Antero Midstream Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 8 speakers on the call.

Operator

Please note this conference is being recorded.

Operator

At this time, I will now turn the conference over to Justin Agnew, Vice President of Finance. Justin, you may now begin your presentation.

Speaker 1

Thanks, operator, and good morning. Thank you for joining us for Antero Midstream's Q2 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 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.

Speaker 1

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 2

Thanks, Justin. Good morning, everyone. In my comments, I will discuss our bolt on acquisition and peer leading breakevens at AR, I'm referring to Antero Resources. Brendan will then walk through our quarterly results and recent credit improvements. Let's start on Slide number 3 titled Marcellus Bolt on Acquisition Highlights.

Speaker 2

During the Q2, we closed on a $70,000,000 acquisition from Summit Mid miles of high pressure pipelines in the Marcellus Shale, highlighted in purple on the map. These highly strategic assets are already connected to Antero Midstream's infrastructure and support the future development by Antero Resources, which is now an investment grade counterparty. In line with our previous bolt on acquisitions, all of the throughput volume on these assets is from Antero Resources production. Most importantly, this transaction was immediately accretive to free cash flow and keeps us on track to achieve our leverage target of 3.0x in the back half of this year. Now let's move on to Slide number 4 titled AR has the lowest free cash flow breakevens.

Speaker 2

The left hand side of the page illustrates AR's free cash flow breakeven gas price of $2.20 per Mcf. This peer leading breakeven is due to several factors including strong well performance, low maintenance capital requirements and high exposure to liquids prices. In particular, AR's exposure to international prices and widening ARPS have resulted in strong C3 plus NGL pricing, which provided a $1.10 per Mcfe uplift to the equivalent price realizations in the first half of twenty twenty four. These low breakeven prices led to a peer leading unhedged free cash flow profile which is shown on the right hand side of the page. Despite NYMEX gas prices of only 2 point 0 $7 in the first half of twenty twenty four, AR's unhedged outspend has only been $59,000,000 well below the rest of the natural gas peer group.

Speaker 2

These results combined with AR's balance sheet strength were the primary drivers of the upgrade to investment grade for AR. In summary, we continue to expand our asset base at AM to support the strongest producer with the lowest gas, natural gas breakeven prices in the U. S. And with that, I will turn the call over to Brendan.

Speaker 3

Thanks, Paul. I will begin my comments on Slide number 5 titled 2nd Quarter 2024 Highlights. Adjusted EBITDA for the 2nd quarter was $255,000,000 which was a 5% increase year over year. Free cash flow after dividends during the quarter was $43,000,000 a 41% increase compared to the Q2 of last year. Both of these metrics are quite notable given AR is only running 2 rigs and 1 completion crew today.

Speaker 3

Importantly, our leverage remained flat quarter over quarter at 3.1x despite the $70,000,000 cash funded acquisition during the quarter. This highlights the attractive purchase price and immediate accretion to AM's free cash flow from the bolt on acquisition. Next, let's move on to Slide 6, titled Improved Balance Sheet Flexibility. This slide highlights the successful refinancings in 2024 provides us with the financial flexibility to execute on our attractive organic capital program and acquisition opportunities. In January, we issued $600,000,000 of senior notes due in 2,032, which was upsized due to oversubscribed demand.

Speaker 3

Proceeds from the offering were used to call our highest coupon notes in May. This was an NPV positive refinancing, which lowers our go forward interest expense and expands our free cash flow. In July, we extended the maturity of our revolving credit facility to 2029 and maintained our $1,250,000,000 of commitments, providing additional near term balance sheet flexibility. As of June 30, we had $556,000,000 borrowed under our credit facility, resulting in almost $700,000,000 of liquidity. I'll finish my comments on Slide 7, citing consistent free cash

Speaker 1

flow and credit momentum.

Speaker 3

This slide illustrates Antero Midstream's leverage and credit ratings since we transitioned to a business model that generates consistent free cash flow after dividends in 2020. In May of this year, we received an upgrade from S and P to BB plus on our corporate credit rating. This is the 4th ratings increase from S and P since the end of 2020 and validates the significant progress we have made towards our debt and leverage targets. Over the same time frame, annual EBITDA has increased by over 25%. We have generated over $280,000,000 of cumulative free cash flow after dividends and we have reduced our leverage to 3.1x.

Speaker 3

All of this was accomplished while acquiring almost 300,000,000

Speaker 4

dollars of bolt on assets without any equity issuance.

Speaker 3

This is a testament to our patience and strict return thresholds on our acquisition opportunities, our ability to quickly integrate assets and drive synergies and our execution on our base organic growth business model. In summary, we continue to execute on our business plan of delivering organic growth supplemented by attractive bolt on asset acquisitions. We have taken a proactive approach towards debt reduction and extending debt maturities, which provides us with tremendous balance sheet strength and flexibility. As we approach our 3 times leverage target, we are well positioned to return additional capital to shareholders in the near term. With that, operator, we are ready to take questions.

Operator

Thank you. We'll now be conducting a question and answer

Speaker 3

Starting with the deferred pad at AR, was this potential delay in when AM begins to gather and compress volumes from these 5 wells reflected in your most recent guidance update from May? Yes. That's currently in the guidance update overall. To the extent that gets deferred further, that would also fall within our guidance range that we provided. So no change to what we provided out there as a result of that deferral to the end

Speaker 1

of the year.

Speaker 3

Understood. And then my second question, can you maybe shed some light on your water results in the Q2? It seems overall volumes declined to about 81,000 barrels a day from 100 and 13,000 barrels a day in the Q1. But at the same time, the number of serviced wells increased from 17 wells in the Q1 to 19. So I guess taken together, this implies much less water per well in the second quarter.

Speaker 3

So and I guess I presume this is related to the timing of well servicing, but any color you can provide would be helpful. Yes. No, it's a good question, Ed. It really is related to just how we define well service. So in particular, there was a 7 well pad that the wells began to be serviced at the end of June, but really most of that volume will come in the Q3.

Speaker 3

So the 19 wells, if you take out the 7 well pad, it's really like 12 wells. And the decline in volumes from the Q1 was really just a result of going AR going from 2 completion crews to 1 completion crew. So it's quite impressive actually today. We were looking back. Historically when you ran one completion crew, it was about 50,000 barrels a day.

Speaker 3

So today with 1 completion crew essentially delivering 80,000 barrels a day is quite impressive and just goes to the efficiency gains overall. But at AM, going back to your question on the 19 wells, it's really just driven by the timing and that's going to be Q3 that 7 well pad gets pushed to. Got it. Thanks for the time.

Speaker 1

Thank you, Ben.

Operator

The next question is from the line of Naomi Marsha with UBI. Please proceed with your questions.

Speaker 5

Hey, good morning. Maybe to start on some capital allocation question. It seems like you'll be achieving a 3 times leverage target sooner rather than later. AM has maintained its DPU for quite some time now. What's the thought process on buyback versus DPU raise once that leverage target is reached?

Speaker 5

And is there some M and A that could potentially complete the buyback?

Speaker 3

Yes. So again, I think we've talked about once we hit our 3x target, we'll start that buyback. Buybacks still look very attractive to us today. So second half of the year, we'd expect to start the buyback program. And I think we've got the $500,000,000 authorization out there.

Speaker 3

And so based on where we want to end up from a leverage standpoint, whether that's flat at 3x or 2.9, 2.8, I think we have to be cognizant of just where our equity is versus internal expectations. And again, today very attractive. So we would expect to use that $500,000,000 over a fairly short timeframe given where leverage would be trending over time here.

Speaker 5

Thanks. That's helpful. Maybe as a follow-up on drivers of base business. AM increased the 24 EBITDA guidance for the acquisition of assets from Thunderbird Stream. Can you help us understand the drivers of base business growth in 24 and how that sets up

Speaker 4

for 'twenty five?

Speaker 3

Yes. So for 'twenty four, again, we increased it by about 15 $1,000,000 That acquisition we talked about, if you do the math on the $15,000,000 increase, a little over $20,000,000 on an annualized basis, So about a 3.5x multiple on that acquisition. So it was a great, great acquisition from an economic standpoint, which again allowed us to keep our leverage flat despite acquiring that asset with cash. So still able to hit that 3x target in the second half, which was our original plan. As we look out, I think it will just depend on where the development plan goes at AR.

Speaker 3

AR is still talking about maintenance capital. So I think at AM, you'll obviously have the CPI on fees. And then on the volumes, should have flat volumes year over year, which gets you in that kind of low single digit from an EBITDA growth standpoint.

Operator

Our next questions are from the line of Jeremy Tonet with JPMorgan. Please proceed with your questions.

Speaker 6

Hey, this is Noah Katz on for Jeremy. First, I want to touch on the 19 wells you connected to the freshwater delivery system in the quarter, which brings you to 36 for the year. Should we expect for similar wells to be brought in service in 3Q and then for a step down in 4Q? Thanks.

Speaker 3

Yes. So if you look at guidance overall, we pushed or not pushed, but the 19 wells we talked about, really 7 of those 19, you're getting most of that volume in the Q3. But in terms of what we'd look to report from a well service, you should have a similar level in 3rd quarter, slight step down in Q3 from the Q2 in terms of well service. And then 4th quarter should be a similar level to what you see in Q1 assuming you run with the 2 completion crews. To the extent that add we talked about gets deferred, then you'd have less activity with those wells getting pushed out in the 4th quarter.

Speaker 6

Got it. That's helpful. And then as a follow-up, can you size the impact that AR having one less completion crew for the deliveries will have on volumes? And I guess what are your expectations for the number of completion crews that they'll have for the remainder of the year? Thanks.

Speaker 3

Yes. So looking at Q3, one completion crew again, we talked about the Q2 had one completion crew at about 80,000 barrels a day. So it's a fair assumption that will be a flat number running 1 completion crew in the 3rd quarter. And then in the Q4, to the extent you run 2 completion crews, I'd expect a similar level of volume to running those same amount of completion crews in the Q1. So pretty simple, I think, math on that just based on the completion crew count.

Speaker 6

Thank you.

Operator

Our next questions are from the line of John McKay with Goldman Sachs. Please proceed with your question.

Speaker 7

Hey, all. Thanks for the time. Maybe as just a quick follow-up there. We're looking at the guidance range for the back half of the year. I guess, how sensitive do you think you are to be able to start the buyback sometime in second half to the timing of that deferral at AR?

Speaker 7

I know we're talking relatively small dollars here, but just trying to figure out timing and if that would be a driver for, let's say, more of a 4th quarter start than, let's say, later this quarter?

Speaker 3

No. I mean, you're talking $3,000,000,000 of debt. So you're not moving the

Speaker 1

needle much by a change in EBITDA

Speaker 3

and the overall 3x leverage impact. So that's not really factoring into the timing there.

Speaker 7

Okay. Fair enough. More broadly, you guys have been talking up maybe some more third party opportunities. Maybe just an update on how those conversations are going, what we could be looking for, time frame, anything like that? Thanks.

Speaker 3

Yes, John. I think those conversations continue. We're always looking at 3rd party opportunities on the gathering side. I think we talked primarily about Ohio in the sense that we have excess capacity there. There is more activity going on in Ohio.

Speaker 3

So that we've had conversations there. But whether that comes to fruition, it's always tough to get 3rd party deals done. So whether that comes to fruition, I think, is still in the works. So nothing to add at this point. Got it.

Speaker 7

Thanks for your time.

Speaker 2

Thanks, John.

Operator

Our next question is from the line of Zach Van Averine with TPH. Please proceed with your question.

Speaker 4

Perfect. Thanks for taking my question, guys. I just got one for you today. Looks like rates across both gas and water ticked up quarter over quarter. I know the CPI escalators in Q1.

Speaker 4

So maybe just any color on what might be driving those rates a little bit higher? Yes.

Speaker 3

I think on the gathering, it was really the high pressure gathering rate. And that was just a function of how we're accounting for the Summit bolt on acquisitions there. So small change there, but again, just due to the accounting treatment. Still, when you think about EBITDA impact from that, again, it's in that $20,000,000 mark for annual EBITDA. It's just a matter of how it was accounted for in terms of fee versus volume.

Speaker 4

Got you. And then maybe on Water, it looks like that one went up quarter over quarter as well?

Speaker 3

Yes. I want to get back to you on that. There should be no real impact there on Water. So we'll come back to you on that one.

Speaker 4

All right. Perfect. Appreciate it. Thanks guys.

Speaker 2

Thanks, Jack.

Speaker 7

Thank you.

Operator

That will conclude our question and answer session. I'll now turn the call back to Justin Agnew for closing remarks.

Speaker 1

Thank you, everybody, for joining today. Please feel free to reach out with any questions.

Operator

This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation and have a wonderful day.

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