanks, John.

Operator

Our next question comes from Zach Van Averine with TPH and Company. Please proceed with your question.

Speaker 7

Hey, guys. Thanks for taking my question. Just a follow-up from the AR call, it sounds like they revised up their guidance kind of on the liquids rich area a little bit. Does that just provide more confidence around your volume forecast of flat to slight growth? Or are you guys leaning more towards that slight growth kind of higher end of the volume guidance?

Speaker 2

No, I think AR was solely really driven by the liquid side of banks. No change on the AUM front, just overall I think solidifies the guidance we put out there already.

Speaker 7

Got you. That makes sense. And then it does look like your guys' JV frac is full. I know on previous calls you mentioned there's plenty of capacity in the area on non JV fracs. Do you guys have to pay any 3rd party frac fees?

Speaker 7

And if so, would those show up just in direct OpEx under the G and P segment?

Speaker 2

Yes. We don't have any fees we're paying on that front. So nothing to note there.

Speaker 7

Okay, perfect. That's all I had. Thanks guys.

Speaker 2

Thanks, Chad.

Operator

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

Speaker 6

Hey, thanks for taking the question. One more on capital allocation, if I may. I called the approximately $2,000,000 repurchase of your 20 26 senior notes. So could you maybe elaborate a little bit more on the decision to buy back debt in the Q1 and whether your capital allocation framework assumes further debt pay down this year?

Speaker 2

Yes. Good question. I mean, we did the just to rewind a little bit, we did issues in senior notes in January, paid off our revolver. If you look at our senior notes outstanding, to the extent that it makes sense to repurchase notes versus having cash on the balance sheet, I think we'd certainly look to buy in bonds like you saw us do at the end of the quarter. But again, as we approach that 3x leverage target, then we'll look at further return on capital beyond the debt pay down.

Speaker 6

That makes sense. And then it seems you guys completed a small acquisition of gathering systems and other facilities in the Q1, not a material number relative to overall spending, but still it would be great to get some additional details on that purchase.

Speaker 2

Yes, we did purchase relatively actually sizable line, but just not much volume flowing through it. So we paid $2,000,000 for a nice asset that gives a lot of optionality to further capital savings. I think you've seen us over the years reuse compressor units and then through some of the bolt on acquisitions, we've been able to save on future capital use. I think that this is a good way to think about it. It's an asset that doesn't have much volume flowing through.

Speaker 2

We picked it up at a very attractive price, and we think it could be very helpful in terms of future capital savings down the road. So we'll provide probably further details down the road on that, but attractive piece of infrastructure to pick up at a very low price.

Operator

There are no further questions at this time. I'd like to turn the call back over to Justin Agnew for brief closing comments.

Speaker 1

Thank you, operator, and thank you to everybody who joined today's call. Please feel free to reach out with any follow-up questions.

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