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Earnings Call Analysis
Q2-2024 Analysis
Antero Midstream Corp
During the second quarter, Antero Midstream closed a significant $70 million acquisition from Summit Midstream. This purchase included two compressor stations and approximately 50 miles of high-pressure pipelines in the Marcellus shale. Already interconnected with Antero Midstream's existing infrastructure, these assets will bolster future developments by Antero Resources, now an investment-grade counterparty. The acquisition brought immediate accretive benefits to free cash flow, contributing positively to the company’s financial health, and positioning them to meet a leverage target of 3.0x by the end of the year. An important takeaway here is the accretive nature of the acquisition, highlighting this as a strategic win for Antero Midstream.
Antero Resources demonstrated remarkable efficiency with a free cash flow breakeven gas price of $2.20 per Mcf. This low breakeven point is attributed to strong well performance, minimal maintenance capital needs, and substantial exposure to liquid prices. Furthermore, exposure to international prices and improved ARPS led to strong NGL pricing, providing a substantial $1.10 per Mcfe uplift in the first half of 2024. Despite NYMEX gas prices being only $2.07 during this period, Antero Resources maintained a favorable unhedged free cash flow profile, with outspend much lower than peers. Such financial resilience also contributed to an upgrade to investment grade for Antero Resources.
For the second quarter of 2024, Antero Midstream reported an adjusted EBITDA of $255 million, which marks a 5% increase year-over-year. The free cash flow after dividends rose impressively by 41%, reaching $43 million. These robust metrics are noteworthy given the company’s current operations with just 2 rigs and 1 completion crew. Furthermore, despite the acquisition expenditure, the company’s leverage remained stable at 3.1x, showcasing the acquisition’s immediate positive impact on free cash flow.
Antero Midstream successfully undertook refinancing activities in 2024 to enhance financial flexibility. In January, the company issued $600 million of senior notes due in 2032, benefiting from the oversubscribed demand, and used the proceeds to redeem higher coupon notes. This refinancing move is NPV positive and helps lower future interest expenses while increasing free cash flow. Additionally, the maturity extension of the revolving credit facility to 2029 ensured near-term balance sheet flexibility, with the company maintaining $1.25 billion in commitments.
Since transitioning to a business model generating consistent free cash flow after dividends in 2020, Antero Midstream has significantly improved its financial position. As of May, the company received a credit rating upgrade to BB+ from S&P—its fourth since 2020. Over this period, annual EBITDA has risen by over 25%, with cumulative free cash flow after dividends surpassing $280 million. Furthermore, the leverage ratio has been trimmed to 3.1x, all while acquiring nearly $300 million in assets without issuing new equity. This progress underscores disciplined acquisition strategies and effective integration capabilities, along with a balanced approach towards debt reduction.
Antero Midstream continues executing on its business plan, focusing on organic growth complemented by strategic bolt-on acquisitions. The company remains proactive in reducing debt and extending debt maturities. As it nears its leverage target of 3x, Antero is well-positioned for increased shareholder returns in the near term. Looking ahead, the company also explores opportunities with third-party entities, especially in Ohio, to maximize utilization of its capacity. However, these endeavors are subject to market conditions and negotiations.
Greetings. Welcome to the Antero Midstream Second Quarter 2024 Earnings Call. [Operator Instructions]. Please note this conference is being recorded. At this time, I'll now turn the conference over to Justin Agnew, Vice President of Finance. Justin, you may now begin your presentation.
Thanks, operator, and good morning. Thank you for joining us for Antero Midstream's second 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&A. I would also like to direct you to the home page 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. 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.
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 #3 titled Marcellus Bolt-on acquisition highlights. During the second quarter, we closed on a $70 million acquisition from Summit Midstream. The acquisition included two compressor stations with 100 million cubic feet a day of capacity and approximately 50 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 #4, titled, AR Has the Lowest Free Cash Flow Breakevens. 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+ NGL pricing which provided a $1.10 per Mcfe uplift to the equivalent price realizations in the first half of 2024.
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 $2.07 in the first half of 2024, AR's unhedged outspend has only been $59 million, well below the rest of the natural gas peer group. 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.
Thanks, Paul. I will begin my comments on Slide #5 titled Second Quarter 2024 highlights. Adjusted EBITDA for the second quarter was $255 million, which was a 5% increase year-over-year. Free cash flow after dividends during the quarter was $43 million, a 41% increase compared to the second quarter of last year. Both of these metrics are quite notable given AR is only running 2 rigs and 1 completion crew today. Importantly, our leverage remained flat quarter-over-quarter at 3.1x despite the $70 million 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 that provides us with the financial flexibility to execute on our attractive organic capital program and acquisition opportunities. In January, we issued $600 million of senior notes due in 2032, which was upsized due to oversubscribed demand. 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 $1.25 billion of commitments, providing additional near-term balance sheet flexibility.
As of June 30, we had $556 million borrowed under our credit facility, resulting in almost $700 million of liquidity. I'll finish my comments on Slide 7, titled Consistent Free Cash Flow and Credit Momentum. 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&P to BB+ on our corporate credit rating. This is the fourth ratings increase from S&P since the end of 2020 and validates the significant progress we have made towards our debt and leverage targets. Over this same time frame, annual EBITDA has increased by over 25%. We have generated over $280 million of cumulative free cash flow after dividends, and we have reduced our leverage to 3.1x.
All of this was accomplished while acquiring almost $300 million of bolt-on assets without any equity issuance. This is a testament to our patients and strict return threshold 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 3x 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 Instructions]. Our first question is from the line of Ned Baramov with Wells Fargo.
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've provided out there as a result of that deferral to the end of the year.
Understood. And then my second question, can you maybe shed some light on your water results in the second quarter. It seems overall volumes declined to about 81,000 barrels a day from 113,000 barrels a day in the first quarter. But at the same time, the number of serviced wells increased from 17 wells in the first quarter to 19. So I guess, taken together, this implies much less water per well in the second quarter. 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, Ned. 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 third quarter. 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 first quarter was really just a result of going AR going from two completion crews to one completion crew. So it's quite impressive actually today. We were looking back.
Historically, when you're one completion crew, it was about 50,000 barrels a day. So today, with one completion crew essentially delivering 80,000 barrels a day is quite impressive. And it just goes with 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 third quarter that 7-well packages pushed to.
The next question is from the line of Naomi Arsa with UBI.
Maybe to start on some capital allocation question. It seems like you'll be achieving a 3x level of stock sooner rather than later. AM has maintained its BP for quite some time now. What's the thought process on buyback within BP rate once that leverage target is achieved. And is there some M&A that could potentially compete with buyback.
Yes. So again, I think we've talked about once we hit our 3x target, we'll start that buyback, buyback 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 million authorization out there. And so based on where we want to end up from a leverage standpoint, whether that's flat at 3x or 2.9x, 2.8x. 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 million over a fairly short time frame given where leverage would be trending over time here.
Maybe as a follow-up on drivers of base business, AM increase the '24 EBITDA guidance post the acquisition of [indiscernible], can you help us understand the drivers of base business growth in '24 and how that steps up in '25?
Yes. So for '24, again, we increased it by about $15 million. That acquisition we talked about, if you do the math on the $15 million increase a little over $20 million on an annualized basis, still about a 3.5x multiple on that acquisition. So it was a 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.
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.
Our next questions are from the line of Jeremy Tonet with JPMorgan.
This is Noah Katz on for Jeremy. First, I wanted 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?
Yes. So if you look at guidance overall, we pushed -- well, not pushed. But the 19 wells we talked about, really 7 of those 19, you're getting most of that volume in the third quarter. But in terms of what we'd look to report from a well service, you should have a similar level in third quarter, slight step down in the third quarter from the second quarter in terms of well service. And then fourth quarter should be a similar level to what you see in first quarter, assuming you run with the two completion crews. To the extent that pad we talked about gets deferred, then you'd have less activity with those wells getting pushed out in the fourth quarter.
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?
Yes. So looking at third quarter, one completion crew again. We talked about the second quarter had one completion crew at about 80,000 barrels a day. So it's a fair assumption that will be a flat number running one completion crew in the third quarter. And then in the fourth quarter, to the extent you run two completion crews, I'd expect a similar level of volume to running those same amount of completion crews in the first quarter. So pretty simple, I think, math on that just based on the completion crew count.
Our next question is from the line of John Mackay with Goldman Sachs.
Maybe just a quick follow-up there for looking at the guidance range for the back half of the year, I guess, how sensitive do you think you are to being able to start the buyback sometime in the second half to the timing of that deferral at AR. 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 fourth quarter start than, let's say, later this quarter.
No. I mean you're talking $3 billion of debt. So you're not moving the needle much by a change in EBITDA and the overall 3x leverage impact. So that's not really factoring into the timing there.
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?
Yes, John, I think the conversations continue. We're always looking at third-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. So that we've had conversations there, but whether that comes to fruition, it's always tough to get third-party deals done. So whether that comes to fruition, I think is still in the works. So nothing to add at this point.
Our next question is from the line of Zack Everen with TPH.
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. So maybe just any color on what might be driving those rates a little bit higher.
Yes. 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 that are so a small change there. But again, just due to the accounting treatment. Still, when you think about EBITDA, in fact, from that, again, it's in that $20 million mark for annual EBITDA. It's just a matter of how it was accounted for in terms of fee versus volume.
Got you. And then maybe on water, it looks like that one went up quarter-over-quarter as well.
Yes, I want to get back to you on that, should be no real impact there on water. So we'll come back to you on that one.
That will conclude our question-and-answer session. I'll now turn the call back to Justin Agnew for closing remarks.
Thank you, everybody, for joining today. Please feel free to reach out with any questions.
This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.