Antero Midstream Corp

NYSE:AM

Earnings Call Analysis

Strong Financial Performance Amid Market Challenges

Antero Midstream reported robust financial results for the third quarter of 2024, generating an EBITDA of $256 million—a 2% increase compared to the previous year. While throughput volumes remained relatively flat, and freshwater delivery volumes dipped due to operational adjustments, the free cash flow after dividends increased significantly by 32% year-over-year to $40 million. This upward trend in free cash flow reflects the company's vigorous efforts to maintain financial discipline and operational efficiency, even in a challenging natural gas price environment.

Focused Capital Management

The company continued with its strategic capital management, having invested $56 million in the third quarter, which accounted for 35% of its full-year budget of $150 million to $170 million. The unexpected favorable weather allowed for accelerated investment, paving the way for projected significant declines in capital expenditure for the fourth quarter. This strategic adjustment is expected to bolster free cash flow further, enabling enhanced debt reduction and improving leverage to below 3x by year-end—a target initially set for 2025, revealing Antero Midstream's effective maneuvering within its capital strategy.

Growth Supported by Optimized Operations

Antero Midstream's integrated midstream system is designed to capitalize on the increasing demand for liquids-rich infrastructure in the Appalachia region. The company’s return on invested capital has been impressive, achieving high teens percentages through targeted organic investments. Notably, the construction of the Torreys Peak compressor station, set to commence operations in Q2 2025, is expected to add sizable capacity, further consolidating the firm’s position in the market. Ongoing performance metrics suggest a capacity for sustained growth amid fluctuating demand dynamics.

Strategic Competitiveness through Pricing Power

The company leverages its competitive edge in the international propane market, capitalizing on the current premium prices which have expanded to the high $0.20 per gallon range due to strong international demand and limited Gulf Coast export capacity. This advantageous pricing structure is expected to last into 2025, thereby enhancing free cash flow and positioning Antero Midstream favorably against peers, underscoring the company's ability to operate efficiently in a fluctuating market.

Predictable Future Growth Trajectory

Looking ahead, Antero Midstream projects mild growth, with low to mid-single-digit increases anticipated in gathering volumes driven by slight escalations in costs and ongoing operational expansions. Despite recent reductions in completion crew activities and rigs, the foundational aspects of the business remain intact, and the integration of acquisitions positions Antero for continued EBITDA and cash flow growth. With expectations to internally finance expansions, the company is well-prepared to return capital to shareholders.

Conclusion: Aiming for Value and Stability

Overall, Antero Midstream’s strong financial performance, disciplined capital management, and strategic positioning in both domestic and international markets underscore its resilience and growth potential. Investors can consider the company's plans to enhance shareholder value through effective debt management, potential buybacks, and robust cash flow generation as key indicators of its long-term stability and profitability.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to Antero Midstream Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Justin Agnew, Vice President of Finance and Investor Relations. Thank you, Mr. Agnew, 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 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. 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, and good morning, everyone. In my comments, I will discuss AM's 2024 capital budget as well as AR's peer-leading free cash flow breakevens supported by strong international LPG pricing. Brendan will then walk through our third quarter results and fourth quarter outlook.

Let me start on Slide #3 titled Efficiently Executing on 2024 Capital Program. The left-hand side of the page illustrates our 2024 capital expenditures compared to our budget of $150 million to $170 million. As we laid out in our initial guidance earlier this year, we had expected a majority of the capital to be invested in the second and third quarters as summer weather conditions are supportive of construction in Appalachia.

During the third quarter, as a result of more favorable weather conditions, we accelerated some capital initially scheduled for later in the year. This resulted in $56 million invested during the third quarter or 35% of the full year budget. Because of this acceleration, we expect a significant decline in capital in the fourth quarter and also expect to end the year within our annual capital budget guidance range.

Looking at Page #3, the pictures on the right-hand side of the page depict our Torreys Peak compressor station. We continue to make good progress on the construction of this station, which is expected to have 160 million cubic feet a day of capacity. This station is expected to be placed online in the second quarter of 2025, and is located in the heart of our liquids-rich midstream corridor.

Now let's move on to Slide #4, titled International Premium Support AR Free Cash Flow. The left-hand side of the page depicts the premium that AR receives on its propane exports transported on the Mariner East pipeline and exported out of Marcus Hook, Pennsylvania. This premium has expanded into the high $0.20 per gallon range as a result of strong international demand, combined with export constraints along the Gulf Coast. This is a distinct competitive advantage for AR to have unconstrained access to the international markets and to be able to capture these premiums by selling propane at the dock at Marcus Hook.

Importantly, we expect these premiums to persist into 2025 until additional export capacity along the Gulf Coast is placed online. These premiums AR's significant liquids exposure and capital efficiencies that have resulted in peer-leading unhedged free cash flow breakevens in 2024. As you can see on the right-hand side of the page, AR's unhedged free cash flow breakevens are approximately $2.20 per Mcf of gas, well below other natural gas peers. This allows AR to continue operating in a maintenance capital level even in today's depressed natural gas environment, providing development and earnings stability for AM.

With that, I will turn the call over to Brendan Krueger.

[Brendan Krueger, executive]

Thanks, Paul. I will begin my comments on Slide #5 titled Third Quarter 2024 Highlights. During the quarter, we generated EBITDA of $256 million, which was a 2% increase year-over-year. Throughput volumes were approximately flat compared to the second quarter and freshwater delivery volumes declined sequentially as a result of AR operating one completion crew and deferring a DUC pad out of the third quarter due to depressed natural gas prices.

Free cash flow after dividends was $40 million, which was a 32% increase from last year. All free cash flow during the quarter was utilized to reduce absolute debt and resulted in leverage of 3.1x as of September 30. Looking ahead to the fourth quarter and reiterating Paul's earlier comments, we expect a significant decline in capital as a result of the acceleration that occurred in the third quarter. This is expected to result in increasing free cash flow, additional absolute debt reduction and leverage declining below 3x during the fourth quarter.

Next, let's move on to Slide #6 titled Consistent Free Cash Flow Generation. This slide illustrates the quarterly and cumulative free cash flow after dividends since the third quarter of 2022 when we acquired the first of our bolt-on acquisitions.

As you can see, we have generated free cash flow after dividends in every single quarter, which has totaled over $350 million over the last 2 years. This is well above the $287 million of bolt-on acquisitions over the same period, highlighting the accretive nature and successful integration of these assets. Importantly, this slide also illustrates our ability to internally finance both our organic capital program and acquisitions that drive EBITDA and free cash flow growth.

I'll finish my comments on Slide #7 titled Delivering on our Free Cash Flow Outlook. Over the past decade, we have built out Appalachia's largest integrated liquids-rich midstream system and are now realizing the benefits of our organic capital investments. These investments generate high teens return on invested capital and significant free cash flow. This results in the ability to internally finance our capital programs, fund our dividend payments and reduce absolute debt.

As a result of absolute debt reduction and EBITDA growth, we expect leverage to decline to less than 3x in the fourth quarter. As a reminder, our initial expectation was to achieve our 3x leverage target by year-end 2025. So we are one year ahead of schedule on our target.

Additionally, I will note that our initial leverage target did not include any acquisitions. Antero Midstream was able to execute several accretive transactions, as we just discussed, all of which were 100% financed through free cash flow.

As we look ahead to 2025, we expect further growth in EBITDA and free cash flow. This positions us well to return incremental capital to shareholders.

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

[Operator]

[Operator Instructions] The first question comes from the line of Jeremy Tonet with JPMorgan Chase & Co.

[Noah Katz, analyst]

This is Noah Katz on for Jeremy. First, I wanted to touch on the impact to AM's results from AR announcing the deferral of completion on the one pad from '24 into '25 and then the deferral of the second pad from early '25 into the latter part of the year. Can you size the impact towards the end of '24 and into '25?

[Brendan Krueger, executive]

Yes. Great question. If you look at 2024 and the guidance range we've given, you can see we've given a range that, to the extent AR completed that due to higher prices, you would fall in the middle of that range. To the extent AR defers it, you'd fall near the lower end of the range. It's about $10 million of EBITDA overall, if you look at just the water impact, you wouldn't see the gathering impact until next year anyways. So the water impact this year would be about $10 million. And then no change really on 2025 in terms of where that's shaking out, push back a bit, you'll still get the water volumes and the gathering would fall within expectations.

[Noah Katz, analyst]

And then going off of that question, with the 9 wells being serviced in 3Q, it looks like AM has serviced 45 wells so far this year. So to hit the guide of 52 to 57, I think you'd have to service between 7 to 12 wells in 4Q. If there was another completion crew added, what are your guys' expectations on how many more water wells you could potentially service in total?

[Brendan Krueger, executive]

Yes. So I think again, the 7 to 12 you mentioned there, midpoint of that, I would assume the completion of that hot pad, if it got deferred out, 5 wells. So you'd be slightly below that 7 to 12. So I think that answers your question. But overall, the easy answer to think about in terms of how much one completion crew provides in terms of water, it's about 75,000 to 80,000 barrels a day per completion crew in terms of water that's delivered. We had a little bit less this quarter, just driven by the ramp-up of an e-fleet. We made a move to an e-fleet this quarter. So just the ramp-up time led to a little bit less than the 75,000 to 80,000. But generally, if you have one crew, it's 75,000 to 80,000. So if you were operating 2 crews, for example, in a quarter, you'd be 150,000 or a little bit above that.

[Operator]

Next question comes from the line of Naomi Marfatia with UBS.

[Naomi Marfatia, analyst]

Just as a follow-up to one of the earlier questions, maybe to look ahead to '25, given some of the deferrals in AR activity, along with the dropping of a completion crew and a rig in '24. Just kind of wondering if you could kind of characterize some of the drivers of growth going into '25. Should we still be expecting like mid-single-digit growth, or is there a potential upside to it?

[Brendan Krueger, executive]

No, I think that's a fair assumption. On the gathering side, we expect in the low to mid-single-digit growth. You have a little bit of CPI escalation on those fees. And then on the water side, it will just depend on where we end up on those deferrals. But generally, should assume about consistent volumes year-over-year. If the pad gets deferred completely out of '24 into '25, then you'd expect a little bit more volumes in '25 relative to '24.

[Naomi Marfatia, analyst]

Great. Just as a follow-up, I think, on the Veolia payment, your 10-Q had a small update. So just wondering what are the signposts and how is management thinking about the potential use of proceeds?

[Brendan Krueger, executive]

Yes, no great answer in terms of timing there. It's still in the court hands, went through the appeals, but we don't have a definitive answer and they don't have a definitive time in terms of when they need to respond. So a little bit of a waiting game still there. To the extent that came in, we would just certainly analyze where we're at on debt, where we're at in terms of the leverage target and make a decision in terms of what makes the most sense at that time. But no great timing as we sit here today after that update.

[Operator]

Next question comes from the line of John Mackay with Goldman Sachs.

[John Mackay, analyst]

I just want to pick up on a couple of these pointing to getting below 3x in the fourth quarter. I guess, how much of that is driven by your confidence in kind of CapEx coming down and the free cash flow looking better that way versus this kind of implied EBITDA step-up just because we've talked about a couple of moving pieces. And should that mean we could start to see buybacks this quarter?

[Brendan Krueger, executive]

Yes. I think we've said in terms of -- once we hit the 3x target, we'll look to the buyback market. I think we do have a lot of confidence we'll hit that 3x target in the fourth quarter. It's really a combination of your points, very confident in the capital coming down. And then in terms of the EBITDA, should see a bit of growth. As I mentioned, we had some ramp-up time in the third quarter on that e-fleet. So even if you just ran one fleet, you should see 10,000 barrels a day of growth or so relative to third quarter. So we feel good about overall increase in cash flow. And if that pad slid into the fourth quarter because of pricing, then you'd see even a further benefit. But even without that, we feel pretty good about hitting that 3x target in the fourth quarter.

[John Mackay, analyst]

And I guess if we're looking at the implied CapEx budget for fourth quarter, I mean, again, you've talked about some of the moving pieces. But like how do we take that and think about what maybe like a run rate CapEx could look like in, let's say, '25 going forward?

[Brendan Krueger, executive]

Yes. In '25, I think we've said historically that we'd be in that $150 million to $200 million, I think, assuming somewhere in the middle of that range is probably a safe bet for '25. We're still in the budgeting process, but in that $150 million to $200 million range is a fair assumption as we sit here today, assuming the midpoint is probably a fair assumption.

[Operator]

[Operator Instructions] Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Justin Agnew for closing comments.

[Justin Agnew, executive]

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

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.