Antero Midstream Corp

NYSE:AM

Earnings Call Analysis

Antero Midstream Q3: Growth and Efficiency

In Q3 2023, Antero Midstream (AM) continued its double-digit year-over-year throughput growth, handling over 3% of US natural gas. This was supported by Antero Resources's (AR) $340 million investment in an organic leasing strategy since 2021, leading to over 22 years of inventory for AM. AM's throughput has soared nearly 15% since 2021 while AR replenished its inventory despite peers' declining volumes. AR's production grew 9% in Q3 year-over-year, outperforming peers and driving a 13% increase in AM's gathering volumes. Alongside this operational success, AM hit a record $251 million in EBITDA, a 12% yearly rise, and generated $138 million in free cash flow before dividends—free cash flow after dividends hit $107 million, surpassing the full-year guidance midpoint in three quarters. Notably, free cash flow is projected to reach $145 million in 2023, nearly 40% over the initial $105 million projection.

Antero Midstream: A Thriving Business in a Growing Industry

Antero Midstream (AM) has been making headlines with its double-digit year-over-year throughput growth, contributing to its 3% share of the total U.S. natural gas production. Amidst this significant progress, a strategic organic leasing program initiated by its affiliate Antero Resources (AR) has led to a more than 15% increase in gathering volumes since 2021, dedicating over 22 years of inventory to AM and underscoring the company's ongoing success. AR's focus on cost-effective and capital-efficient land investments, including lateral extension and acreage consolidation, has not only bolstered production and reserves per well but also ensured capital efficient infrastructure build-outs, hallmarking AM's ascent as one of the industry's most capital-efficient midstream companies.

Historic Earnings and Operational Milestones

In the third quarter, AM's achievements were evident as it set a company record with $251 million of EBITDA, marking over $1 billion on an annualized basis—a testament to the company's potent growth strategy and operational finesse. The quarter saw a notable increase in low-pressure gathering and compression volumes, both up by 13% and 17% respectively, and both setting company records that speak to AM's operational success. Furthermore, approximately half of the growth is attributed to organic expansion, while the other half is leveraged from the Crestwood acquisition—collectively resulting in an uplift in EBITDA guidance.

Fiscal Prudence and Strategic Acquisitions

Antero Midstream's year-to-date free cash flow after dividends has surpassed its original guidance, reaching $107 million in just three quarters. This financial tailwind originates from a combination of over-performance, realizing synergies from strategic bolt-on acquisitions, and optimizing capital expenditure. With regard to the Crestwood and EnLink acquisitions, the company's robust free cash flow has positioned it for efficient balance sheet management, and it is well on track to pay off these acquisitions with just six to seven quarters of excess cash flow—a reflection of the resilience and strength of AM's business core.

Commitment to Environment, Safety, and Governance

In line with corporate responsibilities, Antero Midstream's commitment to Environment, Safety, and Governance (ESG) principles has been commendable. The company boasts one of the lowest methane leak rates in the industry and has a large-scale integrated water system allowing significant reuse and recycling of wastewater—a boon for the environment. All these achievements are secured while maintaining a stellar safety record, with eight consecutive years without an employee lost-time incident and a substantial reduction in the recorded incident rate by 59% in 2022, underscoring AM's dedication to safety and operational efficiency.

The Future Looks Bright with Growing Free Cash Flow

Looking ahead, Antero Midstream is on a confident stride with its financial guidance for 2023 reflecting a second increase within the year, signaling sustained operating and financial triumph. The company now anticipates free cash flow after dividends to reach $145 million at the midpoint of guidance, considerably above the initially projected $105 million. This financial strength lays the foundation for 2024, projecting further increases in free cash flow that could advance the company towards achieving its leverage target and magnify the return of capital to shareholders, marking a promising horizon for AM and its investors alike.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the Antero Midstream's Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you, Justin Agnew, Director of Finance. Thank you, Justin. You may begin.

[Justin Agnew, executive]

Good morning, and thank you for joining us for Antero Midstream's third 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've 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.

[Paul Rady, executive]

Thanks, Justin. In my comments, I will discuss the multi-decade inventory dedicated to AM and the AR capital efficiency achievements in 2023. Both of these attributes support the attractive and derisked long-term outlook at AM. Brendan will then discuss our third quarter financial results, repeatable free cash flow business model and 2022 ESG highlights.

Going to start my comments on Slide #3 titled Consistent Growth and Large Low-cost Inventory Dedicated to AM. This slide highlights the throughput growth at AM and drilling inventory for the natural gas peers at a $2.75 breakeven NYMEX gas price. During the third quarter, AM once again delivered double-digit year-over-year throughput growth. With gathering volumes well over 3 Bcf a day, AM now gathers roughly 3% of the total natural gas production in the United States, highlighting the growth and scale of AM's operations since 2021.

Similar to AM's organic growth strategy, AR has executed its organic leasing program investing $340 million in land capital since 2021. The result is over 22 years of inventory dedicated to AM based on the 2023 development pace as depicted on the right-hand side of the page. So while Antero Midstream's gathering volumes have increased nearly 15% since 2021, AR has more than replenished the multi-decade inventory that drove the throughput growth over that time frame. This organic leasing strategy is not only cost-effective for AR, but incredibly capital efficient at AM. A majority of the land capital is invested to extend laterals, fill-in acreage positions and block up AR's already contiguous acreage position. This results in more production and reserves per well for AM as well as more capital efficient infrastructure build-outs within the consolidated acreage position.

Now let's move to Slide #4, titled Most Capital-Efficient Customer in Appalachia. This slide illustrates the year-over-year change in production on the Y-axis and the year-over-year change in drilling and completion capital on the X-axis. While targeting a maintenance capital program, AR's third quarter 2023 production actually grew 9% year-over-year. This growth, combined with the contributions from the bolt-on acquisitions and drilling partnership, translated to a 13% year-over-year increase in gathering volumes at AM.

Conversely, when AR's peer group attempted to target a maintenance capital program, their volumes actually declined year-over-year. When you compare the production growth to the drilling and completion capital invested to deliver this growth, AR has been far and away the most capital-efficient operator in Appalachia over the last year. For reference, AR is consistently running 2 to 3 rigs and 1 to 2 completion crews, which is a very manageable and balanced development program for 1 of the largest natural gas producers in the U.S. This peer-leading capital efficiency, combined with strong balance sheet at AR, underpins the consistent development program that drives repeatable results at AM.

In summary, we continue to be 1 of the most capital-efficient midstream companies in the industry. The multi-decade, repeatable, low-cost inventory dedicated to AM combined with our unparalleled visibility consistently generates high teens return on invested capital or ROIC. These peer-leading returns on invested capital further supported by AR's peer-leading capital efficiency continues to drive value for AM shareholders.

With that, I turn the call over to Brendan.

[Brendan Krueger, executive]

Thanks, Paul. I will begin my comments on Slide #5 titled Operational Success Drives Earnings Growth. During the third quarter, we generated a company record $251 million of EBITDA or over $1 billion on an annualized basis, which was a 12% increase year-over-year. We also generated $138 million of free cash flow before dividends and $30 million of free cash flow after dividends. This free cash flow is utilized to reduce absolute debt and resulted in leverage declining to 3.4x, which is a reduction from 3.7x at year-end 2022. These financial achievements were a direct result of Antero Midstream's growth strategy and operational success.

During the third quarter, low pressure gathering and compression volumes increased by 13% and 17%, respectively, compared to the prior year quarter. Both throughput measures set company records for Antero Midstream. Of the 13% growth in low-pressure gathering volumes, approximately 6% was organic growth on our legacy assets and 7% was attributable to the Crestwood acquisition that closed in the fourth quarter of last year. The outperformance in AM's gathering and compression business, which drove the increase in our EBITDA guidance, was a result of outperformance on wells turned to sales in 2023, as Paul discussed, as well as the acceleration of completion throughout the year.

Now let's move on to Slide #6, titled Transition to Repeatable Free Cash Flow after Dividends. This quarter was our fifth straight quarter of generating free cash flow after dividends. Year-to-date, free cash flow after dividends has totaled $107 million, which is above our original full year guidance midpoint of $105 million, and we have achieved this in just 3 quarters. Antero Midstream's 2023 free cash flow has benefited from a combination of outperformance in our base business, realizing synergies from our bolt-on acquisitions and optimizing our capital budget.

Looking back at the Crestwood and EnLink acquisitions, we were well positioned to put both acquisitions on the balance sheet given our leverage position and visibility over the near term. To put it into context, we expect to essentially pay off both of these acquisitions with just 6 to 7 quarters of excess free cash flow after dividends. At the same time, we expect our leverage to decline by almost a turn over that period. This is an incredible feat and highlights just how strong AM's base business is as well as demonstrating how free cash flow accretive those acquisitions were.

Before finishing up our prepared remarks, I wanted to briefly touch on our 2022 ESG achievements on Slide #7. The data on this page was just recently published in our annual ESG report. In 2022, we delivered a methane leak loss rate of just 0.031%, 1 of the lowest in the midstream industry. Our integrated water system, the largest in Appalachia, allowed us to reuse or recycle 86% of our wastewater and eliminated over 12 million miles of truck traffic in our local communities. Importantly, while we have delivered significant growth over the last year, we have delivered it safely.

2022 marked the eighth straight year without an employee lost time incident, which is an incredible achievement and something we are very proud of here at Antero Midstream. We also had a 59% reduction in the total recordable incident rate in 2022 further highlighting the corporate focus on safe and efficient operations.

I'll finish my comments on Slide #8, titled Antero Midstream Checking all the Boxes. The first 3 quarters of 2023 have been incredibly successful from an operating and financial standpoint, which is reflected in the second guidance increase this year. The outperformance in our base business and successful integration of our complementary acquisitions, keep us on track to deliver a peer-leading ROIC in the high teens again in 2023. We have significantly derisked the business by transitioning to generate consistent free cash flow after dividends, which we now expect to total $145 million at the midpoint of guidance, which is almost 40% above our initial guidance of $105 million.

As we look to 2024, we expect a further meaningful increase in free cash flow after dividends. This will position AM well to achieve our 3x leverage target and increase our return of capital to shareholders.

In summary, we continue to build on our track record of delivering on our stated guidance and financial targets. More importantly, we deliver these through safe and efficient operations while being good stewards in our local communities.

With that, operator, we are ready to take questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Jeremy Tonet with JPMorgan.

[Unknown Analyst]

This is Noah on for Jeremy. I wanted to touch on your leverage target of achieving 3x by 2024. I guess just what -- how should we think about your capital allocation priorities after achieving this?

[Brendan Krueger, executive]

Yes. I think we've talked about this on some past calls as well. I mean I think overall, as we get closer to that target, we'll certainly evaluate where we are from an equity perspective and we'll look whether share repurchases or further debt paydown or increases to the dividend makes sense. I think as we've talked about in the past, having this visibility -- significant visibility into the long-term business of AM through the integration with AR, gives us a lot of perspective in terms of the underlying equity value. And as we sit here today, I think share repurchases continue to make a lot of sense for that further return of capital. But we'll certainly look at all of those as we approach that leverage target.

[Operator]

And the next question comes from the line of Brian Reynolds with UBS.

[Brian Reynolds, analyst]

Maybe to look ahead to 2024, given some of the recent '23 outperformance. Just kind of wondering if you could kind of characterize some of the tailwinds going into '24, just given the growth that should flow through some of the rate relief that will go away and then the CPI inflator. Should we kind of characterize this as mid-single-digit EBITDA growth? Or could we get into the low teens next year?

[Brendan Krueger, executive]

Yes. Good question, Brian. I think you kind of broke it down nicely. There's really the 3 components. So the fee rebates rolling off will be about $48 million next year. So that's roughly 5% growth on our -- on the midpoint of our guidance this year. The CPI, it's measured June to June. So we know that number already. It was -- it was a 3% CPI number, and then you take 55% of that. So you're, call it, 1.5%, so given that 6% to 7% overall EBITDA growth. And then if you look at the drilling partnership and what AR said, the benefit is that AR has continued to improve with well performance, acceleration of completions. And so the production number at AR is up over 200 million a day from year-end '22 to year-end '23.

And so depending on what they run from a maintenance capital plan will drive kind of that third component of growth at AM. So you can be anywhere, call it, in the 6% to 7% up to that low double-digit number that you talked about, just depending on the development plan that we see at the AR level and AM is well positioned just from a capital standpoint to be able to meet those levels.

[Brian Reynolds, analyst]

Great, makes sense. I appreciate all the color. Maybe as my follow-up, let's look even a little further ahead to 2025. The drill co with AR is expected to end, which could impact the water volumes at AM in '25. So just given where AR's balance sheet is relative to where it was a few years ago and then the call for natural gas, given the LNG supply, the demand that's coming online, and the call for gas from that gas basin. Just kind of curious of how we should think about maybe AR volumes picking up some of the drill co-activity that ultimately flows through to Antero Midstream on the water side?

[Brendan Krueger, executive]

Thanks. I think overall, as you look to 2025, I mean, the benefit for us looking at it from an AR AM perspective here is the gross wellhead volume, you've got the infrastructure in place from a gross wellhead volume perspective. And so once the drilling partnership rolls off, that's very -- it's very efficient to grow from a net perspective at AR into that infrastructure capacity that you already have from a processing, from a firm transport, from a gathering perspective. So if the prices hold with what the strip entails, I think that'd probably be a fair assumption that you maintain that gross wellhead volume at the AR level, and that will flow through to AM, of course.

[Operator]

And the next question comes from the line of Zack Van Everen with Tudor Pickering Holt.

[Zackery Van Everen, analyst]

Just 1 on the processing and frac side. I see you guys are running at or above nameplate for both of those. Have you looked into expanding that capacity? And if so, what would the CapEx spend look like on those?

[Brendan Krueger, executive]

Yes. No, I mean I think the benefit on the processing side is you typically can run about 10% above nameplate. So if you look just net to the JV at the 1.6 Bcf a day, that would be another $160 million of ability to grow. In addition to that, obviously, you've got the Utica, which there will be a couple of pads that will be turned on that AM's gathering in the Utica. And the benefit in the Utica from an AM perspective is a lot of that infrastructure is already built out.

So I think there's plenty of levers that can be pulled in terms of where development occurs, plus the ability to run above nameplate on the processing side. And then on the dry side, you've also got the assets we acquired from Crestwood, which give you the ability to move over there. So you've got Utica dry assets and Crestwood and the ability to run above the nameplate capacity and processing.

[Zackery Van Everen, analyst]

Got it. That makes sense. And then on the frac side, can you also run above that capacity? Or is that pretty limited?

[Brendan Krueger, executive]

The benefit on the frac side is the last frac that was there anyway is essentially unutilized. So you've got full capacity. It's just our frac 4. We elected to participate in the fourth fractionation unit. The fifth one, Hopedale 5, we elected not to participate and that 1 is essentially pretty empty. So you've got the ability to grow from an AR perspective and move into that fractionation facility.

[Operator]

[Operator Instructions] And the next question comes from the line of Gregg Brody with Bank of America.

[Gregg Brody, analyst]

Was trying to see if I can get back in within 30 minutes of the last call. But the -- just the -- 1 more M&A-related question, but this 1 is very specific to Antero Midstream. So we -- obviously, returning capital next year is a possibility. How do you think about the M&A landscape for Antero Midstream today? And if you think there's opportunities out there and does it make sense?

[Brendan Krueger, executive]

Yes. I mean on the AM side, you saw us do the 2, what we call kind of cleanup acquisitions, which were EnLink and Crestwood assets last year. Those were nice fold-in. AR volumes drove the asset cash flow there. So we'll look for other opportunities. There are a few opportunities out there probably smaller in scale. And then you occasionally see some larger opportunities with third parties and that's where you just need to get comfortable with a third-party perspective. And can you derisk it enough relative to the organic opportunities you have on the AR side. That's essentially how we look at M&A and how we'll continue to do that going forward.

[Operator]

There are no further questions at this time. And I would like to turn the floor back over to Justin Agnew for any closing comments.

[Justin Agnew, executive]

Thanks, everyone, for joining us today. Please feel free to reach out with any questions.

[Operator]

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