© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Antero Midstream First Quarter 2019 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Michael Kennedy, Chief Financial Officer for Antero Midstream. Thank you, Mr. Kennedy. You may begin.
Thank you for joining us for Antero Midstream's First Quarter 2019 Investor Conference Call. We'll spend a few minutes going through the financial and operating highlights, and then we'll open it up for Q&A. I would also like to direct you to the home page 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'd first like to remind you that during this call, Antero management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Antero Resources and Antero Midstream and are subject to a number of risks and uncertainties, many of which are beyond Antero's control. Actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements.
Today's call may also contain certain non-GAAP financial measures. Please refer to our earnings press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures.
Joining me on the call today are Paul Rady, Chairman and CEO of Antero Resources and Antero Midstream; and Glen Warren, President and CFO of Antero Resources and President of Antero Midstream.
With that, I'll turn the call over to Paul.
Thanks, Mike. I'll begin my comments with a brief discussion on AR, that's Antero Resources, on Slide 3, titled Strong Sponsor With Scale. First and foremost, Antero Resources exited the first quarter of 2019 in the strongest financial and operational position since its inception. From a balance sheet and liquidity perspective, AR's leverage was 2.1x, and it had essentially an undrawn revolving credit facility, resulting in $1.8 billion of available liquidity. In addition, AR's borrowing base was reaffirmed at $4.5 billion, illustrating the deep inventory and economic reserves at AR. As depicted on the left-hand side of the page, AR's leverage profile has significantly improved over the last five years, declining from almost 4x net debt to adjusted EBITDAX to almost 2x. AR's operational success and balance sheet strength has positioned it to continue developing its low-cost resource base and achieve scale, which is critical in the E&P business. As shown on the right-hand side of the page, AR is now the largest NGL producer in the U.S. and is also the fourth-largest natural gas producer in the U.S.
Now let's move on to Slide 4 titled AR's Firm Transportation Portfolio is a Strategic Advantage to discuss Antero's diversified natural gas and NGL firm transportation portfolio, which has allowed AR to continue its sustainable and disciplined growth. Natural gas firm transformation continues to be an asset for AR as it has allowed AR to avoid frequent Northeast basis volatility, minimize exposure to future long-haul pipeline delays and cost overruns and achieve consistent realized pricing, ultimately benefiting AM. Importantly, all of AR's firm transportation is now in service, including Mountaineer Xpress and the Gulf Xpress for natural gas and Mariner East 2 for propane and butane.
Slide 5 illustrates the impact of Mariner East 2, which allows AR to access premium priced international LPG markets. As a reminder, AR is the anchor shipper around Mariner East 2 with approximately 1/3 of the current capacity. Specifically, AR has 50,000 barrels a day of combined propane and butane capacity with additional expansion rates and has the ability to sell approximately 50% of its NGL production into premium international markets once ME2 came online. This resulted in AR's NGL price realizations increasing from 52% of WTI before ME2 was placed online to 61% of WTI after it was placed online.
For those that were able to listen to the AR call this morning, we discussed the dislocation of NGL prices relative to WTI prices during the quarter, which resulted in lowering AR's NGL pricing guidance on a relative basis to WTI. However, and more importantly, AR actually increased its C3+ NGL pricing guidance on an absolute pricing basis by approximately $4 per barrel due to the strength in international NGL and crude markets.
Before moving on to AM, I'd like to also point out that the entire midstream infrastructure chain of gathering, processing, fractionation, transportation, terminaling and export capacity is all online in the Northeast, insulating AR from temporary infrastructure and pricing dislocations observed along the Gulf Coast in the first quarter.
Transitioning to AM and its investment in NGLs, let's turn to Slide 6 titled Acquisition of Hopedale 4 Fractionation Capacity. During the quarter, the first quarter, AM acquired a 1/3 interest in the Hopedale 4 fractionator through its 50-50 joint venture with MPLX. The acquisition doubles the JV's fractionation capacity from 20,000 barrels a day to 40,000 barrels a day. This investment further strengthens AM's downstream ownership and complements the JV's 1.0 Bcf a day of processing capacity, which was 99% utilized during the first quarter. In addition, the AM-MPLX JV will have the option to acquire an additional 1/3 interest in the Hopedale 5 fractionator, which has a total capacity of 80,000 barrels a day and is scheduled to be placed online at the end of 2019.
High utilization rates and our visible organic growth strategy integrated with AR's operations are the cornerstone of our ability to generate attractive mid- to high-teens returns on our invested capital. Mike will go into specifics on our financial policy, but we believe that one of the best ways to create shareholder value is to retain excess cash flow and invest it organically, particularly when we can generate such attractive rates of return. Our approach to balancing the return of capital to shareholders and retaining cash flow to increase DCF coverage and also to delever the balance sheet ensures that we do not miss out on attractive organic and third-party growth opportunities that meet our rate-of-return thresholds.
In summary, we remain excited for AM as it completed its transition to a best-in-class C-corp with the closing of the midstream simplification transaction. The new structure is designed to attract a broader investor base, including equity index and C-corp investors, which we have yet to benefit from due to the recent closing of the transaction.
With that, I'll turn the call over to Mike.
Thank you, Paul. I'll begin my comments by highlighting the recently announced AM cash dividend of $0.3025 per share, 180% increase year-over-year for former AMGP shareholders and a 47% increase year-over-year for Antero Midstream Partners unitholders. The dividend at AM was the 17th consecutive distribution increase since the IPO of Antero Midstream Partners. We are very proud of this achievement and the ability to deliver dividend accretion to both AM and AMGP shareholders as a result of the simplification transaction. As depicted on Slide 7, we are on track to achieve our 2019 full year dividend of $1.24 per share, which represents approximately a 10% yield on today's share price.
Now let's move on to the first quarter operational results, beginning with Slide 8 titled High-growth Year-over-year Midstream Throughput. Starting at the top-left portion of the page, low-pressure gathering volumes were 2.6 Bcf a day in the first quarter, which represents a 40% increase from the prior year quarter. Compression volumes during the quarter averaged 2.3 Bcf per day, a 60% increase compared to the prior year quarter. Compression capacity was 85% utilized during the first quarter. Joint venture gross processing volumes averaged nearly a Bcf a day, a 92% increase compared to the prior year quarter. Joint venture gross fractionation volumes averaged 22,000 barrels per day, a 267% increase over the prior year quarter. Fractionation volumes during the quarter included one month of contribution from the Hopedale 4 acquisition, and average fractionation capacity during the quarter was 83% utilized fresh water delivery volumes averaged 153,000 barrels per day, a 31% decrease over the prior year quarter. The decline was driven by a reduction in completion activities at AR as expected.
Moving on the financial results, which are presented on a pro forma basis as at the simplification transaction closed on January 1, 2018. Adjusted EBITDA for the first quarter was $202 million, a 26% increase compared to the prior year quarter. The increase in adjusted EBITDA was primarily driven by increased throughput volumes. Distributable cash flow for the first quarter was $166 million, resulting in a DCF coverage ratio of 1.1x. Antero Midstream's first quarter results place us on track to achieve our previously communicated 2019 dividend guidance of $1.23 to $1.25 per share with 1.1 to 1.2x DCF coverage.
During the first quarter, Antero Midstream invested $184 million in gathering, compression, water infrastructure and the processing and fractionation JV. Gathering, compression and water infrastructure capital invested - investments totaled $93 million, and investments in the JV totaled $91 million. While we expect gathering and fresh water capital to increase modestly in the future quarters throughout 2019, we are currently trending towards the bottom end of our capital budget range. Our ability to - or capital to adjust to changes in AR's development plan further illustrates the benefits of Antero's integrated model. AM's $91 million investment in the JV during the quarter included the acquisition of the 1/3 interest in Hopedale 4. The Hopedale acquisition was included in our 2019 capital budget, and we expect a run rate in the JV to normalize over the remainder of the year to total $200 million as previously communicated.
Moving on to the balance sheet and liquidity. As of March 31, 2019, Antero Midstream had $1.1 billion drawn on its $2 billion revolving credit facility, resulting in $900 million in liquidity. Importantly, AM's net debt-to-LTM EBITDA was 3.1x, even after paying out approximately $600 million for the cash consideration and the simplification transaction.
I'll finish my comments on AM with our financial policy and outlook for the next few years on Slide 9 titled Antero Midstream Financial Policy. Management of the newly formed AM board, following the closing of the simplification transaction, constructed a financial policy ultimately designed to maximize shareholder value. First and foremost, the policy is designed to maintain a strong balance sheet with leverage in the low 3x net debt-to-EBITDA range or below. While we acknowledge that our leverage profile is well below the C-corp infrastructure peer average of over 4x, we believe that a strong balance sheet provides the flexibility to further invest in organic project opportunities or other accretive transactions. The recently closed simplification transaction is a perfect example of having the ability to flex the balance sheet to provide accretion to both our former AM and AMGP stakeholders.
In addition, the financial policy targets an increasing DCF coverage ratio to 1.3x or higher over the long term in order to maintain balance sheet strength. These results in capital while we return to shareholders through a combination of growing dividends per share and potential opportunistic share repurchases. Paul mentioned it in his comments, but we believe a flexible policy that balances sufficient capital deployment towards attractive rate-of-return projects and returning capital to shareholders in the optimal way to maximize shareholder value. For 2020 specifically, we are targeting high single-digit return of capital growth to shareholders as compared to 2019 and a DCF coverage ratio of around 1.2x. After that, the Board will continue to evaluate future return of capital growth with the objective of growing the dividend at a pace that's sustainable and derisk while utilizing opportunistic share repurchase to take advantage of market pricing dislocations.
Based on AM's previously disclosed 18% DCF CAGR outlook corresponding to a $50 oil and $2.85 gas price outlook for AR, AM expects to reach its leverage and DCF coverage targets by year-end 2021. Any increases in DCF growth above those levels will be evaluated by management and the Board for further deleveraging DCF coverage increases and return of capital to shareholders. Based on current commodity prices, AR is trending towards a 10% annual production growth outlook as strength in NGL prices, particularly internationally, has offset current natural gas price weakness to levels below AR's $2.85 gas price outlook. As a reminder, this 10% annual production growth outlook at AR translates to the 18% DCF CAGR I've previously mentioned.
Antero's unique balance of natural gas and liquids production, exposure to international markets further highlights the benefits of a diversified portfolio, ultimately allowing for sustainable long-term growth that benefits AM.
With that, operator, we're ready to take questions.
[Operator Instructions]. Our first question comes from the line of Spiro Dounis with Crédit Suisse.
Just want to start with M&A first. You mentioned third-party growth opportunities, and you put that together with this new flex that you've got and the balance sheet with a higher leverage target. So just curious, outside of a potential stake in ME2, maybe if that's on the table or additional investments in the JV, what else would be on your radar from an M&A perspective?
Well, we don't really want to comment on specifics there, but we keep our eyes on everything. You saw the Eureka Hunter Pipeline [ph] trade just recently. You've seen several pieces of activity out there, and we certainly keep our head up. And there are other opportunities for us in assets that we actually contribute to. So I'll just leave it at that.
Fair enough. Second question, just around the new policy between dividend and buyback and thinking about how you're going to decide sort of which one to lean on more tying it to AR. You mentioned the financial policy tying it to AR's development plan, which makes sense from an operational perspective. But is there a financial aspect, too? And I guess what I mean by that is does AR partly rely on dividends coming up from you? And so would your decision on whether or not to pay the dividend or do buyback depend a little bit on AR's liquidity position or free cash flow position?
Well, from AR's perspective, no, not at all, not a factor.
Right. Not a factor to AR because it's not terribly material to AR. For AM, we'll just evaluate it each quarter, looking where we trade and the valuation around our shares versus increasing the dividend.
Got it. And just last quick one on that. Because I know this obviously kicks in, in 2020. Just curious if there's any interest in starting buybacks earlier, maybe in '19, just given where the units are trading.
Yes. There would be interest. That's something we're going to evaluate throughout the year.
Our next question comes from the line of Tim Howard from Stifel.
Just following up on the M&A question. Is the preferred method through the JV? Or is that Antero Midstream kind of on its own?
Could be either.
Okay. And then just trying to understand [indiscernible] first buyback better. Are - is there an investor preference? Are you hearing a big pushback from your investment community that, hey, buybacks is the preferred method versus distribution growth? Just want to understand the investor base there.
Yes. No. We're not hearing any feedback like that. We did go out on the road before the simplification vote and heard from a lot of different investors, and their preference was obviously to have a dividend that was seen as sustainable. And for that to happen, you have a strong balance sheet and increasing coverage, and that's how we selected kind of that 1.3x. Then they also commented on when you look at your yields, churning at double-digit yields, you're really not getting paid for that growth. So I want to allocate some of that growth to increasing the balance sheet coverage and also look at buying back some shares.
Got it. And then as it relates to AM getting into the indexes - indices, I guess what - is it just timing until they kind of review, given AM is simplified now? Or what else...
Yes. We did a thorough analysis, and the majority of the index funds wait obviously till the - after the close. And then looking at those various indices that looked like they did a lot of the rebalancing in May and June of each year. So we expect some in the C buying this month and next.
Got it. And then just finally on the water treatment facility. Could you just give us an update overall? I saw the 40,000 barrels per day is expected kind of throughout the remainder of the year. Is that kind of the upper end of available capacity? Or is that just the available volumes that you anticipate? And then just thoughts on third-party business as well.
Yes. We've been - as we continue to improve on the operational and mechanical efficiencies at Clearwater, we're now testing up into the low- to mid-50s thousand barrels a day and just perfecting all of the processes there. I think the 40,000s, yes, those are based on available water flowback and produced water on the Antero front. We are talking with third parties, and they are weighing the cost of hauling their water to Ohio for injection versus bringing it to Clearwater. So there is an opportunity there since there is a lot of water being produced in the Marcellus overall and in our general neighborhood on the west side of the play in Northern West Virginia, the Panhandle as well as Southwest PA. Those are all territory for possible third-party volumes coming to Clearwater when we have spare capacity. So - but just moving through and perfecting the operations at the plant right now but do think we might have available capacity of 10,000 to 15,000 barrels a day of third party if we decide to contract it.
That's helpful. And then one of your peers is kind of getting in the water kind of a major way. Is that impacting Antero's water strategy at all?
No, not at all.
None whatsoever.
Yes. I don't think so. I think, yes, they may be following down the road. We've gone - certainly, the first step of having fresh water in buried pipe from reliable sources and then as to whether they do local polishing or they do a more full-blown recycling of the water remains to be seen.
Our next question comes from the line of Ned Baramov with Wells Fargo.
So on your new financial policy, does this allow for potential changes to your CapEx backlog through 2020, which I believe is currently $2 billion in favor of share repurchases?
No. I think the backlog you referenced, I believe, is through 2023, that $2 billion. No, the first priority is obviously to invest in these organic capital projects. We have mid-teens rate of return on that, so those are obviously very attractive to us and highly visible around the AR's current development plan, which is a 10% growth case. So no, that's first priority. And when we're talking about the financial policy, we're talking about amounts above that.
Sure. And you mentioned some of the buybacks may be initiated as early as this year. The question is when do you think you're going to have a Board authorization for share repurchases in place?
That's something we're evaluating right now. We don't have a time frame on that. But with current valuation and with kind of a newly formed Board, it will be a topic this year.
Got it. And then one last one, if I may. Have you discussed the new financial policy with the rating agencies? And if yes, could you share some of the feedback you've received on the share buyback plans?
Yes, we have, and they're actually very favorable towards it. It results in a lot more retained cash flow for Antero Midstream, so it's very credit-positive. Obviously, building coverage and lowering leverage is something that they view very favorably.
[Operator Instructions]. Our next question comes from the line of Gregg Brody with Bank of America Merrill Lynch.
Just a follow-up on the rating agency question, something you said. I think you are - your leverage target went up, I saw, as a part of this announcement. Did I mishear what you said that the agencies viewed the - I thought you said the opposite with respect to the agencies.
No. They do view favorably. Before the leverage targets, obviously there is a GP and an IDR portion of that structure and so that was not cash flow that was retained by Antero Midstream. Our leverage right now is a bit higher, but we have a much more retained cash flow going forward in the prior structure.
So is it by their metrics they view you as less levered?
They do.
They do. Okay All right. So that sounds like the original question didn't sound like this has changed their - this one. This definitely won't hurt their view.
No.
Our next question is a follow-up question from the line of Spiro Dounis.
Two quick follow-ups. First one, I think AR is sort of leaning towards the lower end of its 2019 CapEx guidance. So just curious, any potential impact on 2020 as you see it with respect to, I guess, mostly on the processing plants? I think you talked about maybe two plants per year coming online. Just curious if there's any impact there.
Well, first off, lower capital doesn't necessarily translate to lower production, so that's a key message that we're seeing efficiencies and ways to reduce capital, increase cycle time for rigs and crews. So no, no impact on the production outlook or the use of water for that matter.
And so as to plans, we're still on that pace of at least a couple of plants a year.
Got it. Okay. Appreciate the clarification on that. And then just one again on one of your peers, same one that I think Tim was referring to. Also talking about negotiating rates lower with this E&P's sponsor in exchange for maybe additional cash flow streams and extending the contract. Sounds like a very specific circumstance, but just curious if that's something that's on your radar as it relates to AR.
Yes. That is a specific circumstance, and there's no discussion along those lines here. Of course, you've got two public companies, and there would have to be a lengthy negotiation to make any changes there. It have to be essentially revenue-neutral for AM if something like that were to transpire, but there's nothing going on in that realm.
Our analysis continues to be that our midstream to upstream rates are still very competitive and very much at the market. People sometimes make the - have the misimpression. Remember, our rates are generally on a Mcf basis, and now our residue gas alone is quite high. Raw gas is up in the 1,300 Btu range. So when you adjust for Btu, we're right in the middle of almost all the things we've seen done in the area.
Our next question is a follow-up question from the line of Ned Baramov with Wells Fargo.
Just one follow-up on your dividend growth. So starting in 2020, do you still expect quarterly increases? Or does your new policy envision one annual increase in the first quarter of the year?
No. We envision quarterly increases.
Okay. And one more with respect to your private equity backers, I guess, could you talk about their plans with respect to AM shares?
We're not aware of any plans relative to the AM shares at this point, no.
Our next question comes from the line of Ethan Bellamy with Robert W. Baird.
Big picture. On the AR call, you talked about the expectation that there would be some more consolidation in Appalachia. Do you think that's true on the midstream side as well? And then sort of related play but different, are you guys still focused solely on Appalachia? Or would you look outside the basin for other opportunities?
Yes. So first part of the question, consolidation continues. I think we saw an announcement on the so-called Stonewall gathering projects, Stonewall AGS, where DTE picked up an additional interest there just announced I think this morning. But consolidation does continue. There is interest of consolidating. There's a number of midstream assets out there. Our focus is, although we are quite aware and study the place going on in the U.S., the big 7 or 8 plays, both liquids and dry gas, and have a pretty good handle on that, but our focus is on Appalachia. That's certainly lowest risk, what we know the best where we can capitalize on our knowledge, our operational efficiencies, our FTE and so on. So I don't think you'll see us stepping foot in other basins, but we do study them.
And then just one more question. There's an article recently talking about the lack of regulatory oversight on water pipelines. Anything in that arena we need to be concerned about?
No. I don't think I saw that article, but nothing on our end. All of our water pipes are in very good shape and very solid and young assets, and they still perform very well.
And keep in mind, just a reminder, Ethan, you probably know this, but our water pipelines are strictly for freshwater. We don't have any pipelines for produced water.
Our next question comes from the line of David Amoss with Heikkinen Energy Advisors.
Quick thinking about the Clearwater facility. Do you think there's any potential remedy where, hypothetically, you could recoup some of the loss revenue from the operational issues that you've seen since the facility came online?
Yes. We're working on things. Certainly, the residue salt is something that we are perfecting. There is a market for the higher-quality salt that could be in the black. The brines, the salt brines that are used by oil and gas industry, we're selling some of that. There's opportunity for more, so we could make up some ground in the loss revenue.
I was actually asking about the time period from when the facility first came online till today.
And you're probably asking about with Veolia, and I'll just say there are internal contractual remedies as well as external.
And there are no further questions in the queue. I'd like to hand the call back to Mr. Kennedy for closing comments.
Thank you for joining us on our conference call today. If you have any further questions, please feel free to contact us. Thanks again.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
Thank you.