Antero Resources Corporation
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Greetings and welcome to the Antero Resources’ Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And as a reminder, this conference is being recorded. It is not my pleasure to introduce your host, Michael Kennedy, Senior Vice President of Finance. Thank you, sir. You may begin.

[Michael Kennedy:]

Thank you for joining us for Antero’s fourth quarter 2020 investor conference call. We'll spend a few minutes going through to the financial and operational highlights, and then we'll open it up for Q&A. But also I like to direct you to the homepage of our website at www.anteroresources.com, where we have provided a separate earnings call presentation that will be reviewed during today's call.

[Paul Rady:]

Thank you, Mike. Let's begin on Slide Number 3, by discussing the formation of the drilling partnership that we announced this morning. Under the agreement QL Capital, an affiliate of Quantum Energy Partners, will fund 20% of drilling and completion capital in 2021; and between 15% and 20% of total drilling and completion capital in 2022 through 2024 in exchange for a proportionate working interest percentage in each wells spud. QL will participate in every well that Antero drills over the next four years, starting with wells that were spud as of January 1, this year. So as of about seven weeks ago. As you can see on the lower right side of the slide, we will drill and complete over 300 wells over the next four years together. The result is an incremental 60 gross wells being drilled through 2024 as compared to our initial base development plan. Importantly, on a net basis, AR's net capital spending and production will remain unchanged from our prior maintenance capital programs. Slide Number 4 illustrates how Antero is in a unique position to benefit from a drilling partnership. First, we have over 2,000 premium, undeveloped, core drilling locations in the Marcellus and Ohio Utica, and a contiguous acreage footprint that delivers efficient development. I'll discuss our advantaged drilling inventory in more depth, a little later in the presentation. Second, since over 1,400 of Antero’s 2000 plus premium undeveloped core locations are liquids rich, we are well-positioned to take advantage of the strong NGL prices that Dave Cannelongo will talk about in just a minute. Based on our recent basin-wide study of the remaining undeveloped locations in Appalachia, we estimate that these 1,400 AR locations represent approximately 38% of the remaining liquids rich core locations in Appalachia.

[Dave Cannelongo:]

Thanks, Paul. Let's begin by discussing the NGL and LPG markets this winter. For the last several quarters, we have talked about the imbalance in supply and demand in the LPG market underpinned by strong international demand for LPG in the residential, commercial and petrochemical markets and lower supply from U.S. shale, OPEC and refinery runs. Despite entering the winter with near record propane inventory levels on an absolute barrels basis, a lackluster U.S. crop drying season and mild early winter. Due to LPG exports, we saw U.S. propane inventory levels experience a record setting rate of withdrawal as illustrated in Slide number 10, titled propane market fundamentals.

[Glen Warren:]

Thank you, Dave. Good morning. A bullish NGL price outlook is very encouraging for Antero due our position as the second largest NGL producer in the U.S., producing 132,000 barrels a day of C3+ in the fourth quarter last year. At that production level, every $2 per barrel or $0.05 per gallon change in C3+ pricing as a $97 million impact on cash flow. You can see that lower right on Slide number 14. A key catalyst to Antero self-driven plan to number one, address near-term maturities, and number two, fill our premium FT in a flat production environment has been a series of creative financings. As highlighted on Slide number 15, over the past year, we've raised over $1.1 billion of committed funds through an overriding royalty transaction, a volumetric production payment, and a drilling partnership with three outstanding counterparties, all leaders in their respective spaces. Those are 63 Capital Partners, JPMorgan, and Quantum Energy Partners. We truly appreciate their strong endorsement of our assets, operations and company. Now let's turn to Slide number 16, entitled Much Improved Senior Note Term Structure. In late 2019, we announced a de-leveraging program with a goal of addressing our near-term maturities. Since then, we have eliminated $2.3 billion of near-term maturities and reduced absolute debt by over $800 million. As you can see in the maturity schedule at the bottom of the slide, we now have just $574 million due over the next four years, a dramatic improvement from the nearly $2.9 billion we had due over that timeframe at the beginning of the program. Slide number 17 titled Significant Leverage Reduction and it illustrates how the recent financing transactions combined with expected free cash flow have and will dramatically reduce borrowings under our credit facility and improve our leverage profile. The dark green bar on the left hand side of the slide is our credit facility balance at year end 2020. Accounting for the net proceeds from our two recent senior note offerings that's net of the – the bond redemptions between 2022s, which totaled $525 million after calling the 2022 notes, the convertible senior notes, equitization and the $51 million contingency payment related to royalty sale and our 2021 projected free cash flow of at least $500 million, we expect to have almost nothing drawn on our credit facility at year end 2021.

[Operator:]

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question is coming from the line of Arun Jayaram with JPMorgan. Please proceed with your question.

[Arun Jayaram:]

Yes, good morning, gentlemen. I guess the first question is if you could provide a little bit more color around the 2021 liquids guide relative to 2020, it looks like the mix is going down from 33% to 31%. And perhaps you give us a bit more color around the accounting for the royalty barrels and how that's affecting your C3+ volume guide for 2021?

[Michael Kennedy:]

Yes, Arun. Hi, this is Mike Kennedy. We elect obviously not to pay our royalty owners and uneconomic NGLs. So in 2020 obviously with the liquids prices, the averages those were uneconomic to process. So we did not pass that along to our royalty owners with the increase in commodity prices and liquids prices in 2021 that will not be the case. So what occurred in 2020 is we allocated all of the liquids from the wells to Antero and paid our royalty owners and natural gas volumes in 2021. We now will pay the royalty owners and their share of the liquids and have lower royalty payments from a gas perspective. So, it's actually a huge benefit to Antero from a cash flow standpoint. When you look at 2020, we allocated ourselves about a $50 million negative cash flow amount related to processing on economic NGLs and retaining them for our own account versus allocating them to royalty owners in 2021 that reverses. And so, we'll have a little bit higher realizations because of that and lower processing costs, but also a little bit lower net production.

[Arun Jayaram:]

Got it. Got it. And that's helpful. And just a follow-up is, can you provide a little bit more color around the potential marketing uplift in 1Q, given the conditions in Texas and Mid-Continent, we did note that you did raise your natural gas realization guidance for the full year, but maybe help us to understand what kind of uplift you could see given the pricing surge that we're seeing on our screens?

[Michael Kennedy:]

Yes, yes. We did up our guidance on that without the recent winter weather then it would have been flat to $0.10 premium with our initial guidance. Over the last week, we've been able to track some of our gaps where it's needed most and that enabled us to capture about an incremental $75 million of revenue, $50 million of that will be realizations, $25 million will be in lower marketing expense. So we did adjust our realized guidance for that $50 million. So that's why we increased it from flat to $0.10 to now it's $0.10 to $0.20. And you'll see the majority of that increase occurred in the first quarter.

[Arun Jayaram:]

Okay. But that's just booking what you've realized thus far. So is that potential for that to get larger…

[Michael Kennedy:]

Correct.

[Arun Jayaram:]

Okay. Thanks a lot, Michael.

[Paul Rady:]

Thanks Arun.

[Operator:]

Thank you. Our next question is coming from Subash Chandra with Northland Securities. Please proceed with your question.

[Subash Chandra:]

Yes. Hi. Good morning, everybody. On the four-year outlook that you have, it looks like the CapEx is around 635 a foot. I think you're going to be there this year, second half of this year. Can you just talk about maybe how conservative that outlook might be over the four-year period?

[Paul Rady:]

Yes, I think it's probably on the conservative side, Subash. We have a couple of key drivers that take it down this year from 675 as we finished last year down to that 635. And there's some initiatives on the sand side as well as completion side. So we feel pretty confident in that. Can we take it even further, even lower? I think there's still upside there. We generally don't like to talk about anything that we don't have pretty well under control in hand. So that's what we're talking about here is what's in hand and beyond that there are some other things that we continue to work on. So that's definitely the potential. And in terms of the service costs these days, we still see sort of downward pressure in general on service costs kind of in the $5 to $10 a foot range. So we don't see that turning around just yet.

[Subash Chandra:]

Okay, thanks. And as a follow-up, can you sort of give us a picture on how NGL volumes shaping up this quarter? And if sort of that export split is looking similar to Q4 or has there been any sort of weather disruptions or even an ability to split more and export more in the first quarter?

[Paul Rady:]

Yes, I should include in my first comments. The gross wellhead volumes is flat year-over-year and it is truly a maintenance capital volumes. Obviously, you had elevated volumes in the third and fourth quarter as we had a gross capital in the first half. So the NGL volumes in the first quarter will be down similar to what the guidance is because of a lack of completions in the fourth quarter, but also because all of the economics are clearly economic at $40 per barrel. There have been no disruptions. There'll be the same mix between export and selling at the Hopedale.

[Subash Chandra:]

Okay. Thanks, guys.

[Michael Kennedy:]

Thanks, Subash.

[Operator:]

Thank you. The next question is from the line of Nate Svensson with Truist. Please proceed with your question.

[Nate Svensson:]

Hi, all. Thanks for taking my question. So I wanted to get into your FT commitment into a little bit with the new drilling partnership. So I know you get into this on Slide 6, I think. But I wanted to talk how things have changed versus your previous expectations. So I know you had previously talked about the potential for FT volumes to decline by 810 MMcf a day with about 300 of those rolling off this year. So I'm just wondering if you can give an update on how we should think about that FT roll off, what annual fees it may look like and any comments you can provide on that marketing expense based on this new drilling partnership.

[Paul Rady:]

Yes. That all still holds. It all does roll off still. So you can see that on that slide, how you're in the – around the 4.147 BBtu per day, going down to 3.130 by 2025 now. The difference to drilling JV is a lot of that is now filled by the drilling partnerships. So by the year end 2025, you have no marketing expense. So you see that in the guide to our guide of $0.08 to $0.10 down from our initial guide, which would have been more in the $0.10 to $0.12 range.

[Nate Svensson:]

Okay. Very helpful. And then just a follow-up. So I was hoping for a little more detail on the new CapEx and production guidance versus what you had in your December presentation. So in that last presentation, I think you had a D&C CapEx of 580 to keep production roughly flat. And now your new CapEx guide is slightly higher at 590 with production dropping by about six points. And I know you've touched on the liquids portion of that in answering the Arun’s question. But wondering if you can just touch on any drivers to explain that difference, and has anything have changed in your assumptions between December and now beyond the new drilling partnership?

[Michael Kennedy:]

Yes, yes, nothing has really changed. I can't really talk to $10 million of capital, but – in this size of a company. But when you look at the average for 2020 we are at 3.55 Bcf a day – Bcfe a day that EPA I talked about $150 million. So we're not going to have any sort of allocation of liquids solely at Antero, so that gets you down to 3.4, and then we sold the VPP mid-year July, which is $50 million a day and that gets you the 3.35, which is the midpoint of our guidance.

[Nate Svensson:]

Okay, great. Thanks very much.

[Paul Rady:]

Thank you.

[Operator:]

Thank you. Our next question is from the line of Jeoffrey Lambujon with Tudor, Pickering, Holt. Please proceed with your question.

[Jeoffrey Lambujon:]

Good morning. Thanks for taking my questions. My first one is on capital allocation across the portfolio, around the Marcellus, Utica mix that we see this year. Just wondering if that's a good base case, I guess, ratio to think about over the next several years? And also what the mix between premium and Tier 2 Marcellus looks like within the Marcellus bucket?

[Paul Rady:]

Yes, I mean, all of our drilling will be in the premium bucket over that five-year plan. And the mix is roughly 90-10 Marcellus, Utica, I think, it's maybe 88% Marcellus. And we'll put out a little bit more detail on that in our website presentation, which we rolled out later today. So, you'll see a little bit more detail there, but it's primarily Marcellus-focused with some Utica various part of the year. I mean, we plan to drill two Utica wells this year a couple of pads anyway.

[Jeoffrey Lambujon:]

Okay. I appreciate it. And then secondly, apologize if I missed this earlier, but just wanted to confirm that maintenance on a net basis is how we should be thinking about CapEx and production through that same partnership plan timeframe, especially considering the line-of-sight to fully utilizing your long-haul, or if that was specific to 2021 and there might be inflection points from a macro standpoint that would incentivize any sort of activity beyond maintenance?

[Paul Rady:]

That's a good question. That's the way we built the plan was off of maintenance capital throughout the five-year outlook that you see on the page there. So, we're essentially holding maintenance capital around that $590 million, $600 million number. It bounces around a little bit each year, but that's generally the outlook. And I think over the five years, it actually – we're spending a little bit less than we would have pre drilling partnership and that's excluding the, any kind of carry payment. But it's actually down a little bit, I think, $15 million or so over the five-year plan. So that's absolutely right. It's a maintenance capital program for AR for the next five years. That is the plan certainly for now to generate maximum pre-cash flow and paydown our debt profile.

[Jeoffrey Lambujon:]

All right. Thank you.

[Paul Rady:]

Thank you.

[Glen Warren:]

Thanks.

[Operator:]

Thank you. Our next question is from Robert Raymond with RR Advisors. Please proceed with your question.

[Robert Raymond:]

Hi guys. So just a quick question here. And it really gets to the use of all the free cash flow. So, to the extent that you guys do what appears to be an excess of $500 million of EBITDA in the first quarter, and you have your entire revolver paid off by the end of June, right. As we think about a $3.5 billion total free cash number, right. How do you plan on or think about allocating that against a market cap as you guys make the point, right, that is less than the full $3.5 billion and a free cashflow yield on an equity that's well over 25% at this point?

[Glen Warren:]

Yes, that was a great question. So, I couldn't have said it better myself. Yes, that's a big number. And once again, that would be holding our gas flat at 2.99 max for the five years. And there are a lot of views out there on that. Some feel like that it's going to go higher certainly in the next few years and then holding NGLs flat the C3+ at $35 a barrel, that's where you get to that $3.5 billion number. So easily, I mean, the first use of proceeds is to pay down debt just as you decided, and pay down that credit facility and continue to pay down our debt until we get below $2 billion. And that happens over the next several years, next couple of years, really, depending on your price. If you hold it flat, that happens probably next year. But that's the first use. And then, we'll start to segue towards return of capital to shareholders. Could there be some A&D along the way? That's possible. But it would be eventually to shareholders and in the form of potentially stock buybacks, but also considering dividends at some point, if you'd have that count, free cash flow profile. So, time will tell. And the nice thing is we have the benefit of looking at it every quarter as we go along and adjusting as we go. But a good question.

[Robert Raymond:]

Yes. Okay. I mean, it would just seem to me that you have an opportunity to effectively almost take yourself private on a free cash flow here, right over sort of a two- to three-year window. And I may be more aggressive on propane prices, but net of $60 oil and the shortage we have, that's one person's opinion, but that's how I'd be thinking about it. Thank you.

[Glen Warren:]

Yes, thank you.

[Paul Rady:]

Thanks.

[Operator:]

Thank you. Our next question is coming from Holly Stewart with Scotia Howard Weil. Please proceed with your question.

[Holly Stewart:]

Good morning, gentlemen.

[Paul Rady:]

Good morning Holly.

[Holly Stewart:]

Maybe just a question, I appreciate all the details on Slide 9, on just the inventory in the basin. Glen, I'm curious your thoughts and maybe how does this impact your overall view and thinking on just on M&A?

[Paul Rady:]

Yes, thank you, Holly. I appreciate the question. Yes, I mean, it's obviously – I mean, we're not driven to do M&A for inventory reasons necessarily. I mean, that's well in hand with a couple of thousand premium locations, and even with the drilling partnership, we're churning through about 80 locations a year and they average 13,000 feet in lateral length. So, these are big wells. And so we've got many, many years of running room in inventory. So, that's not likely to be a driver for us in M&A, but there are other reasons that you do acquisitions as well, of course. Sort of one of the points is you have a basin just doesn't have that many years of running room premium inventory. Now that should tell you that eventually you see higher prices, and maybe we're seeing that move even now. But over time, I mean, if you run 30 rigs in the southwest Marcellus and Utica, for instance, I think today we’re 26 or 27 rigs in the Utica and the Southwest Marcellus. These rigs these days can generally drill 30 wells a year. And so just using an easy math, let's say it's close to a thousand completions a year. If they are only 5,200 premium Marcellus and 1,100 Utica, that's only about six years of supply in the premium realm in the Southwest. So that's pretty sobering, because that's not been the case for many years and that's the way we see it when we analyze each acreage position out there.

[Holly Stewart:]

Yes, it seems to point to a lot more activity, not drilling activity, but consolidation activity.

[Paul Rady:]

I think you're probably right.

[Holly Stewart:]

Maybe just one and maybe Mike, this is, more on the micro side of things. As we look at the February natural gas commentary that you provided in the release, we went back and looked, you had one quarter, I think, it was the first quarter of 2018 where you turned that net marketing expense into a $0.27 benefit. I know you broke out sort of the $50 million, $25 million revenue versus net marketing expense. I mean what does it take to kind of – I guess let's flip the switch and have another quarter like that that 1Q 2018 from a net marketing expense standard?

[Michael Kennedy:]

Yes, that was the polar vortex here in the East coast. So, you are seeing another winter weather event most likely occur this quarter as well. I mean, the interesting thing about this quarter is, it is still ongoing. It's just a broad impact of this, and we're still seeing premium prices out there. And who knows what happens from here with storage and all that. So it's going to be an interesting six weeks, I think, the next six weeks.

[Holly Stewart:]

Yes. And maybe Glenn, just to follow-up to that, do you have like a percentage that you could share on just, I guess, the way I've thought about everybody's portfolio is there's just not a lot to sell in the spot market itself. Most open volumes are priced at midweek. So, is there anything that you can share to give us kind of a rough ballpark on what you can sell into spot?

[Michael Kennedy:]

Yes, I think it's in that 450 million, 500 million a day range is kind of what we have available depending on pipe capacity and all that to move around the system, whether that's Chicago, Midwest, or Gulf Coast. So, it's a pretty significant number for us.

[Holly Stewart:]

Wow! Okay, thank you, guys.

[Paul Rady:]

Thanks Holly.

[Operator:]

We have reached the end of our time for the question-and-answer session. So, I'd like to pass the floor back over to management for any additional, closing comments.

[Paul Rady:]

I would like to thank everyone for participating in our conference call today. If you have any further questions, please feel free to reach out to us. Thanks again,

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.