Antero Midstream Corp

NYSE:AM

Earnings Call Analysis

Record EBITDA with Lowered Capital Budgets for 2024

Antero Midstream celebrated record-breaking EBITDA of $981 million in 2023, amassing an 18% compound annual growth rate since its 2014 IPO. The company anticipates reaching the EBITDA midpoint of $1.04 billion in 2024, signifying a 5% year-over-year growth. This forecast is underpinned by prudent cost management featuring a 14% reduction in 2024's capital budget to $150-$170 million. The company highlights its operational efficiency with a promising capital efficiency metric of $0.55 per Mcf equivalent, the lowest in its peer group. The fourth quarter of 2023 alone saw a 10% increase in EBITDA and $48 million in free cash flow post-dividends. Coupled with a stable dividend policy of $0.90 per share, representing a 7% yield and an aggressive debt reduction plan, Antero Midstream also outlined a new $500 million share repurchase program for 2024.

A Record Year and Strong Guidance Ahead

Antero Midstream (AM) celebrated a momentous year in 2023, achieving a record $981 million in EBITDA, reflecting an 18% return on invested capital. Since its IPO in 2014, the company has shown a remarkable compound annual growth rate of 18% in EBITDA. This impressive streak is anticipated to continue into 2024, with a projected EBITDA midpoint of $1.04 billion, driven by maintenance capital programs and projected to maintain high teens in return on invested capital. This forecast capitalizes on AM's high-quality assets and the efficiency of its operations.

Capital Expenditure Efficiency

In 2023, AM demonstrated fiscal prudence by reducing its capital expenditures by 30% compared to the previous year, bringing it to $185 million. As it moves into 2024, the company has set a capital budget between $150 million and $170 million, aimed primarily at the Marcellus liquids-rich midstream corridor. This adjustment is notably below previous targets and highlights the company's ability to adapt its capital budget to shifting development plans – earmarking a 14% year-over-year decrease at the midpoint for 2024.

Robust Financials and Debt Reduction

In the fourth quarter of 2023, AM generated a record $254 million in EBITDA, up 10% year-over-year, and closed the year with $989 million in EBITDA, a substantial 12% increase from 2022. Such financial milestones allowed the company to generate robust free cash flows, leading to a remarkable reduction of approximately $150 million in absolute debt and a decline in leverage to 3.3x by the year's end. AM's judicious use of its financial resources underscores its commitment to maintaining a sound balance sheet and enhancing shareholder value.

Uptick in EBITDA and Capital Allocation for 2024

With a forecast of over $1 billion in EBITDA, or 5% growth, for 2024, AM is setting its sights on continued financial improvement. This outlook is propelled by several factors: expected flat to low single-digit throughput growth, the expiration of fee rebates amounting to roughly $53 million, and annual inflation adjustments estimated to increase fees by $10 million to $15 million year-over-year. A combination of strategized capital investment reductions and revenue growth enhancements is poised to deliver a 65% increase in free cash flow after dividends, totaling over $250 million. AM is prioritizing sustainable dividends and leverages a new $500 million share repurchase program to balance shareholder returns and debt reduction.

Long-term Strategy and Shareholder Returns

AM's strategic approach, characterized by balanced debt and equity reductions, fortifies its position for long-term success. The leadership has crafted a five-year outlook (2023-2027), with an ambitious target of $1.0 to $1.3 billion in free cash flow after dividends, supported by a $900 million to $1 billion organic project backlog expected to yield high teens return on invested capital. The recently announced $500 million share repurchase program will further bolster shareholder value, representing about 50% of the projected free cash flow post-dividends for the next four years.

Focus on Free Cash Flow Expansion

AM is transitioning into a period of increased free cash flow, signaling a significant inflection point for the company. Leveraging the strength of its balance sheet and an arsenal of strategies to prioritize the return of capital to shareholders, AM is carving out a niche as a distinguished investment option in the midstream sector and among domestic mid-cap enterprises.

Volume Trajectory and Share Repurchase Clarifications

Looking ahead to 2024 and beyond, AM expects a stable volume trajectory, thanks in part to its drilling partnership with QL and associated fee adjustments. With a focus on maintaining maintenance capital levels in 2025, the company remains well-equipped to support its parent company, Antero Resources. Concurrently, AM is preparing for a structured share buyback plan, posturing to initiate the program when leverage ratios improve to 3x or lower. This will be executed through open market repurchases, with the intention of deploying up to 50% of the four-year free cash flow forecast on share buybacks.

Strategic Investment Decisions

AM is leveraging its clear visibility into capital plans, extending over the next few decades, to make calculated investment decisions. Whether evaluating bolt-on acquisitions or share buybacks, the goal remains to maximize return on invested capital while weighing the options of further debt reduction. These strategic decisions will be guided by a thorough analysis of projected cash flows, ensuring the continued generation of free cash flow after dividends and maintaining a strong opportunity to enhance shareholder returns.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the Antero Midstream Fourth Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Justin Agnew, Director of Finance and Investor Relations for Antero Midstream. Thank you. You may begin.

[Justin Agnew, executive]

Good morning, and thank you for joining us for Antero Midstream's fourth 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 the financial and operational success at Antero Midstream since our IPO in 2014. I'll also discuss the 2024 capital budget and the capital efficiency of our primary customer, Antero Resources, or AR. Brendan will then highlight our 2023 results, 2024 guidance and long-term outlook and Antero Midstream's capital allocation strategy.

I will start my comments on Slide #3 titled, A Decade of Success since our 2014 IPO. In 2023, we generated a company record $981 million of EBITDA and an 18% return on invested capital. Additionally, since the IPO in 2014, EBITDA has grown by an impressive 18% compound annual growth rate. This is a testament to AM's world-class assets, operational success and the visibility it has into the development plans of Antero Resources, who is one of the premier E&P operators in North America.

Looking ahead to 2024, we are guiding to a midpoint of $1.04 billion of EBITDA based on a maintenance capital program at AR. This program is expected to generate high teens ROIC in the 2024 as well as later our capital -- as our capital budget declines and EBITDA increases.

Now let's dive into AM's 2024 capital budget by turning to Slide #4 titled, Unparalleled Capital Flexibility. 2023, our capital expenditures were $185 million, which was at the lower half of our guidance range and a 30% reduction compared to 2022. Looking ahead to 2024, we have budgeted $150 million to $170 million of capital, substantially all of which is invested in the Marcellus liquids-rich midstream corridor.

This is below our previous target of flat year-over-year capital in 2024 and illustrates the flexibility of our capital budget to changes in the development plans. At the midpoint, this represents a 14% decrease compared to 2023. The right side of the page depicts the breakout of the capital budget by segment. As you can see, our compression capital declined year-over-year. This is driven by our compression, what we call relocation and reuse savings, and the completion of our Grays Peak compressor station which will add 160 million cubic feet of compression capacity in the second quarter.

In addition, Antero's midstream freshwater delivery and water blending capital declined in 2024 as a result of modestly lower activity levels and the completion of a main water pipeline artery in the liquids-rich Marcellus Shale. On a quarterly basis, it is worth noting that AM expects to invest approximately 60% to 65% of its full year capital budget in the second and third quarters during the summer months, which are more favorable for infrastructure build-out.

One of the foundations of AM's flexible and capital-efficient investment approach is the visibility of shares with AR. The chart on Slide 5 titled, Most Capital Efficient Customer compares the capital efficiency of the natural gas peer group. Based on expected 2024 drilling and completion capital budgets relative to its production, AR will have the lowest capital per unit of production of the peer group at just $0.55 per Mcf equivalent.

This is 40% below the natural gas peer average of 62% per Mcf. This measure is important when comparing the asset quality and operational efficiency of such -- of each company. In the case of AR, the quality and depth of the inventory, along with its operational efficiencies achieved in 2023, provides tremendous ability for AM's long-term operations.

I'll finish my comments on Slide #6 titled, AR Benefiting from Liquids Pricing Improvement. The left-hand side of the page depicts year-to-year propane inventories relative to 2023 and the 5-year average. As a result of strong exports and winter weather, inventories have declined by more than 45 million barrels since October. In just a few months, propane stocks have moved from the high end of the 5-year range to 5-year average levels. This return of propane inventories to the historical average has tightened the market and driven bullish sentiment from Mont Belvieu propane prices as a percent of WTI, increasing from 43% last fall to 57% today as prices have risen above $0.90 a gallon.

This pricing uplift uniquely benefits AR due to its productivity diversity compared to traditional dry gas producers. Approximately 50% of AR's 2023 revenues were derived from liquids, including NGLs. To put a dollar value on the pricing uplift, each dollar per barrel change in the C3+ NGL pricing results in approximately $40 million of incremental free cash flow for AR since AR will produce about 40 million barrels of C3+ NGLs.

Pricing improvement, combined with the reduced maintenance capital at AR more than offsets the impact from the decline in natural gas prices and supports the stable development plan at AR that underpins AM's 2024 guidance.

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

[Brendan Krueger, executive]

Thanks, Paul. I will begin my comments on Slide #7 titled, 2023 Highlights. During the fourth quarter, we generated a company record $254 million of EBITDA, which was a 10% increase year-over-year. We also generated $156 million of free cash flow before dividends and $48 million of free cash flow after dividends during the quarter. These financial achievements were a direct result of Antero Midstream's organic growth strategy and operational success.

During the fourth quarter, low pressure gathering and compression volumes increased by 10% and 14%, respectively, compared to last year. Both throughput measures set company records for Antero Midstream. As Paul mentioned, full year 2023 EBITDA was $989 million, a 12% increase compared to 2022. Full year free cash flow before and after dividends were company records at $587 million and $155 million, respectively. Free cash flow after dividends was at the top of our updated guidance range of $145 million to $155 million and nearly 50% above our initial guidance range. This free cash flow is utilized to reduce absolute debt by approximately $150 million in 2023 and resulted in leverage declining to 3.3x at year-end 2023.

Now let's discuss our 2024 outlook by turning to Slide #8, titled 2024 EBITDA Increasing and Capital Declining. For 2024, we are forecasting over $1 billion of EBITDA or 5% growth in 2023 at the midpoint of guidance. The EBITDA growth is driven primarily by flat to low single-digit throughput growth, the expiration of the LP gathering fee rebates with AR and annual inflation adjustments to our fixed fees.

As Paul discussed earlier, we are also forecasting $160 million of capital investment at the midpoint of our guidance, which represents a 14% decrease from 2023. This is the second year in a row with EBITDA growth and capital declining by double digits and illustrates the significant operational leverage of our assets. This 2024 plan allows us to generate over $250 million of free cash flow after dividends or a 65% increase compared to 2023.

Slide #9 illustrates our capital allocation strategy for 2024 with sources on the left and uses on the right. Starting at the top, we are forecasting $190 million of interest payments at the midpoint of guidance which is a 13% reduction year-over-year and is driven by lower absolute debt levels and interest savings from the successful senior note issuance in January of this year next to the highly economic blocking and tackling capital investments that are the foundation of our capital allocation strategy.

The peer-leading return on capital supports our return of capital to shareholders. In 2024, we plan on maintaining our stable $0.90 per share dividend, which represents an attractive 7% yield at today's share price. The remaining discretionary cash flow will first be allocated towards debt reduction to achieve our 3x leverage target in 2024. Thereafter, we plan to utilize any excess cash flow for further debt reduction and opportunistic share repurchases under our new $500 million open market share repurchase program. We believe this balanced approach to reducing both the debt and equity components of the capital structure is the most efficient way to accrue value to our shareholders.

I'll finish my comments on Slide #10, titled, Delivering on 5-year Outlook. Our transition to sustainable free cash flow after dividends over the last several years has allowed us to reduce absolute debt and leverage, execute accretive bolt-on acquisitions and now announce a sizable $500 million share repurchase program.

Looking ahead, despite the volatile commodity price environment, Antero Midstream remains on track to achieve its previously disclosed 5-year targets from 2023 through 2027. Our highly economic organic project backlog of $900 million to $1 billion is expected to continue to drive high teens return on invested capital and generate $1.0 billion to $1.3 billion of free cash flow after dividends. Excluding our 2023 actual results, our $500 million share repurchase program represents approximately 50% of our remaining $1 billion of free cash flow after dividends from 2024 through 2027.

This program will allow AM to supplement its stable dividend with flexible and opportunistic share repurchases in order to maximize value for our shareholders. Importantly, debt reduction will continue to be an integral part of our overall capital allocation strategy to maintain a strong balance sheet, provide flexibility and derisk our business. The goal of this balanced capital allocation strategy is to ultimately provide the highest risk-adjusted return profile for our shareholders.

In summary, 2023 was a fantastic year for AM, both operationally and financially. We have been discussing our inflection point of expanding free cash flow, and we are now delivering on that plan in 2024 and beyond. Our balance sheet strength, combined with multiple avenues to return capital to shareholders, positions AM as one of the most unique investment opportunities, not only in the midstream industry, but in the domestic mid-cap investment universe.

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

[Operator]

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

[Jeremy Tonet, analyst]

Looking forward to 2024. I just want to dive in, I guess, a little bit more on volume trajectory expectations as it relates to, I guess, AR's activity into '24 and what that could maybe look like going into '25. And I also want to dive in, I guess, for the drilling partnerships, the changes in working interest there for AR and I guess, just overall impact on what it means for AM volumes?

[Brendan Krueger, executive]

Yes. I mean on the AR side, AR came out with its guidance, which was overall production, flat; maintenance capital plan overall at AM. Again, we do have the drilling partnership with QL. AR talked about gas volumes being down slightly. But again, with the drilling partnership, we'd expect more flat volumes at AM.

And then as noted, I think, in the prepared remarks, we have the fee rebates rolling away, which is about $53 million, and then CPI adjustments as well, which is another, call it, $10 million to $15 million increase year-over-year. So that's what drives the 5% outlook on EBITDA in '24. And then I think AR talked on its call as well on 2025 outlook, which was, again, maintenance capital levels. And so AM is well positioned, again, to service AR in 2025 at that maintenance capital level.

[Jeremy Tonet, analyst]

Got it. And then moving over to the buybacks. Just wanted to be clear, I guess, on how timing of that could unfold. It looks like when leverage hits 3 or lower, that would be an option on the table. Just wondering how you see, I guess, a timeline for that playing out? And with this -- would you look at more open market purchases or from AR? Just any thoughts in general would be helpful.

[Brendan Krueger, executive]

Yes. No, I mean, just to be at your latter point, I think that we've -- open market repurchases, I think AR stated in the past, it certainly enjoys its ownership in AM. So open market repurchases. And from a timing -- we did have the previous target out there on free cash flow after dividends. It was $1.15 billion at the midpoint and that was for 2023 through 2027. So that's now $1 billion after taking out the 2023 results. So $1 billion over the next 4 years, $500 million share repurchase program. So it's about 50% of that $1 billion of free cash flow after dividends that we'd look to put to work once you hit that leverage of 3x over the next couple of years here.

[Jeremy Tonet, analyst]

Got it. And sorry, just to be clear on the point, the buybacks wouldn't start ahead of hitting 3, right? You'd wait for that to materialize and then the buybacks should be on the table.

[Brendan Krueger, executive]

Yes. We're very committed to hitting that 3x leverage. So to the extent you sell some sort of big dislocation and you had high visibility 3x, you certainly could potentially take advantage of that like we have in the past, but we're pretty committed to that 3x before we really go in a big way on the share repurchases.

[Operator]

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

[Brian Reynolds, analyst]

Maybe to follow up on some of the buyback commentary, but more through the lens of just flexibility and use of cash. Over the past few years, it's been pretty consistent. But with the flexibility going forward, just kind of curious how maybe perhaps some accretive M&A could compete with buybacks. Are there any metrics that you're looking at, just given that there does seem to be a few more assets out there that could compete with buybacks?

[Brendan Krueger, executive]

Yes. Good question, Brian. I mean we try to look at everything through the lens of just return on invested capital. And so the benefit that AM has, and I think we've talked about this on past calls, is the high visibility that it has into its capital plan for not only the next few years, but really the next couple of decades with AR's development plan. So that allows us to have a pretty strong view of what our equity should trade at.

And so when we look at bolt-on acquisitions, we can look at return on invested capital for those acquisitions relative to what we could be buying our stock back at and what the return we'd expect on that. So we'll certainly be thoughtful between bolt-on acquisitions that could be attractive versus share buybacks versus further debt paydown. This just allows us to have another tool in the toolbox, I think, as we continue to generate more and more free cash flow after dividends moving forward.

[Brian Reynolds, analyst]

Right. Makes sense. And then maybe as a follow-up on the EBITDA guide. I think you're ending the year at, call it, $990 million and you kind of talked about the bridge of where your base guide is with the rate relief in the CPI. So maybe if you can just help sensitize maybe the lower end of the guide. I mean does that really just kind of imply limited to no activity? Because it seems like kind of your base outlook given where AR came out today, seems like you'll be trending towards the high end of that guide at this point.

[Brendan Krueger, executive]

Yes. I think the guidance is really around -- I mean we're in certainly a volatile gas price environment and ARs got strong with prices as we've talked about. But I think the low end is just to provide for, to the extent you had any further reduction because commodity prices have come up even further, and AR pulled back completion. That would likely be the low end of the guide. But I think your point is fair. We feel pretty good about the activity given AR's strong balance sheet, liquids focus and the capital efficiency gain that AR has had. They pulled back capital over 25% and generating free cash flow despite gas prices being at kind of a 25-year low outside of COVID. So feel pretty good about the outlook today, but the low end reflects potential slightly lower activity.

[Operator]

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

[John Mackay, analyst]

Maybe just to pick up one on the gas macro there. I'm pretty sure I know what the answer is going to be, but just so we can kind of talk through it. We do need to see production kind of roll over somewhere in the U.S. on the gas side given where we sit right now. Just curious to hear your high-level thoughts on kind of where you think that would hit? What any impact at all you could see on AM? And I know it was kind of answered on the AR call a little bit, but maybe just go through that again for us.

[Brendan Krueger, executive]

Yes. No, good question. I mean, I think, again, if you think about where it should come from on the AR front, given the liquids focus, liquids is driving the economics as we see other basins out there and so let me step back. Liquids is driving the economics and even at AR, gas volumes declining 3%. And so to the extent you had similar producers take an approach, I think that AR is -- you'd have a significant decline in production on the gas side.

And so I think we view producers that have dry gas focus, faced with challenges, high declines, high capital intensity areas. Those should all come down, which essentially is all the other gas basins, if you don't have a liquid-focus, I think, today. So we'd expect kind of an allocation across gas basins to see activity. You've seen some of that come out already with some producers, and we'd expect more of that as we move forward through the earnings season here.

[John Mackay, analyst]

I appreciate that. And look, you guys -- I guess, second question. You guys gave a lot of guidance on the forward look. So I'm not trying to pick apart too much, but I guess last year, you guys kind of gave the forward look to '27. This year, your kind of forward look didn't roll over a year. Is there anything special about '27 or 2028? Or is this kind of -- you've gotten into a pretty steady EBITDA outlook, pretty steady CapEx outlook, you'd generally expect that to hold through past the '27, I guess, is the crux answer. Is that fair?

[Brendan Krueger, executive]

Yes. That's well said. I mean there's no material change to our outlook. And I think you can look at the remaining years and come to an average in terms of free cash flow after dividends, and there's nothing in particular that would change that as you move into 2028 and beyond. So we're executing on the plan we put out there. And to the extent something changed over time, we'd certainly update, but I think we'd continue to expect those expectations.

And ARs got plenty of inventory. There's over 22 -- over 20 years of inventory. I think 22 years was the number that they talked about on their call. And so plenty of inventory, like I said, multi-decade inventory at AR. So no impact from an inventory. It's just a matter of there's no real material change beyond '27 and so did not really feel the need to go out another year just to extend the years that we've already put out there.

[Operator]

[Operator Instructions] Our next question comes from the line of Zack Van Everen with TPH.

[Zackery Van Everen, analyst]

Just want to circle back on the production side to help me think through that. I believe AR mentioned 1% declines on total volumes, 3% like you guys had mentioned on gas. So maybe just a refresher on that drilling partnership. Are they just more incentivized to keep volumes flat around your system based on contracts? Or just any kind of clarity there would be helpful.

[Brendan Krueger, executive]

Yes. So just a reminder, the drilling partnership is in all of the wells that AR drilled during the year. And so with AR declining, AM gathers gross gas, of course, gross wellhead gas. So AR's net gas volumes are not really reflective of the gross operated wellhead volumes. So with the gross operated wellhead volumes, which include QL and other non-op interest owners, which is a small component that's where you get to flat gross wellhead volumes year-over-year, which is what we talked about.

[Zackery Van Everen, analyst]

Okay. That makes sense. And then just one on the -- I'll probably mispronounce this, but the Veolia lawsuit. I know in '23, it was kind of going back and forth. Any update there on when that might come through and what you might do with that cash if it does?

[Brendan Krueger, executive]

Yes. No update outside of what we disclosed in the 10-K. So always hard to pinpoint timing on those things and no update there in terms of -- none of the guidance we put out there includes Veolia. To the extent the cash comes in, we'll certainly just evaluate like we do with our regular free cash flow and what's the best return on that cash flow to the extent it comes in.

[Operator]

Our next question comes from the line of Ned Baramov with Wells Fargo.

[Ned Baramov, analyst]

It seems you continue to pay down debt even after hitting your 3x target later this year. So what is the ultimate leverage metric you would like to get to at AM?

[Brendan Krueger, executive]

Yes. I mean, again, I think we'd put out the 3x. I don't think we're necessarily saying we're going to pay down more than the 3x leverage. I think we're just saying we'll evaluate once we get to that level what makes the most sense between share repurchases, asset bolt-on acquisitions, further dividend increases. I mean I think we'll evaluate once we get to that point.

As we sit here today, share repurchases certainly make a lot of sense, which is why we came out with our $500 million share repurchase program. But we'll just continue to evaluate. And if you need to re-up the share repurchase program or if you get through it over the next few years, then you'll do that, but no magic to that and no identified further leverage target beyond the 3x right now.

[Ned Baramov, analyst]

Got it. And then a quick clarification on Slide 10. Does the 2025 through 2027 outlook for free cash flows after dividends, does that reflect the impact of share repurchases?

[Brendan Krueger, executive]

That is before share repurchases. So you'd have slightly different after-share repurchases.

[Ned Baramov, analyst]

Okay. Understood. And then a housekeeping item, if I may, just on some of the drivers for the water business. It seems that you're looking for fewer wells to be serviced in 2024. However, lateral length is now longer and I presume the barrels per foot is essentially unchanged, but net-net, my math seems to indicate that total water volumes should be pretty much unchanged in '24 relative to 2023. Am I thinking about this correctly?

[Brendan Krueger, executive]

No, they should be down. So the guidance we gave was about 20 fewer completions and lateral feet are up 2,000 feet. So you're down about 180,000 feet. And so volumes are down about 15% to 20% overall, which is part of the guidance that we gave.

[Operator]

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Agnew for any final comments.

[Justin Agnew, executive]

Thank you, everybody, for joining today's conference call. Please feel free to reach out with any further questions.

[Operator]

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