Antero Midstream Partners LP (AM) Q1 2021 Earnings Call Transcript

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Antero Midstream Partners LP (AM 0.44%)
Q1 2021 Earnings Call
Apr 29, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Antero Midstream First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn this conference over to our host, Brendan Krueger, Vice President of Finance. Thank you, you may begin.

Brendan E. Krueger -- Vice President of Finance and Treasurer, Antero Resources

Thank you for joining us for Antero Midstream's first quarter 2021 investor conference call. We'll spend a few minutes going through the financial and operational 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 Michael Kennedy, CFO of Antero Midstream.

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

Paul M. Rady -- Chairman and Chief Executive Officer

Thanks, Brendan. I'd like to start on Slide number 3 highlighting the step change improvement to AR that's Antero Resources balance sheet. During the first quarter of 2021, AR generated over $400 million of free cash flow as depicted on the top left portion of this slide. AR used this free cash flow to reduce total debt from $3.0 billion to $2.6 billion during the first quarter. The top right quadrant of this slide illustrates the LTM EBITDA improvement from $1.0 billion to $1.3 billion. This improvement was a direct result of AR's liquids focus and scale, which allowed us to take advantage of the improvement in C3 plus NGL at oil prices. This total debt reduction, combined with an improvement in AR's LTM EBITDAX, decreased AR's leverage by over a turn to 2.0 times.

Lastly, during the spring redetermination period, AR's borrowing base was reaffirmed at $2.85 billion, supported by the deep drilling inventory of liquids-rich locations in AR's portfolio. This reaffirmation, along with the $700 million senior note issuance and debt reduction during the quarter, resulted in AR's liquidity doubling to $1.8 billion.

Looking ahead, we expect AR to continue generating free cash flow and reducing total debt, which is expected to result in a completely undrawn credit facility balance over the next few quarters. This significant improvement in the financial strength of AM's primary customer, AR, continues to strengthen the outlook at AM.

To put AR's first quarter financial results into perspective, let's turn to slide number 4. Since we are early in the reporting cycle, most of these figures are based on consensus estimates. The top of the slide highlights AR's balance sheet positioning compared to its E&P peers in Appalachia. On the top left, you can see AR's $2.6 billion of total debt ranks third among its peers. However, the chart on the top right hand side of the page shows that AR's net debt to EBITDAX of 2.0 times ranks second. The bottom of the page focuses on financial performance and scale. AR's $519 million of EBITDAX in the first quarter ranks second in Appalachia and is substantially above the remaining peers.

Looking at free cash flow. AR's $419 [Phonetic] million of free cash flow during the first quarter is dramatically above the Appalachian peers and highlights the significant scale and liquids-rich exposure that AR has in a rising commodity price environment. In summary, AR is one of the strongest customers in Appalachia today and a strong AR results in a strong AM.

Now, let's turn to slide number 5 to discuss the recent NGL hedging done at AR that protects their free cash flow profile and results in further debt and leverage reduction throughout 2021. While the fundamentals remain strong for C3 plus NGLs, we viewed this hedging program as an insurance policy to protect AR against any seasonal weakness or risk associated with the change in the COVID-19 pandemic recovery.

Before getting into NGL hedging on the slide, I want to remind everyone that AR is also over 90% hedged in natural gas in Cal-21 at $2.76 per mmbtu. During the first quarter, AR hedged 36,000 barrels a day and 35,000 barrels a day of C3 plus NGLs for the second quarter and third quarters of 21, respectively. This represents approximately one-third of AR's C3 plus NGL production during the summer months, which can be seasonally weakest -- the weakest pricing months for NGLs. Importantly, we are hedging at incredibly attractive prices during the summer, around $36 a barrel, which is approximately double the price that AR realized at this same time last year. Hedging has always been a core principle at AR and we plan to continue prudently layering on additional hedges across all commodity products to support AR's consistent development program.

Before turning the call over to Mike, I want to congratulate Glen on his upcoming retirement and thank him for all of his contributions to the Antero entities over the years. Glen and I have been partners for over 20 years, dating back to coal bed methane exploration and production in the Powder River Basin. Since then, we became early shale pioneers, adopting horizontal drilling and multi-stage completions in the Barnett Shale and have built Antero into one of the largest and most integrated NGL and natural gas producers in the U.S. Over this last year, Glen was instrumental in successfully executing a series of strategic transactions and capital market activities, which allowed us to navigate the challenging environment and put us in the position that we are today.

As we look ahead, AR and AM are in the strongest financial positions that we've been in since inception, both generating significant free cash flow with strong balance sheets and leverage profiles. While Glen will be missed, I'm very excited about internally backfilling his positions with Mike Kennedy and Brendan Krueger, which highlights the deep bench we have here at Antero.

With that, I'll turn it over to Mike.

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

Thanks, Paul. I'll begin my AM comments of the first quarter operational results beginning on slide number 6 titled 'Year-Over-Year Midstream Throughput'. Starting in the top left portion of the page, low pressure gathering volumes were 2.9 Bcf per day in the first quarter, which represents a 5% increase from the prior year quarter. Compression volumes during the quarter averaged 2.7 Bcf per day, an 8% increase compared to the prior year quarter. Our 50-50 joint venture gross processing volumes averaged 1.4 Bcf per day, an 8% increase compared to the prior year quarter. Processing capacity was 100% utilized during the first quarter. JV gross fractionation volumes averaged 38,000 barrels per day, a 15% increase from the prior year quarter. Fresh water delivery volumes averaged 104,000 barrels per day, a 43% decrease from the prior year quarter, driven by lower completion activity by Antero Resources as they transitioned to a maintenance capital development program.

Adjusted EBITDA for the quarter was $219 million, a 1% increase year-over-year. Capital expenditures were $30 million, a 64% decrease year-over-year. Looking ahead, we expect an increase in our quarterly capital expenditures as we begin construction on infrastructure supporting the drilling partnership. And we expect to drive throughput growth over the next several years. Specifically, we expect to invest roughly two-thirds of our 2021 budget of $240 million to $260 million in the second and third quarter combined as we take advantage of better weather during the summer months.

Importantly, a third drilling rig has already arrived in the Utica to commence development by the drilling partnership, utilizing Midstream infrastructure that is largely in place. We expect completion activities using AM's freshwater delivery system to begin on those two pads in the back half of the year and expect to turn in line those wells by year-end to drive throughput growth heading into 2022.

During the first quarter of 2021, we generated $146 million of free cash flow before dividends, a $50 million increase compared to last year. Importantly, for the second time in the last three quarters, we generated free cash flow after dividends, which totaled $39 million during the quarter.

I'll finish my comments with slide number 7 titled 'Uniquely Positioned Midstream Entity'. We're very excited for the future of Antero Midstream following the announcement of the drilling partnership. We believe AM is uniquely positioned in the Midstream space with its C-Corp structure and one of the very few companies with expected throughput and EBITDA growth over the next several years. Importantly, AM has significant visibility into this throughput growth, which supports our confidence in generating attractive rates of return on the incremental investment supporting the drilling partnership.

As a reminder, we expect the incremental $175 million of capital investment supporting the drilling partnership over the next five years to generate $200 million of incremental free cash flow, net of that capital. So these are highly economic and attractive opportunities for AM. While it does result in a near-term increase in capital for AM, as a Midstream company, we're in this business to evaluate and invest in projects that generate attractive rates of return and deliver value to our shareholders. We have a strong track record, generating a 14% ROIC on average over the last six years, well in excess of our cost of capital.

Importantly, our new financial policy allows us to internally finance both our capital investments and a return of capital to shareholders, which we believe is the prudent decision that resulted in leverage trending toward the low 3 times range.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Brian Reynolds with UBS. Please go ahead.

Brian Reynolds -- UBS -- Analyst

Hi. Thanks for taking my question. Michael, and Brendan, first, congrats to you both. To start out, I was wondering how we should think about gathering rate relief expiration with AR in 2023. I'm just wondering if we could see a share buyback from AR in exchange for continued rate relief as it appears that AR may look to potentially increase production beyond 2025. Thanks.

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah, I know we talked in the other call, the first order of business for AR is to pay down debt below $2 billion and then we'll assess at that time whether further debt paydown or return of capital or what form of return of capital, a combination of both. We do have a slide out there on AR's website that walks through all the reductions in the firm, transport volumes over that period, so that's a step down between now and '24 and '25 and it's more rightsized to what our actual production at this maintenance capital levels would add in '24 and '25. But for the next three to four years, I would say AR's in the maintenance capital mode.

Brian Reynolds -- UBS -- Analyst

Great. Thanks. And lastly, just given the long-term drilling expectations for AR seem pretty fixed at this point, are there any unique opportunities for AM to pursue, i.e., further Downstream or around Marcus Hook that could provide incremental value to the Antero family as a whole? Any color would be helpful. Thanks.

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

When you look at the drilling JV -- I mean, that's really third-party volumes and third-party business. So that was terrific for AM. As I mentioned in my comments, AM to have 2%, 3%, 4% throughput growth over the next three years is somewhat unique in the Midstream -- for a Midstream company. So I think AM is well positioned from a growth standpoint with capital being very efficient and having just-in-time visibility into that. That will deliver that free cash flow growth of $200 million net of that $175 million of capital. So AM is in good shape from that and with the system being almost fully built out, has very low capital over the next couple of years as well. So generating free cash flow after dividends in the $500 million plus range and generating free cash flow -- I'm sorry, before dividends in the $500 million plus range and then after dividends this year and next, kind of flat to $25 million positive. But then after that, about $100 million a year. So very attractive profile for Antero Midstream.

Brian Reynolds -- UBS -- Analyst

Great, thank you guys for answering my questions. Have a great day.

Paul M. Rady -- Chairman and Chief Executive Officer

Thanks, Brian.

Operator

Our next question is from Jeremy Tonet with J.P. Morgan. Please go ahead.

James -- J.P. Morgan -- Analyst

Hey, good morning, guys. This is James on for Jeremy. Just two quick ones from me. I guess, to start on the gathering, opex seemed to tick up in this quarter just looking past the run rate from last year. Maybe just looking forward, is that run rate to use or how are you guys thinking about that?

Paul M. Rady -- Chairman and Chief Executive Officer

No, it should come down, always in the winter and the first quarter is always a little bit higher. It should drop. Operating in winter weather, once the weather improves, which it has, it comes back down to its normal run rate.

James -- J.P. Morgan -- Analyst

Got it. And then just on the free cash flow front, starting the year off with a strong kind of 1Q with the $40 million after dividends. You guys messaged that 2Q and 3Q will be more capital intensive, but just on the cadence of the year, do you see kind of 4Q as returning to positive free cash flow post dividends or just any color you can share there in terms of what you guys are budgeting there?

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

Yeah, right now, Q4 is about neutral. There is a step down in the water activity in Q4. So you're correct, Q2, Q3 there is a bit of a negative just because the capital steps up in that $80 million to $90 million range for those two quarters. Capital, though, steps down a bit in Q4, but with a little bit less water, you have a little bit less EBITDA in that quarter. So it's about flat. So very positive this quarter, $39 million, a little bit negative in the second and third quarter and then neutral in the fourth. That's the cadence.

James -- J.P. Morgan -- Analyst

Got it, thanks. And, sorry, just one more if I could. I noticed the asset sale recorded in the quarter. Anything you can share there and if there's potential down the road for similar sales?

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah, that was just some sales from excess pipe that we did not need anymore. We had some gains on some sale of pipes that showed up in 4Q '20 and so a little loss here. So it was net breakeven, but we just sold some excess pipe. So, not important.

James -- J.P. Morgan -- Analyst

Got it. Thanks. Appreciate the questions.

Paul M. Rady -- Chairman and Chief Executive Officer

Thanks, James.

Operator

Our next question is from John McKay with Goldman Sachs. Please go ahead.

John McKay -- Goldman Sachs -- Analyst

Hey, good morning. Thanks for the time. I just wanted to circle back, I know this came up earlier on this call and came up a little bit on the AR call. But again, just with AR getting closer to that 2 times level, I know you're talking more about shareholder returns up there, but it sounds like growth is, in theory, still on the table. Just wondering if you could unpack a little bit maybe what would drive that decision. Is it NGL prices? Is it basin takeaway? Just anything that we can kind of frame an argument. Thanks.

Paul M. Rady -- Chairman and Chief Executive Officer

Yes, I think in our guide in here, growth was on the table, but maybe after like three to four years growth, just depending on what kind of environment we're in because with the amount of free cash flow generation we have at AR over that timeframe, it's just somewhat astounding how much it is. After three or four years, maybe you would think about it. But until then, it's very focused on paying down debt and returning capital to shareholders.

John McKay -- Goldman Sachs -- Analyst

Okay.

Paul M. Rady -- Chairman and Chief Executive Officer

[Speech Overlap] Yeah. The growth is really coming from the drilling partnership. I think that's a key takeaway of this. For AM it is -- AM does have growth. It's volume, throughput's growing, the gross volumes from this -- from Antero's field is growing. It's just from a net perspective Antero is at maintenance capital.

John McKay -- Goldman Sachs -- Analyst

Okay. Absolutely. Thank you for that. And maybe just one more in the weeds. Looks like Stonewall picked up a little bit this quarter. Just wondering is that a timing thing or is something new going on in that asset? I know it's small, but.

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

Yeah, that was essentially a catch-up payment from -- there were some deferred capital in 2020 because of COVID. That capital has kind of been pushed into '21 and they held a reserve for that and so they kind of released that reserve to us in the first quarter. We still do expect those annual distribution. It's in the $10 million to $12 million this year, so nothing has changed there. We just had a catch-up payment in the first quarter.

John McKay -- Goldman Sachs -- Analyst

All right. And then, maybe I'll just squeeze one more in, around the JV assets. Just any update on Smithburg timing and it also looks like maybe the Sherwood margin stepped up a little bit or it's the processing margin overall. So maybe just anything else going on there would be helpful.

Paul M. Rady -- Chairman and Chief Executive Officer

You're not from there, but on Smithburg, it's July 1.

John McKay -- Goldman Sachs -- Analyst

[Speech Overlap] Okay. Great, thank you.

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

Yeah.

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah. Thanks, John.

Operator

Our next question is from Kyle May with Capital One Securities. Please go ahead.

Kyle May -- Capital One Securities -- Analyst

Hi, good morning, everyone. Just wondering if you could talk more about the construction and development of infrastructure for the drilling partnership and just curious about more details on the assets that you're developing and maybe longer term, if we should expect kind of lumpiness of spend similar to this year.

Paul M. Rady -- Chairman and Chief Executive Officer

I wouldn't really say it was a lumpiness of spend this year. I mean, to have $80 million to $90 million in the second and third quarter and call it $60 million in the fourth and those are the quarters post to drilling JV, I mean, that's not terribly lumpy. I think it's fairly consistent. There is always a little less in the winter, because it's a little harder to build in the winter. The projects, it's not really anymore processing. There is one processing plant like we just mentioned in the last question with Smithburg. Really it's just building out the low pressure high pressure and compression to serve the increased drilling pace that occurs because of the drilling JV. It's about 60 more wells over the next four years. So just gathering, though, it's kind of our bread and butter and then also providing fresh water distribution to those wells for completions. So right within our existing system, really just building it out a little bit more on an accelerated time fashion to meet the accelerated volumes.

Kyle May -- Capital One Securities -- Analyst

Got it. And in the water segment, it looks like you serviced 24 wells in the first quarter, which is kind of similar to what you did in the second and third quarter of last year. Should we think about this as the high watermark for the year or is this a more normalized run rate?

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah, no, it's going to be the high watermark. It was 24 completions but you've got to remember that some of those were simul fracs of volumes. We count it as when it spud, but it was completing kind of work in progress over that March 31 timeframe so the volumes slipped into 2Q. But then the actual wells that are spud in those quarters, about 15 to 20 in 2Q and 3Q and then drops off to around 10 wells in Q4. But it's very similar to last year. Yeah.

Kyle May -- Capital One Securities -- Analyst

Okay, got it. That's helpful. Thank you.

Paul M. Rady -- Chairman and Chief Executive Officer

Thanks, Kyle.

Operator

Our next question is from Timm Schneider with Citi. Please go ahead.

Timm Schneider -- Citi -- Analyst

Hey. Just really quick one for me, just confirming that you're not a cash taxpayer through '25. So, [Speech Overlap]

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

That is correct. Yeah. that's correct.

Timm Schneider -- Citi -- Analyst

Got it. That was it, quick and easy. Thank you.

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

All right. Thanks, Timm.

Paul M. Rady -- Chairman and Chief Executive Officer

Thanks, Timm.

Operator

Our next question is from Sunil Sibal with Seaport Global Securities. Please go ahead.

Sunil Sibal -- Seaport Global Securities -- Analyst

Yes, hi, good morning, guys. So just a couple of follow-ups actually. So first. it seems like as activity picks up, could you give us a sense of cadence of volumes on your gas systems for the remainder of the year?

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah. They're flat. They pick up a bit in the -- they're relatively flat throughout the year.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay.

Paul M. Rady -- Chairman and Chief Executive Officer

The drilling JV, really those volumes are coming on at the end of the year. So you really don't see the pickup in the volumes until 2022 from that -- from the drilling joint venture.

Sunil Sibal -- Seaport Global Securities -- Analyst

So basically, then we should think about 2022 as a little bit of a step change in volumes. Is that fair?

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah, it's up 2% to 3% and that's the same case for every year, '22, '23 and '24.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay, got it. And then on a different subject. It seems like the Shell cracker in the Northeast is expected to start up within the next year or so. I realize that it helps kind of in-basin pricing, but I was curious in terms of any impact on Antero Midstream from the start up of that cracker.

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

Yeah, there is no impact. It will just -- for Antero Resources, it will help our realizations. We'll get NYMEX gas plus pricing on that. So it'll just improve our margins at Antero Resources. But since we're at maintenance capital at AR, it'll just be additive to the free cash flow profile.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay, got it. Thanks for the outlook.

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

Yeah.

Paul M. Rady -- Chairman and Chief Executive Officer

Thanks, Sunil.

Operator

Our next question is a follow-up from Brian Reynolds with UBS. Please go ahead.

Brian Reynolds -- UBS -- Analyst

Hey. Thanks for taking my question again. Just a quick question around the water treatment litigation. Was any of the potential -- as part of the litigation, was any of that included in your long-term guidance with regards to free cash flow? And just any commentary around that would be helpful with the general case coming up...

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah, no. It was not.

Brian Reynolds -- UBS -- Analyst

Okay, thanks.

Paul M. Rady -- Chairman and Chief Executive Officer

Yeah.

Operator

There are no further questions registered at this time. I would like to turn the conference back over to management for any closing remarks.

Paul M. Rady -- Chairman and Chief Executive Officer

Yes, thank you for joining us on today's call and please follow up with any questions. Thank you.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Brendan E. Krueger -- Vice President of Finance and Treasurer, Antero Resources

Paul M. Rady -- Chairman and Chief Executive Officer

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

Brian Reynolds -- UBS -- Analyst

James -- J.P. Morgan -- Analyst

John McKay -- Goldman Sachs -- Analyst

Kyle May -- Capital One Securities -- Analyst

Timm Schneider -- Citi -- Analyst

Sunil Sibal -- Seaport Global Securities -- Analyst

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