Antero Midstream Corp

NYSE:AM

Earnings Call Transcript 2019-Q4

[Operator]

Welcome to the Antero Midstream 2020 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time I'll turn the conference over to Michael Kennedy, Senior Vice President of Finance. Mr. Kennedy you may now begin.

[Michael Kennedy, Senior Vice President, Finance]

Thank you for joining us for Antero Midstream's Fourth Quarter and Full Year 2019 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've provided a separate earnings call presentation that will be reviewed during today's call.

Before we start our comments, I'd first like to remind you that during this call Antero management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Antero Resources and Antero Midstream and are subject to a number of risks and uncertainties many of which are beyond Antero's control. Actual outcomes and results could materially differ from what is expressed implied or forecast in such statements.

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 and CEO of Antero Resources and Antero Midstream; and Glen Warren, President and CFO of Antero Resources and President of Antero Midstream. With that I'll turn the call over to Paul.

[Paul Rady, Chairman & Chief Executive Officer]

Thanks Mike. I'd like to start by discussing the 2020 outlook and development plan at AR that supports Antero Midstream's 2020 capital budget and financial guidelines. Yesterday, Antero Resources announced a drilling and completion capital budget of $1.15 billion that is expected to generate 9% net production growth in 2020 as compared to 2019.

AR's 2020 capital budget utilizes an average of 4 drilling rigs and 3 to 4 completion crews consistent with 2019 levels. This development program is approximately free cash flow neutral at AR and results in leverage, trending toward the mid 2 times range, assuming execution of its previously announced asset sale program.

For those that were able to listen into the AR call we just finished, I highlighted that we remain focused on achieving our cost reduction strategies and achieving our asset sale target at AR. The ability to continue growing production in the current commodity price environment is supported by AR's continued capital efficiencies, liquids-rich focus and industry-leading hedge portfolio.

Let me move to Slide number 3 in our investor presentation titled Marcellus Well Cost Reductions, which illustrates the significant momentum in well cost reductions at AR. Last quarter, AR announced a well cost savings initiative that targeted a 15% to 18% reduction in well costs on a per lateral foot basis or approximately $1.7 million to $2 million per well.

The left-hand side of the page illustrates, AR's, January 2019. So, a little over a year ago, well costs of $970 per lateral foot that was assumed in AR's 2019, capital budget. During the fourth quarter of 2019, AR's actual well costs were $840 per lateral foot.

This was driven primarily by lower costs for flowback water, as AM implemented flowback water blending and localized storage operations. The coordinated effort between AR and AM allowed us to quickly and successfully execute our blending program. And deliver savings ahead of schedule.

For 2020, AR is targeting total well costs of $795 to $825 per lateral foot, driven by expanded flowback water services provided by AM, drilling efficiencies, achieved in 2019. And lower fresh water usage and completions, that is included in AM's 2020 budget.

These savings allow AR to continue actively developing in today's commodity price environment. And drive high-margin, stable gathering, and processing cash flow growth for AM.

Now let's move to slide number 4, titled, Well Protected From Near-Term Gas Pricing Weakness. Antero Resources has a long track record of hedging and selling production forward, generating $4.7 billion of hedge gains since 2008.

This has resulted in development program, stability that we expect to continue in the future. Looking to 2020, AR has hedged 94%, of its expected natural gas production at $2.87 per MMBtu or 42%, above current strip pricing.

AR is also well hedged in 2021 with 93% of expected natural gas production, hedged at $2.80 per MMBtu. In addition to the natural gas hedges detailed on this slide, Antero Resources is 100% hedged on its crude oil and pentane production at approximately $56 per barrel or 10% above current strip prices.

Moving to slide number 5 titled, 2020 Capital Budget. This details AM's capital budget for 2020. As depicted on the map, on the right-hand side of the page, in 2019 we built the backbone of our midstream infrastructure in Tyler County, West Virginia that supports the majority of AR's development, over the next several years.

In 2020, we optimized our capital plan to focus on the highest rate of return locations at AR that are also in close proximity to existing gathering, and water infrastructure. This resulted in a capital budget of $300 million to $325 million, in 2020 or more than a 50% reduction compared to 2019.

Since we released our original 2019 capital budget and 2020 target one year ago, we have eliminated or deferred almost $400 million of capital in those two years combined. This speaks to the just-in-time nature of our investments, visibility into AR's development plan and AR's success in consolidating acreage to acreage trades that minimize the geographic footprint of AM's infrastructure.

Our capital budget for 2020 is focused primarily in the Marcellus and includes our first processing plant at Smithburg processing complex located just west of Sherwood or Smithburg 1.

As a reminder, the joint venture with MPLX placed Sherwood plants 12 and 13 online during the fourth quarter of 2019. These plants added 400 million cubic feet a day of additional processing capacity, increasing the joint venture's total processing capacity to 1.4 Bcf a day.

Including the 200 million a day of additional capacity from Smithburg 1, the joint venture will add 600 million cubic feet a day of processing capacity to support liquids-rich production growth for Antero Resources.

Looking more granular into 2020, we expect to invest approximately two-thirds of our capital budget in the first year -- first half of the year and the remaining one-third in the second half of the year.

AM's capital flexibility in addition to its visibility into AR's development plan is a competitive advantage for AM. It gives us confidence in the volumetric growth and ability to maintain high asset utilization rates that drive peer-leading returns on our invested capital.

Slide number 6 titled Consistency of Returns and Capital Resiliency, illustrates our track record of disciplined capital investment that drives our peer-leading returns on invested capital. The top right chart on the slide depicts our asset utilization with blue illustrating our compression utilization and grey illustrating our joint venture processing utilization.

As you can see the utilization rates have continued to improve every year since our IPO and we set company records in 2019 for compression and processing utilization rates of 88% and 98%, respectively. This is a testament to our integrated planning efforts and appropriately sized infrastructure to match AR's visible production growth profile.

This just-in-time philosophy has proven to be very resilient over the last several years where AM has generated an average return on invested capital or ROIC of 12% since its IPO in 2014. In 2019, our ability to defer $130 million from our original capital budget allowed us to again deliver a 13% return on invested capital.

Looking ahead to 2020, we expect our ROIC to improve further into the mid-teens range. As a company, we remain highly focused on ROIC, but also leverage per share cash flow growth and safety all of which are metrics in our management and employee compensation plan. Our focus on these metrics along with our C-corps structure and independent Board puts AM at the governance forefront of the new midstream infrastructure model.

With that, I'll turn the call over to Mike.

[Michael Kennedy, Senior Vice President, Finance]

Thank you, Paul. I'll begin my AM comments by highlighting the recently announced AM cash dividend of $0.3075 per share for the fourth quarter. The dividend at AM was the 20th consecutive distribution or dividend paid since the IPO of Antero Midstream Partners in 2014.

In addition, during the fourth quarter we purchased 19.4 million shares from AR. To-date we have repurchased 22.9 million shares for $125 million resulting in $175 million of remaining capacity under our $300 million share repurchase program.

Now let's move on to the fourth quarter operational results beginning with slide number 7 titled: Year-Over-Year Midstream Throughput. Starting in the top-left portion of the page low-pressure gathering volumes were 2.6 Bcf per day in the fourth quarter, which represents a 1% increase from the prior year quarter. Compression volumes during the quarter averaged 2.4 Bcf per day, a 9% increase compared to the prior year.

Our 50-50 JV gross processing volumes averaged 1.2 Bcf per day a 51% increase compared to the prior year quarter. Processing capacity was $0.92 utilized during the quarter. Joint venture gross fractionation volumes averaged 31,000 barrels per day a 63% increase from the prior year. Freshwater delivery volumes averaged 148,000 barrels per day a 9% increase over the prior year quarter.

Moving on to financial results. Adjusted EBITDA for the quarter was $203 million a 6% increase compared to the prior year quarter. Distributable cash flow for the fourth quarter was $159 million resulting in a DCF coverage ratio of approximately 1.1 times. Capital expenditures during the quarter were $125 million or $30 million below the midpoint of our revised guidance range. As a result, full year capital investments totaled $646 million or $130 million lower than our original capital budget at the beginning of 2019. This highlights the capital flexibility Paul mentioned in his comments.

Moving on to the balance sheet and liquidity. As of December 31, 2019 Antero Midstream had $960 million drawn on its $2.1 billion revolving credit facility resulting in $1.2 billion of liquidity. Additionally, AM's net debt to LTM adjusted EBITDA was 3.5 times at year-end.

I'll finish my comments on slide number 8 that summarizes how far we've come as a company since our 2014 IPO. In 2019, we took significant steps to improve our corporate structure and governance eliminating the GP and IDRs and converting to C-corp with a Board comprised of a majority of independent directors.

Looking ahead to 2020, we look to continue to deliver on our organic growth strategy. Despite natural gas prices declining over 50% since 2014 our 2020 adjusted EBITDA guidance of $850 million to $900 million, represents over 1,200% increase since our IPO highlighting the significant growth underpinned by Antero Resources. Our capital budget for 2020 of $300 million to $325 million is 44% lower than our 2004 capital expenditures, as we leverage our existing infrastructure and drive capital efficiencies.

Based on the midpoint of the adjusted EBITDA and capital budget ranges, we expect to generate over $400 million of free cash flow before return of capital in 2020. We expect to transition away from the MLP model paying out a majority of the cash flows generated to the C-corp model generating free cash flow after dividends over the next several years, as we grow our EBITDA and reduce future capital expenditures.

The output of this growth profile and capital discipline is in improving return on invested capital into the mid-teens or higher in the future. This consistent return on invested capital supported an increase in our return of capital to shareholders by 242% since our IPO, while still maintaining a strong balance sheet, with leverage in the mid-3 times range and $1.2 billion of liquidity.

In summary, we remain highly focused on capital discipline and generating free cash flow during sustained periods of low commodity prices. This results in lower AM capital budgets and non-speculative short-cycle time investments that still generate high asset utilization rates. This capital flexibility results in an attractive cash flow profile that should drive shareholder value.

With that, operator, we're ready to take questions.

[Operator]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

[James Kirby, JPMorgan]

Hey, guys. This is James on for Jeremy.

[Paul Rady, Chairman & Chief Executive Officer]

Hi, James.

[James Kirby, JPMorgan]

Hi. Just looking at the high-pressure gathering fees it looked like a step-down sequentially and year-over-year, maybe, I missed this in the K, but what's the driver there for that?

[Michael Kennedy, Senior Vice President, Finance]

The high-pressure fee stayed the same at $0.21. We just had some prior period adjustments that we caught up in the fourth quarter. So that's the reason it shows the decline, but the $0.21 is still applicable to high-pressure fees.

[James Kirby, JPMorgan]

Okay. So for 2020, $0.21 would be a good model.

[Michael Kennedy, Senior Vice President, Finance]

Yes, $0.21.

[James Kirby, JPMorgan]

Okay. All right. Great. And then, just moving to CapEx, what was really the driver for the coming under budget in 4Q 2019? And then looking out to 2020 as well, what were kind of the biggest cuts in terms of segments for just lower CapEx there?

[Michael Kennedy, Senior Vice President, Finance]

The lower capital in 2019, we just continued to defer projects and focus on Antero's current development plan, which has become more concentrated in Tyler County, which is where our infrastructure build-out occurred earlier in the year, so just leveraging existing infrastructure. That continues in 2020. On that map, it showed deferring the Wetzel build-out. It's really just focusing on that Tyler County in 2020 and then 2021 and 2022 having the capital associated with the Wetzel build-out.

[James Kirby, JPMorgan]

All right, Great. Thanks. That’s it for me.

[Operator]

[Operator Instructions] Thank you. Our next question is from the line of Gregg Brody with Bank of America. Please proceed with your question.

[Gregg Brody, Bank of America]

Hey, guys.

[Paul Rady, Chairman & Chief Executive Officer]

Hi, Gregg.

[Gregg Brody, Bank of America]

Just a few questions for you. Your share repurchase program, how are you thinking about that today? And sort of the cadence of what we should expect this year in terms of how much you think about buying back?

[Paul Rady, Chairman & Chief Executive Officer]

Yes. So there's still $175 million of purchasing power authorized by the Board at AM just as a reminder. And AM has certainly expressed an interest in repurchasing shares from AR. So that's kind of an ongoing dialogue subject to coming together on price. I wouldn't anticipate anything in the near-term there at these prices. But the sooner you buy in shares, obviously you eliminate those dividends and it's great for AM. So I think AM will execute on that throughout the year in one fashion or another it may buy some in the open market as well.

[Gregg Brody, Bank of America]

Got it. I think – so in the AR presentation showed some incremental gathering processing and transportation improvements since the end of December. Just wanted to clarify was any of that at AM, or was it all incremental third-party or not really the third party?

[Michael Kennedy, Senior Vice President, Finance]

In 2020 that $48 million of it was AM. There is an additional $27 million with a total of $75 million from that GP&T that were third parties.

[Gregg Brody, Bank of America]

From the third party. And that's – I mean that was realized after you made the December nine announcement?

[Michael Kennedy, Senior Vice President, Finance]

No that was all December 9.

[Paul Rady, Chairman & Chief Executive Officer]

The December 9 announcements was $350 million total over four years and $250 million of that $350 million was – is AM – is anticipated to be from AM rebates. The rest is other third parties.

[Gregg Brody, Bank of America]

Got it. So there – was there – just maybe – I know this is an AM call. Was there anything on AR that was incremental then?

[Paul Rady, Chairman & Chief Executive Officer]

There was nothing incremental on that.

[Michael Kennedy, Senior Vice President, Finance]

No.

[Gregg Brody, Bank of America]

Okay. And then it looks like you changed your targeted year-end leverage metrics for year-end. Actually they're improving a bit versus what you've provided on December 9. Just a slight change. What's driving that?

[Michael Kennedy, Senior Vice President, Finance]

I think the mid-3s is where we were in December. There hasn't been a material change from that. EBITDA is exactly as we expected in capital is at the same levels too. So I don't see any change to the announcements that we had in December.

[Gregg Brody, Bank of America]

And probably being just too little with – so that’s helpful. All right. Thank you for the time. I appreciate it.

[Paul Rady, Chairman & Chief Executive Officer]

Sure. Thanks, Gregg.

[Operator]

Thank you. Our next question is from the line of Sunil Sibal with Seaport Global. Please proceed with your question.

[Sunil Sibal, Seaport Global]

Hi, good morning, guys. A couple of questions for me. First on the cost reduction side. You guys have done a pretty good job so far on the AM cost side. I was wondering if there are more levers available to pull for bringing that down further? And how should we be thinking about that?

[Michael Kennedy, Senior Vice President, Finance]

I would just say Sunil that we've got a lot of things always working there incremental things and we just continue to push things lower as we get better and better at all parts at logistics and sand supply at the drilling and so on the completions, the rate of completions. So it's pretty much the laundry list that you've heard out already but just continue to make improvements in all of that.

[Paul Rady, Chairman & Chief Executive Officer]

We think there could be more to come in AR. And as far as AM goes, it's really just getting more efficient about planning and logistics and where we're spending capital in front of the drill bit. As Mike mentioned earlier, it was a bit of concentrating the drill bit more and utilizing existing infrastructure. So that's really what's going on there. I mean, you try to -- you certainly bit everything out and try to improve on construction costs and all that. But I think this is really more about building what was really needed and could be highly utilized.

[Sunil Sibal, Seaport Global]

Okay. Got it. And then one, kind of, broader question. You highlighted the returns on invested capital as an important criteria. I was wondering if you talk -- can talk a little bit about broader capital allocation policy. And, obviously, it seems like leverage will tick up a bit in 2020. Considering all that's going on, what is the leverage target that you guys have in mind ultimately for AM?

[Michael Kennedy, Senior Vice President, Finance]

Yes, mid-three’s leverage target. Our leverage doesn't inflate going forward. We have EBITDA growth every year in the high single digits. So you've got cash flow growth and your capital continues to come down. So the leverage stays flat in the mid three times range.

[Sunil Sibal, Seaport Global]

And then on the broader capital allocation side, obviously, equity markets don't seem to be rewarding for the dividend payout. How do you think about that in terms of your broader capital allocation philosophy?

[Michael Kennedy, Senior Vice President, Finance]

Similarly like I mentioned, you've got growing cash flow capital coming down -- it came down over 50% this year. So your leverage is staying flat in the mid three times. It's very attractive for a midstream company. And so at today's dividend rate assuming holding it flat you're at 1.1 times. That grows over the next year or two to 1.2 times, and then a couple of years you actually have cash flow, free cash flow before return of capital in excess of the dividend. So we don't see any reason right now that the dividend isn't sustained at today's levels.

[Paul Rady, Chairman & Chief Executive Officer]

No, we think the equity market will come back to the dividend so to speak, so no need to have a knee-jerk reaction over the last few quarters.

[Sunil Sibal, Seaport Global]

Okay. Got it. Thanks guys.

[Paul Rady, Chairman & Chief Executive Officer]

Thank you.

[Operator]

Our next question is a follow-up from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

[Jeremy Tonet, JPMorgan]

Hi, good afternoon. Thanks for taking another question. Just wanted to see on the processing JV side, it seems like the CapEx pulled back a bit there or is a bit later I guess going forward at this point. And just wondering, if you could refresh us as far as would you expect any cadence to new plants, or what type of activity for future CapEx we should expect there?

[Michael Kennedy, Senior Vice President, Finance]

Yeah, we have $30 million in the budget for 2020. Paul mentioned we just put onshore with 12 and 13 in the fourth quarter. So kind of a pre-build and grow into those processing plants in the first part of the year and then Smithburg 1 comes on and utilize that in the back half of the year. So we only have $30 million. So invested a lot in those processing plants and now we have the ability to form and then just build a plant or two each year from here on now.

[Jeremy Tonet, JPMorgan]

So that still is the current plan then I guess building a plant or two per year going forward?

[Paul Rady, Chairman & Chief Executive Officer]

Yeah.

[Michael Kennedy, Senior Vice President, Finance]

That's correct.

[Jeremy Tonet, JPMorgan]

Got it. And then, maybe I'm looking at this too finally here, but it looks like on the -- for ARs lateral length that had been kind of coming in recently and was a bit shorter in subsequent quarters over the course of 2019. And I think the guide you laid out here talks about 12,000 foot lateral. So just wondering if there's any kind of shift here that we would expect?

[Michael Kennedy, Senior Vice President, Finance]

No, there's no shift. I mean when you look at the 2020 plan for Antero, the completions average 11,400 feet to drilling average over 12,500 feet around that. So, it's just timing. And they're still trying to drill longer laterals and our type well is 12,000 foot lateral well.

[Jeremy Tonet, JPMorgan]

Got it. Great. And maybe just the last one if I could. It sounds like the current dividend level you're looking to sustain here didn't want to have a knee-jerk reaction to the market, but is there a certain length of time where things don't change might kind of re-evaluate the approach here given kind of the elevated yield, or any other thoughts that you could share on that?

[Paul Rady, Chairman & Chief Executive Officer]

Yeah. No thoughts to share on that. That's something that the Board discusses over time, but no inside thoughts there. No.

[Jeremy Tonet, JPMorgan]

Got it. That’s it for me. Thank you.

[Paul Rady, Chairman & Chief Executive Officer]

Thank you.

[Michael Kennedy, Senior Vice President, Finance]

Thanks, Jeremy.

[Operator]

Our next question is from the line of Ned Baramov with Wells Fargo. Please proceed with your question.

[Ned Baramov, Wells Fargo]

Hi. Thanks for taking the question. Just one for me. Could you maybe provide an update on your discussions with Veolia regarding the idled Clearwater facility? And then as part of that, are there any other expenses related to the idling of the plant expected in 2020? Thank you.

[Paul Rady, Chairman & Chief Executive Officer]

Yeah. What we can say is that discussions continue with Veolia, and that's about all we can say. We can't comment further. But -- and then on the...

[Michael Kennedy, Senior Vice President, Finance]

No material expenses going forward.

[Paul Rady, Chairman & Chief Executive Officer]

Yeah, no material expenses. It's been mothballed.

[Ned Baramov, Wells Fargo]

Thank you.

[Paul Rady, Chairman & Chief Executive Officer]

Yeah. Thank you, Ned.

[Operator]

Thank you. At this time, I'll turn the floor back to management for further remarks.

[Paul Rady, Chairman & Chief Executive Officer]

Thank you for joining us on our conference call today. If you have any further questions, please feel free to reach out to us. Thanks again.

[Operator]

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