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Antero Midstream GP LP (NYSE:AM)
Q3 2020 Earnings Call
Oct 29, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Antero Midstream Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

It's now my pleasure to turn the call over to Michael Kennedy, Chief Financial Officer. Please go ahead, sir.

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

Thank you for joining us for Antero Midstream's third quarter 2020 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. Before we start our comments, I would 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; Glen Warren, President and CFO of Antero Resources and President of Antero Midstream; and Dave Cannelongo, Vice President of Liquids Marketing and Transportation.

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

Paul M. Rady -- Chairman and Chief Executive Officer

Thanks, Mike. I'd like to start by highlighting the progress AR has made on its asset sale program in 2020 beginning on slide number three titled AR Asset Sale, Refinancing and Debt Repurchase Update.

To date, AR has executed $751 million of asset sales achieving the bottom end of its $750 million to $1 billion asset sale target. These transactions have allowed AR to reduce its near-term maturities by $1.3 billion since initiating the asset sale program in the fourth quarter of 2019 and positions AR to repay its 2021 and 2022 maturities. AR continues to monitor various asset sale markets and any additional proceeds will be used for further debt reduction.

The current natural gas and NGL fundamentals continue to look encouraging as we head into 2021 as Dave Cannelongo will discuss in his comments. This further supports upside to AR's free cash flow profile driven by the scale AR has achieved over the last several years. To put it in perspective, as the second largest NGL producer in the US every $5 per barrel change in C3+ NGL prices improves AR's annual cash flow profile by over $225 million. On the natural gas side AR is 100% hedged in 2021, but the improving gas strip increases AR's underlying value and opportunity set.

Now let's turn to slide number four titled AR Firm Transportation Provides Stability. The red line in the chart represents the Appalachian basis differential, which has averaged $0.82 below NYMEX going back to 2014. AR's premium FT, firm transportation, has delivered a $0.05 discount to NYMEX over that same time frame. It is also worth noting that since AR has had access to its entire FT portfolio in 2018, it has been able to realize a 0.06 premium to NYMEX to date. During the third quarter this benefit was even more pronounced as Appalachian basis differentials blew out and regional prices traded at $1.50 below NYMEX.

As depicted on the slide AR's FT portfolio provides pricing stability and production flow assurance derisking AR's business model. It effectively provides an insurance policy that protects physical gas flow and allows AR to hedge liquid NYMEX Henry Hub prices. This has allowed AR to avoid shut-ins and curtailments experienced by other peers in Appalachia and in turn it drives stability and reliability for AM's revenue stream.

Lastly, I would like to briefly discuss AM's corporate sustainability report which highlights our outstanding environmental, social and governance or ESG performance on slide number five. Since its inception Antero Midstream has been committed to environmental excellence and our greenhouse gas intensity is one of the lowest in the industry. Our methane leak loss rate of 0.017% in 2019 was significantly below the ONE Future industry and sector targets of 1% and 0.28% respectively. Looking forward, we believe natural gas will be key to the energy transition in the coming decades as a complement to renewable energy growth. As one of the largest natural gas gathering and processing midstream companies in the US, we are well positioned to maintain our peer-leading ESG position while striving to improve our metrics even further through our 2025 environmental targets.

On the governance front in 2020 and 2019 Antero Midstream transitioned away from the MLP structure to a full C corp structure significantly enhancing shareholder rights and improving corporate governance. Our Board is comprised of a majority of independent directors and our compensation plans are based on metrics aligned with shareholder value, including return on invested capital, leverage, ESG metrics and per share cash flow growth.

With that I will turn it over to Dave Cannelongo.

David A. Cannelongo -- Vice President-Liquids Marketing & Transportation

Thanks, Paul. Let's turn to slide number six and begin by adding some color on the NGL and LPG macro environment. In the aftermath of the March, OPEC+ price war and the COVID-19 pandemic, the resulting decline in rig and completion crew activity in the oil focused shale basins has set up expectations of a prolonged period of depressed US oil production. Thus far, that is what has materialized, a decline in flattening of oil production, which has resulted in a decrease in associated NGL production from the oil focused plays.

The chart on the left hand side of the slide illustrates that US NGL supply forecasts have declined by 1.1 million barrels per day since the beginning of this year. We believe it may take three to four years for US NGL production to return to pre-COVID-19 levels. The chart on the right hand side of the slide highlights the expected surplus of LPG export capacity along the Gulf Coast. Since the start of the shale revolution we have enjoyed only a handful of periods when ample export capacity has been available.

Looking forward plentiful dock capacity will allow the US to fully access the international markets on a sustained basis, resulting in US Mont Belvieu prices closely linked to international markets. While Antero has enjoyed unrestricted access to these international markets through our Mariner East commitment for nearly two years now, this fundamental change on the US Gulf Coast will benefit Antero share of NGL production that is sold domestically and linked to Mont Belvieu pricing.

Turning to slide number seven titled NGL Price Recovery Expected, we can see that the strength of NGL markets relative to WTI and Brent has continued to stay elevated as a result of resilient petrochemical and residential commercial markets during this pandemic. Here we illustrate the outperformance of Mont Belvieu C3+ pricing relative to WTI in 2020. On the right, we see the continued outperformance in propane relative to Brent at the Far East Index or FEI which is the benchmark in Asia. What we've witnessed is that demand for LPG in key Asian markets during the third quarter has actually increased year-over-year and that the strength of NGLs witnessed early in the pandemic was not temporary.

Looking beyond the resilient residential and commercial demand, the relative preference of gasoline in the global transportation fuels market during this pandemic has also been favorable for NGL pricing on a relative basis to oil. Gasoline has been less effective than distillates, which have seen inventories increase significantly due to the more pronounced and prolonged decline in jet fuel demand. Resulting weak distillate demand has led to reduced refinery runs in the US and globally, which in turn has lowered the production of refinery LPG and other gasoline blend components such as naphtha. Ultimately these downstream trends have been even further supportive of blending butanes and C5+ into the gasoline pool.

In addition, the relatively tighter supply and demand dynamics for naphtha has a knock-down effect for LPG as there is some competition between naphtha and LPG for use as a feedstock in select steam crackers in Europe and in Asia. Overall, we believe the global market dynamics are constructive for NGL prices at a minimum in the near to mid-term time frame.

Turning to slide number eight titled NGL Pricing Outlook. The chart illustrates the value that some third party analytical teams, including the Citibank commodities team shown here, continue to place on NGLs in 2021 and beyond based on their bottoms-up global supply demand models. Behind many of these forecasts is the realization that if oil is to stay rangebound throughout 2021 at $40 to $45 a barrel, the world will simply not be able to supply enough hydrocarbons in the subsequent years to meet demand in a post-pandemic environment which undoubtedly will result in higher prices.

Looking more closely at the Northeast takeaway capacity, slide number nine titled Northeast LPG Supply & Demand highlights the reason for a tightening of the Northeast differentials to Mont Belvieu for LPG that has resulted from the Mariner East project. Realized Northeast differentials continue to improve year-over-year with more and more volumes shipping out of the basin on the Mariner East system as Energy Transfer has added incremental capacity since initially placing Mariner East 2 in service. With the Northeast LPG supply potentially at its peak here in 2020, we ultimately expect Northeast differentials to Mont Belvieu to strengthen even further in coming years.

With that I will turn it over to Mike.

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

Thanks, Dave. I'll begin my comments with third quarter operational results, beginning on slide number 10 titled Year-over-Year Midstream Throughput. Starting in the top left portion of the page, low pressure gathering volumes were 3.1 Bcf per day in the third quarter, which represents a 13% increase from the prior-year quarter. Compression volumes during quarter averaged 2.8 Bcf per day, a 16% increase compared to the prior year. AM added a 120 million per day compressor station in the Marcellus and compression capacity was 90% utilized during the third quarter of 2020. Our 50-50 joint venture gross processing volumes averaged 1.5 Bcf per day, a 43% increase compared to the prior-year quarter. Processing capacity was over 100% utilized during the third quarter. JV gross fractionation volumes averaged 39,000 barrels per day, a 22% increase from the prior year. JV fractionation capacity was 98% utilized during the quarter.

Fresh water delivery volumes averaged 111,000 barrels per day, a 21% decrease from the prior-year quarter, driven by lower completion activity by Antero Resources. Fresh water delivery volumes were ahead of expectations during the third quarter, driven by an acceleration of completions as AR averaged a company record 8.5 completion stages per day. This pulled incremental stages into the third quarter originally scheduled for the fourth quarter and as a result, we expect a reduction in freshwater delivery volumes in the fourth quarter.

Moving on to financial results. Adjusted EBITDA for the third quarter was $229 million, a 5% increase compared to the prior-year quarter. Distributable cash flow for the third quarter was $189 million resulting in a DCF coverage ratio of 1.3 times. Capital expenditures during the quarter were $37 million, a 77% decrease compared to the third quarter of 2019. During the third quarter, we generated a company record of $158 million of free cash flow before return of capital, compared to just $23 million in the prior-year quarter.

Moving onto the balance sheet and liquidity. As of September 30th, 2020 Antero Midstream had $1.19 billion drawn on its $2.13 billion revolving credit facility, resulting in approximately $950 million of liquidity. AM's total debt and leverage were both flat quarter-over-quarter at $3.1 billion and 3.7 times respectively.

I'll finish my comments on slide number 11 titled AM Updated Guidance Summary. As depicted on this slide, we have taken significant steps to reduce capital investments by over $100 million compared to our original budget, a 34% decrease. Driven by throughput exceeding expectations and operating expense reduction achieved to date, we increased our adjusted EBITDA guidance from the previous range of $800 million to $815 million to $835 to $845 million. These two factors have driven a $90 million or 23% increase in our free cash flow guidance in 2020 at the midpoint of the revised guidance range of $485 million $495 million. In addition, we are currently trending toward the higher end of our return on invested capital target of 14% to 16%. Our just-in-time capital investment philosophy has positioned us to quickly adapt to changes in AR's development plan and avoid being overbuilt on midstream infrastructure. All of these achievements would not be possible without the hard work and dedication from all of our employees who safely delivered another exceptional operational quarter.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today is coming from Jeremy Tonet from JP Morgan. Your line is now live.

James -- JP Morgan -- Analyst

Hey. Good morning, guys. This is James [Phonetic] on for Jeremy. I guess just to start it off with 2021 and understand it's early to provide any numbers there, but I guess just given the revised guidance for 2020 and what that assumes for 4Q, would it be fair to assume that 4Q might be a good annualized run rate for 2021 just assuming [Indecipherable]?

Paul M. Rady -- Chairman and Chief Executive Officer

No. I mean, it would be, at least on the revenue side probably OK, but Antero Midstream had a couple expense items in 2020 that will not repeat in '21 and that's specifically around the Clearwater Facility. And then also on the -- it remains to be seen, but the rebate step-up in 2021, the threshold levels, so some of those may or may not be achieved, whereas in the 2020 time frame and in fourth quarter we expect those to be achieved. So EBITDA should be higher than that kind of fourth quarter run rate.

James -- JP Morgan -- Analyst

Got it. That's helpful. And then just shifting to kind of the debt profile here. It seems like it's been trending a little bit higher in the past few quarters. Can you just talk to me about what do you expect in terms of the pace of deleveraging next year and then you guys have mentioned you're comfortable within this kind of three to four times range. But just want to see if -- given the free cash flow inflection, if you can see that leverage ticking lower next year.

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah, I don't know what you're referring on the second and the third quarter. We actually paid down a little bit in the second quarter and the third quarter. We only increased leverage by $30 million and that's because we have our interest expense and the actual cash interest paid occurs in March and September of every year for $60 million versus an interest expense of $30 million. So we actually had free cash flow above the return of capital this quarter. I think it was $147 million, [Phonetic] about $10 million worth. So that's the first time.

So, no we expect leverage to be flat when we look at the models going forward. We don't add any absolute leverage. It stays flat and with EBITDA ticking up a little bit that 3.7 times trends a bit lower, but kind of stays in the mid 3s level.

James -- JP Morgan -- Analyst

Got it. And just one more, if I can, just sort of a macro one. But obviously given the takeaway of the basin, you have the Atlantic Coast cancellation and there is MVP hurdles remaining. I guess, just looking out to next year, what's really the impact if maybe MVP is delayed on the AM business?

Paul M. Rady -- Chairman and Chief Executive Officer

For me I think that would be encouraging for AR. Obviously AR has the firm transport already in place to deliver its production to the premium priced markets. So any widening in basis does not affect them from a production, flow assurance, from a throughput in a AM system but it'd probably allow AR to have lower marketing expense, which would improve just their overall financial profile.

James -- JP Morgan -- Analyst

Got it. Thanks [Indecipherable].

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

Thanks, James.

Operator

Thank you. Our next question today is coming from John Mackay from Goldman Sachs. Your line is now live.

John Mackay -- Goldman Sachs -- Analyst

Hi, everyone. Good morning. Thanks for the time. Just wanted to circle back on two of those, actually just asking a little bit different way. The 2020 guidance implies a bit of a step-down for 4Q '20. I understand that AR production is going to step back a little bit. But is there anything else moving there, maybe a one-off on either side?

Paul M. Rady -- Chairman and Chief Executive Officer

No. I mean, one thing I mentioned in my comments probably about half the completion activity that we had in the second and third quarter on the water. And so when you look at that way I think the water EBITDA for this quarter was in between $30 million and $35 million. So half of that would suggest next quarter's water EBITDA would be $15 million to $17 million. So that's part of the primary stepdown. And then you do have a little bit lower, about 100 million a day lower volumes of throughput. So those two in combination gets you to that. Implied EBITDA kind of at the midpoint in the fourth quarter of $195 million to $200 million.

John Mackay -- Goldman Sachs -- Analyst

Great. That's helpful. Thank you. And then my -- actually didn't use the buyback this quarter, but could you guys just share how you think about using the buyback going forward and whether or not you might consider increasing leverage even just temporarily to buy back shares?

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah. No, we won't consider increasing leverage to buy back shares. We still have $150 million available to us and we're just opportunistic around that. But we definitely take into account our leverage and do not want to increase our leverage for buybacks.

John Mackay -- Goldman Sachs -- Analyst

That's it for me. Thank you.

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

Thank you, John.

Operator

Thank you. Our next question today is coming from Gregg Brody from Bank of America. Your line is now live.

Gregg Brody -- Bank of America -- Analyst

Hi, guys. Just a clarification on the midstream fees, incentive that was in this quarter which I guess you paid AR, do you expect that to occur in the fourth quarter as well or --

Paul M. Rady -- Chairman and Chief Executive Officer

Yes.

Gregg Brody -- Bank of America -- Analyst

You do. And that's in the numbers. And there is no delay in that that happens -- so for instance in the third quarter that happened you paid AR in the third quarter for it or [Speech Overlap]

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

In month delay, we paid them in October.

Gregg Brody -- Bank of America -- Analyst

October. Okay. That's it for me. Thanks for the time.

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

Thanks, Gregg.

Operator

Thank you. Our next question today is coming from Sunil Sibal from Seaport Global Securities. Your line is now live.

Sunil Sibal -- Seaport Global Securities -- Analyst

Yes. Hi. Good morning, guys. Thanks for taking my question. First question was related to the NGL volumes that you processed with your JV. It seems like there was a pretty decent pickup sequentially in that number. Is that anything to do with how you are recovering NGLs or because the process volumes were up 6% but NGL flows seems like were up more. So just trying to understand that.

Paul M. Rady -- Chairman and Chief Executive Officer

No, nothing different. It was just from the production growth at AR and it being focused on the heavy liquids window of the Marcellus.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay. And then on the consolidation front, obviously the E&P sector is seeing some consolidation effort. I was curious how you are -- what your views are around consolidation in the midstream side. I think in the past you guys have talked about growing third party business. I was wondering if you could frame us for -- frame for us any opportunities or how do you see that playing out.

Paul M. Rady -- Chairman and Chief Executive Officer

No, we're still focused on organic -- the organic business. But we definitely keep our eyes open for opportunities and I don't think there's anything near term but we'll keep evaluating if anything comes up in the basin. And we generally have shied away from situations where we buy in the gathering driven by another producer. So that's not really been of interest. It's been more looking at downstream opportunities.

Sunil Sibal -- Seaport Global Securities -- Analyst

Got it. Thanks.

Paul M. Rady -- Chairman and Chief Executive Officer

Thank you.

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

Thank you, Sunil.

Operator

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Michael Kennedy for any further or closing comments.

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

I want to thank everyone for participating in our conference call today. If there are any further questions, please feel free to reach out to us. Thanks again.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Michael N. Kennedy -- Senior Vice President-Finance and Chief Financial Officer

Paul M. Rady -- Chairman and Chief Executive Officer

David A. Cannelongo -- Vice President-Liquids Marketing & Transportation

James -- JP Morgan -- Analyst

John Mackay -- Goldman Sachs -- Analyst

Gregg Brody -- Bank of America -- Analyst

Sunil Sibal -- Seaport Global Securities -- Analyst

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