Antero Midstream Corporation (AM) Q4 2015 Earnings Report, Transcript and Summary

Good day. And welcome to the Antero Midstream Partners LP Fourth Quarter and Full Year 2015 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Chad Green, Vice President of Finance. Please go ahead.

Thank you for joining us for Antero Midstream's Fourth Quarter and Full Year 2015 Investor 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 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 would first like to remind you that during this call, Antero Midstream will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Antero Midstream and its sponsor, Antero Resources, 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. Joining me on the call today are Paul Rady, Chairman and CEO, of Antero Resource and Antero Midstream. Glen Warren, President and CFO of Antero Resources and President of Antero Midstream and Mike Kennedy, CFO of Antero Midstream. I will now turn the call over to Mike.

Thanks, Chad. We thank you everyone for listening in to the call today. In my comments I'm going to highlight our 2015 achievements, and briefly walk through out fourth quarter results and then Glen will provide additional details on our 2016 guidance and organic growth opportunities. Paul will then provide a brief update on AR's fourth quarter and full year results and discuss Antero Resources development plan for 2016 as well as how that impacts Antero Midstream. I would also encourage participants on this call to review the February 2016 Antero Midstream Investor Presentation on our website, which has been updated for Q4 and full year results. Lastly, during the call today we'll commonly reference AM and AR in order to more easily make the distinction between Antero Midstream and Antero Resources, respectively. First and foremost, it was the great year for Antero Midstream both operationally and financially despite the challenging commodity price environment in 2015 AM stayed on course and announced the fourth quarter distribution of 0.22 per unit, a 29% increase compared to the minimum quarterly distribution and the midpoint of our distribution guidance. The distribution marks our fourth consecutive distribution increase since the IPO in November of 2014. A trend we expect to continue was we reaffirmed our distribution growth target of 28% to 30% in 2016 and 2017, despite the decade low commodity price environment. Now let's move on to our financial results during the fourth quarter. As a reminder, the results in year-over-year comparisons include contribution from the gathering and compression segment and water handling a treatment segment on a combined basis after successfully closing the water drop down transaction at the end of third quarter. As highlighted on the Slide 2 of our earnings call presentation titled High Growth Midstream Throughput, average daily low pressure gathering volumes were 1,124 million per day in fourth quarter which represents a 52% increase from the prior year and an 8% increase sequentially. High pressure gathering volumes were 1,195 million per day, a 32% increase over the prior year and 2% decrease sequentially. The sequential decrease in high pressure gathering volumes is driven throughput volumes transported on the third party Stonewall gathering pipeline that previously flow through an AM owned high pressure line as a temporary solution until Stonewall was placed into service. Going forward, we expect to see a more normalized one-to-one relationship or slightly below of high pressure volumes relative to low pressure volumes. Compression volume during the quarter averaged 478 million per day a 115% increase compared to the prior year quarter and a 10% increase sequentially. The sequential increase in compression volumes is driven by higher overall throughput on Antero Midstream dedicated acreage and the commissioning of Antero Mistreats first Utica Shale compression station late during the fourth quarter. Freshwater delivery volumes averaged at 119,671 barrel per day, a 36% decrease compared to the prior year quarter and a 78% increase sequentially. Freshwater delivery volumes increased substantially from the prior quarter due to Antero beginning completions on 12 Marcellus wells that had been deferred from earlier in the year. Total revenue for the fourth quarter was $132 million, 31% increase compared to the fourth quarter of 2014, driven by increased throughput volumes from AR production. Direct cash operating expenses were $40 million comprised of 6 million of gathering and compression operating expenses and 34 million of water handling and treatment operating expenses. Adjusted EBITDA for the fourth quarter was $83 million while distributable cash flow was $72 million during the quarter. Adjusted EBITDA including contributions from the water handling and treatment segment, for the fourth quarter of 2015 increased a 196% over the full fourth quarter 2014. Distributable cash flow coverage for the quarter was 1.8 times, a highest quarterly coverage levels since the partnerships IPO. Now, I will briefly touch on full-year 2015 results, adjusted EBITDA on a recast [ph] basis including both the gathering and compression and water handling and treatment segments for the full year was $280 million or 41% increase compared to full year 2014. Adjusted EBITDA attributable to the partnership which reflects contribution from the water handling and treatment segment only during the fourth quarter 2015 and corresponds to our previous guidance of $180 million to $190 million was $215 million. The significant outperformance versus guidance was driven by the accelerated completions originally scheduled for the first part of 2016 that were completed in the December to take advantage of favorable operating conditions, combined with continued operational efficiencies. As you can see on Slide 3, titled Top Tier Distribution Growth, the strong coverage of 1.8 times for the fourth quarter and 1.4 times for the full-year 2015 were well above Antero Midstream's targeted covered ratio of 1.1 times to 1.2 times. Looking ahead into the 2016, we recently released distribution growth guidance of 28% to 30% while again maintaining strong DCF coverage above the partnerships targeted ratio of 1.1 times to 1.2 times. The ability of Anterior Midstream to delivered this top tier growth while maintaining prudent and conservative coverage really speaks to few things. First, Antero Resources development plans is forecasted to target the high rate of return locations positioned on Anterior Midstream dedicated acreage which consequently will drive AM volume growth well in excess of Anterior Resources production growth guidance of 15%. Second, AM will benefit in 2016 from the first full year of contribution from the accretive water drop down transaction. And third, AM's organic capital invested in 2015 on Midstream infrastructure that will be immediately cash flowing in 2016. Or said another way, our high cash flow and distribution growth while maintaining strong coverage illustrates the benefits from an organic growth model in Appalachian versus the lower return drop down model. Moving on to capital expenditures, during the fourth quarter Antero Midstream invested $37 million in gathering and compression infrastructure, $7 million in water handling infrastructure and $44 million for the continued construction of the advanced wastewater treatment facility. Full year 2015 capital expenditures on gathering compression totaled $360 million while water handling and treatment capital expenditures totaled a $133 million including $70 million invested in water handling and treatment for Antero Resources prior to the drop down transaction. Excluding capital invested by Antero Resources, Antero Midstream invested $423 million which was in line with the lower boundary of our guidance of 425 million to 450. Now before I turn it over to Glen, I want to point out that at the beginning of 2015, our original budget for only gathering and compression capital was exactly the same at 425 million to 450 million, so despite significant investment in the water handling and treatment assets during the fourth quarter our capital spend was in line with our original budget. The reason I point this out is to illustrating importance of the visibility and efficiency of our capital spending. Our ability to adjust project timing and quickly adapt to Antero Resources development plan allows us to efficiently deploy capital only where it will be utilized and generate attractive rates of return. Antero Midstream does not take the, if you build it they will come, approach to investing capital, rather AM invests just in time capital alongside of strong sponsor and Antero Resources. Unlike many other MLPs out there the benefit of efficiently deploying the organic growth capital’s ability to generate returns in the four to seven times EBITDA range and avoid the need the grow through extensive acquisitions or access the equity capital markets to fund dropdown transactions, which have historically curved in at 10 to 12 times EBITDA level. As we have said in the past following the water drop down last September we expect to be a pure play organic growth MLP, not a dropdown MLP. I'll now turn the call over to Glen.

Thank you, Mike. And we are looking into 2016 and illustrated on Slide 4 in the deck titled, 2016 Capital Budget. Antero Midstream's initial 2016 capital budget of $435 million, is a 3% increase compared to 2015. Approximately 86% of the budget will be focused on midstream opportunities in the Marcellus Shale driven by Antero Resources focused on Marcellus Shale drilling and completions in 2016 due to constraints on firm transportation to favorable markets in the Ohio Utica shale. The capital budget also includes 130 million of the continued construction of the Antero clear water facilities which is on track to be placed in service in late 2017 and that's our advanced waste water treatment facility. Moving on to other in hand opportunities, we have the option to participate in a 67 mile regional pipeline called as Stonewall gathering pipeline as a 15% non-operating equity interest owner. The pipeline was placed in the service on November 30, 2015, a few months ago which would put to expiration of our option on May 30th of this year, while we have not announced a decision regarding our participation which would require approximately 45 million to 50 million of incremental capital on top of our budget guidance, this opportunity would give us another avenue to expand our footprint into attractive regional pipelines to deliver ARs natural gas production to other demand centers with more favorable pricing points. At yearend we had cash on hand of $7 million and $620 million drawn on under our $1.5 billion revolving credit facility. On Slide 5, is our earnings call presentation, titled Strong Balance Sheet and Flexibility. You can see that as of December 31, 2015 despite closing of major dropdown transaction in 2015 we still have a very strong balance sheet and ample liquidity to fund ongoing organic growth opportunities. Moving to the left hand portion of the slide, I think it's also important to note that AR had 2.6 billion of standalone liquidity and also has the ability to -- and that’s under the credit facility and also has the ability to target 2016 capital program and targeted 2017 developed plan through borrowings under its revolving credit facilities, so no need for outside capital markets activity. While our strong balance sheet and liquidity allows us to pursue opportunities outside of what I just discussed we continue to remain prudent and declined on the M&A front given the backlog of over 3 billion of opportunities downstream from AR in the portfolio. Shifting gears slightly to AR I think it's important to highlight the deep inventory and current well economic that support continued organic long-term growth opportunities there. As outlined on Slide 6, titled AR's Single Well Economics drive value creation. AR has nearly 2,000 un-drills liquids rich locations between the Marcellus and Utica shale plays that generate lower 20% to 30% rates of return based on strip pricing and these are all 3P locations. Additionally, AR has over 250 Utica dry locations in Ohio that have approximately 25% rates return at year end 2015 strip pricing. This of course exclude the almost 1,900 and almost 2,000 of locations associated with ARs West Virginia and the Pennsylvania-Utica dry gas resource. It’s also worth mentioning that when you incorporate the hedge book in order to derive blended gas and NGL price these rates returns increase dramatically to a range of mid-40% to 80%. Paul will go into more detail in her remarks, but AR has hedged virtually all of its undeveloped production through 2017, as well as an additional 2.1 Tcfe for the 2018 to 2022 time period, so we do feel that the blended hedge return approach is relevant here. Continuing on the strong sponsor’s team I'd like to briefly touch on the recently announced firm ratings AR received from Moody's and S&P, relative to other E&P operators. As highlighted on Slide 7, titled Antero Credit Quality affirmed at Ba2/BB, Antero was one of only five public BAA or BA rating E&P companies that received affirmed ratings from Moody's during its recent review and one of only two public BA rated E&P company that received affirmed rating. The other 16 BAA and BA rated companies received downgrades ranging from one to five notches, in fact six of the 10 public BA rated companies prior to review were downgraded to single B or even triple C levels. This reaffirmation of AR's credit quality supports our continued message that AR and in turn AM is much better positioned that appears to execute business plan in the current downturn. Before I turn over to Paul, I would like to provide a brief recap on the current outlook for AM. We had very strong first year as a publically traded MLP which was driven primarily by the increase in throughput on our systems and fourth quarter contribution from the accretive water drop down transaction. We remain optimistic about the growth opportunity at AM both internally and externally and have positioned to partnership with the strong balance and $900 million of liquidity in order to pursue accretive opportunities. With that, I'll turn over to Paul to cover the outlook and development program at AR.

Thanks, Glen. Similar to calls in the past, I'll discuss the fourth quarter and year end operating results, AR's 2016 development plan and outlook for AM. AR reported another outstanding quarter and year operationally, producing under a 1.5 Bcf equivalent per day, which represents an organic production growth rate of 18%, as compared to the fourth quarter of 2014, and an annual production growth rate of 48% compared to full year 2014. Now let's move on to AR's operations during the fourth quarter and their impact on AM's results. AR completed and placed online 14 West Virginia Marcellus wells during the quarter, all of which were located on Antero Midstream dedicated acreage. As this was the first quarter following the water drop down transaction, it's important to point out that each of these locations generated freshwater distribution revenue, low pressure gathering revenue, compression revenue and high pressure gathering revenue for Antero Midstream. As we've discussed since AM's IPO, the goal of the partnership is to become a full-service midstream provider in Appalachia particularly as it relates to AR activities. The water drop down served as another step in that direction and we expect the momentum to continue as we move forward. In addition to the West Virginia Marcellus activity and highlighted on the Slide 8 and titled Antero's First Utica Dry Gas Well, Antero completed its first West Virginia Utica Shale well in Tyler County, West Virginia, called the Rymer 4HD with a lateral length of 6,620 feet. The Rymer well has been flowing at 20 million cubic feet a day which was our plan from the beginning on a restricted choke program since it was placed on sales at the beginning -- at the end of December and that's nearly 60 days now. While results are early-stage on several more months of flow testing are required, this well assists in the evaluation of Antero's 188,000 net Utica acreage underlying its Marcellus acreage position in West Virginia and Pennsylvania, this dry gas opportunity represents a significant long-term organic growth opportunities for Antero Midstream to build out a dry gas gathering system to support this prolific resource. Shifting to the Ohio Utica shale, during the fourth quarter AR completed and placed online 16 horizontal Utica wells. Again, I think it's important to point out that all 16 of these wells were located on Antero midstream dedicated acreage and thus generated revenue for Antero Midstream in the gathering and compression segment and the water segment. On the midstream side, we placed our Utica Shale compressor station into service late during the fourth quarter of 2015 with 120 million cubic feet a day of capacity which we expect to drive growth in our compression volumes in 2016 as the station utilization continues to increase. Looking ahead into 2016, AR released its 2016 capital budget including $1.3 billion of drilling and completion capital and $100 million for leasehold activity which represents a reduction of 21% and 38% respectively compared to 2015 spending levels. AR continues to high grade its portfolio and expects to deliver 15% production growth in 2016 and target to 20% production growth in 2017 by developing high rate of return locations on Antero Midstream dedicated acreage. AR will continue to run the most active program in Appalachia with an average 7 rigs drilling during the year and will complete 110 wells all on AM dedicated acreage. Existing 2016, AR expects to have an inventory of 70 drilled but uncompleted wells up from 50 drilled but uncompleted wells existing 2015. This will provide AR with a substantial inventory of wells that could be completed in 2017 should prices improve. All but 20 of these 70 ducts are on AM dedicated acreage and give AR and AM significant optionality as oil and gas prices recover. While we talked about this on past calls I think it's necessary to reiterate the important of being linked to a strong sponsor that has the ability and wherewithal to continue to grow despite the current commodity environment as you can see on Slide 9, entitled Hedging Undeveloped Production, AR has essentially hedged a 100% of production including all undeveloped production from yet to be completed wells through 2016 and 2017 at attractive prices of 3.94 per MMBtu and 3.57 per MMBtu respectively. To provide some context around the hedged book AR has hedged on average 94% of expected production through 2018 at a hedged price of 3.81 per MMBtu compared to the peer group average of over the same time period of just 20% of consensus production. Some people may argue that this limits the upside for AR should prices recover, however we view it differently, in that AR has the flexibility to begin completing its substantial backlog of ducts and accelerate development when prices recover which ultimately benefits AM through the full cycle nature of the water and gathering businesses. As a reminder AR was running 21 rigs just over a year ago so the ability to ramp up when prices improve is certainly there. To summarize it was an outstanding full first year for Antero first full year for Antero Midstream Partners. We completed the transformative water dropdown transaction in September. We grew our distribution to 29% from the minimum quarterly distribution and increase distribution every quarter since the IPO. We're excited about the future of AM and opportunities the partnership has in order to accommodate the most active operator in Appalachia that is AR and grow both organically and through attractive third party opportunities. The Antero franchise is fully integrated business model, significant hedge book and efficient just in time capital spending continues to position us well to achieve significant value creation for AM unit holders for many years to come. With that operator we are ready to take questions.

[Operator Instructions]. The first question comes from J.R. Weston of Raymond James. Please go ahead.

Few questions here. Just wondering if you could provide any color on the ’14 and ’15 results and how to compare that through 2016, especially that quarterly progression? I recognize it's simplistic enough just to analyze that 4Q results, you’re solidly above the recent EBITDA guidance range per year and just wondering if you could help us quantify what happens in 4Q 2015 and is it really fair to extrapolate across 2016 and certainly some in the water business and you mentioned accelerated completions and continued operational efficiencies, is there anything inside gathering compression and then maybe is there anything that's new to 2016 from an expense perspective or otherwise?

The fourth quarter 2015 definitely included accelerated completions from the water segment of the business which is not expected to continue at quite that rate so the water completion business revenues expenses associated with that will be little bit lower in 2016. From the gathering compression those actually should accelerate during the year as the grows from Antero Resources is 15% growth during the year and that's all on Antero Midstream dedicated acreage, so there would actually be out sized growth compared to that for the gathering compression. So I think trending from fourth quarter 2015, gathering compression should be up with water being down and as accelerated completions in fourth quarter 2015 were ahead of schedule.

Okay, great. And I guess maybe just the two quick questions building off of that. So the first one, just kind of wondering about the timing of those ducts that AR has and maybe how we should think about that on a quarterly basis as well, and then probably more important than that what type of price action or other event would it take for AR to maybe move those ducts around again and so likelihood as another shift?

Yes, the schedule as we mentioned the budget for Antero Resources if there is a 110 completions during the year, all on Antero Midstream dedicated acreage. I think that will be fairly ratable throughout the years how I would model that and then on the price.

Yes, on the price, we'll make a judgment call based on not only the specific price but just our feel for the overall industry and where things are going, what that’s going to be, it's going to be rig count, it's going to production, production in the Marcellus, it's going to be bases, differential and so on and so, we'll make a call sometime in the June-July period as to what we're going to do for the second half of the year and whether we keep it steady, we accelerate or we decelerate through the course of second half of ’16 and ’17. And so the acceleration of ducts for example through ’16 and into ’17 will be depended on how we’re seeing things midyear.

And then I guess just a last one and again you alluded to AM's acreage, I recognized the commentary about AR completing the 30 year of ducts on AM acreage, and deferring the others to 2017 and then what you've outlined as far as rig, I was just kind of wondering if there was any additional detail you could provide the volumetric outlook on the third party dedication to the east for 2016 and just got to maybe how to think about the [indiscernible]?

No, we don't have any commentary on the third party volumes.

[Operator Instructions] The next question comes from Holly Stewart of Scotia Howard Weil. Please go ahead.

Just two quick follow-ups, first on the 70 ducts that you're expecting at year end, how should we think about the split for those on whether AM dedicated volumes and whether third party?

Yes, those are approximately 50 of AM and 20 of third party.

Okay great. And then finally just maybe a little help on the throughput modeling. I know you’ve given some guidance on added pipeline mileage on both the low and the high pressure gathering, but then you also said the rate of growth wouldn’t be kind of comparable to the production growth target, so I guess how should we think about that growth rate and throughput throughout the year?

First addressing the low versus high pressure throughput, those should more equate in 2016 as Stonewall came on and is now allowing those volumes to equate on the actual volume growth with the gathering. As I mentioned there is 15% in AR, but it's all on Antero Midstream, so that translates to a higher rate, now they'll probably be fairly ratable growth, little more in the first quarter and then little bit of a plateauing in the second and third and then growth in the fourth quarter.

This concludes our question-and-answer session. I would like turn the conference back to over Chad Green for any closing remarks.

Thank you for participating on our call today. If you have any further questions, please feel free to contact us. Thank you.