Antero Midstream Corporation (AM) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Antero Midstream Partners LP First Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Chad Green, Vice President - Finance. Please go ahead.

Thank you for joining us for Antero Midstream's First Quarter 2016 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 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 management 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 today 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. And thank you everyone for listening into the call today. In my comments I'm going to highlight our first quarter results and provide additional details on AM’s increased 2016 guidance and growth opportunities. Paul will round out our comments by providing a brief update on AR's operational improvements and discuss Antero Resources outlook for 2016 all which benefits Antero Midstream. During our comments today we will periodically refer you to a handful of slides that are located in a separate conference call presentation on the home page of our website titled first quarter 2016 earnings call presentation. This is separate from our monthly investor presentation also located on our website. So please make sure you're viewing the correct slide deck during the call. 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 there was another strong quarter for Antero Midstream both operationally and financially. AM announced the first quarter distribution of $23.5 per unit a 31% increase year-over-year and 7% increase sequentially. The distribution marks our fifth consecutive distribution increase since the IPO in November of 2014. As detailed in our earnings release we are now guiding to the year-over-year distribution growth of 30% in 2016 the top end of the original guidance range, which equates to increases of a penny and a half during each quarter in 2016. The increase is driven by the $25 million increase in EBITDA and distributable cash flow guidance. The consistent top-tier distribution growth all while maintaining excess coverage, which came in at 1.6 times during the first quarter speaks to the stability and consistency of resulted AR and AM despite a decade low commodity price environment. As you can see on Slide number 2 titled top-tier distribution growth and coverage AM continues to deliver top-tier distribution growth and DCF coverage well in excess of the partnerships 1.1 times to 1.2 times target. Now let’s move on to our operating results during the first quarter. As a reminder, the results in year-over-year comparisons both include contribution from the Gathering and Compression and Water Handling and Treatment segment on a combined basis after successfully closing the water dropdown transaction at the end of the third quarter last year. As highlighted on Slide number 3 of our earnings call presentation titled high growth midstream, average daily low pressure gathering volumes were 1,303 million per day in the first quarter, which represents a 39% increase from the prior year, and a 16% increase sequentially. High pressure gathering volumes were 1,222 million per day, and 8% increase over the prior year and 2% increase sequentially. As we talked about in the fourth quarter, we now see a more normalized relationship of high pressure volumes of 90% to 95% of low pressure volumes now that the Stonewall pipeline is in service. Compression volumes during the quarter averaged 606 million per day, a 69% increase compared to the prior year quarter and a 27% increase sequentially. The sequential increase in compression volumes is driven by growth from our first Utica compression station that was placed in the service late during the fourth quarter. The long station which has the capacity of 120 million per day was over 90% utilized in the first quarter just months after being placed into service. This growth project is an excellent example of just-in-time capital spending philosophy we have in Antero Midstream, which allows for the attractive organic build-out multiples of 4 to 7 times EBITDA. Moving on to the fresh water delivery segment, fresh water delivery volumes averaged 97,331 barrels per day, a 7% decrease compared to the prior year quarter and a 19% decrease sequentially. One thing I would like to point out on the fresh water delivery volumes is that while we had a 7% decline in overall volumes year-over-year. Antero Midstream serviced 10 fewer wells in the first quarter of 2016 relative to 2015 or 25% fewer wells utilizing the fresh water delivery system. Driver of that percentage difference is the amount of water used in each Marcellus completion in 2016 which has increased approximately 25% from 30 to 32 barrels per foot of lateral, the 38 to 40 barrels per foot of lateral. I will walk through the increased guidance in detail in a moment, but the new completion techniques using increased water intensity is the primary driver of AM’s guidance increase. Next, I’ll move on to financial results, adjusted EBITDA for the first quarter was $80 million and distributable cash flow was $69 million resulting in DCF coverage of 1.6 times. The strong financial performance was again driven by volumetric growth during the quarter as well as our continued operating expense improvement on both the gathering and compression and fresh water delivery segments. Moving on to capital expenditures, during the first quarter Antero Midstream invested $49 million in gathering and compression infrastructure, $10 million in water handling infrastructure, and $27 million for the continued construction of the advanced wastewater treatment facility. The advanced wastewater treatment facility or the Antero Clearwater facility is on track to be placed in the service in late 2017. As of March 31, Antero Midstream had $14 million in cash and $680 million drawn on its $1.5 billion revolving credit facility, with a debt LTM EBITDA of 2.3 times. Additionally, AM had over $800 million of liquidity to fund the 2016 capital program. Low leverage and high liquidity are certainly attractive attributes in this challenged MLP environment. Now, let’s discuss the increased AM guidance. As you can see on Slide number 4, titled Antero Midstream updated 2016 guidance. Antero Midstream increased its financial guidance after a strong first quarter and higher expectations for the remainder of the year. Antero Midstream is now forecasting adjusted EBITDA of $325 million to $350 million and distributable cash flow of $275 million to $300 million or an increase of $25 million compared to the previously issued guidance. Looking ahead to the second quarter, we expect cash flow to be relatively in line with first quarter results as growth in gathering and compression offsets modest declines in fresh water delivery volumes due to the reduced completion activity at AR in the second quarter. Similar to the 2015 completion and production cadence, AR expects to accelerate completions in the back half of the year on previously drilled but uncompleted wells. Additionally, given the strong results and significant excess coverage AM expects year-over-year distribution growth to be 30% in 2016 the top end of the previously provided guidance range. The primary driver for the increasing guidance was increased and expected fresh water delivery volumes due to the more water intensive completions being executed by AR. To elaborate a little further on the enhanced completion techniques as you can see on Slide number 5 titled Marcellus increased fresh water volumes. AR has increased the amount of water volumes utilizing the Marcellus completions from 30 to 32 barrels per foot the 38 to 40 barrels per foot or approximately a 25% increase in water volumes per well. In addition to increased water AR has increased proppant design per well from approximately 1200 pounds to 1500 pounds per foot, while increasing proppant placement to 98%. We have already seen the benefit to AM’s water business through increased fresh water delivery volumes but we could see even further upside to the gathering and compression business from better well results in improved recoveries, which appear encouraging based on initial results from the first quarter. Antero’s average Marcellus well completed in the first quarter had an initial EUR of 2.3 Bcfe per thousand foot at wellhead versus our 2.0 Bcfe per thousand foot type curve. Set an another way by virtue of being a full cycle midstream provider to AR. AM sees the benefits and multiple aspects of its business from increased water usage driving improved well results. Paul, will go into detail further in his comments on the additional well costs and performance improvements at AR during the quarter but we are really excited about the potential for these enhanced completions. Now on the additional growth opportunities, as you know AM has the option to become a 15% non-operated equity interest owner in the Stonewall gathering pipeline, which was placed into service on November 30, 2015. AM has up to six months or until May 30, 2016 to exercise the option. We are continuing to evaluate the option expect to have a decision before the expiry date. Looking at other M&A opportunities we continue to evaluate various projects while also remaining prudent with our capital in the current operating environment. The benefit of having the organic growth model is the abundance of opportunities that are low risk and already in house. It's really a great advantage to be able to rely on these organic opportunities and not have to acquire to grow especially when the returns and visibility for organic opportunities are almost unparalleled across the midstream space. In addition to the opportunities at AM we also see an attractive opportunity for AR to be a consolidator in Appalachia continuing to add to its core acreage position, which ultimately brings additional attractive organic opportunities the AM's doorstep. The other benefit of AR strength and skills, ability for AR to pledge its resource and development and more downstream opportunities such as long-haul pipelines, processing, fractionation and terminalings. The AM would then have the opportunity to invest in. While we haven’t executed one of these yet we remain very excited about the opportunities and continue to envision AM as the full value chain midstream provider. Before I turn it over to Paul I wanted to round out my comments on the AR side highlighting the importance of being tied to a strong sponsor. As you can see in Slide 6 titled AR Spring 2016 borrowing base reaffirmed. AR represented one of five public E&P companies with a borrowing base greater than $1 billion that did not receive a reduction in its borrowing base in the redetermination season thus far and only one of two BB rated public E&P companies that reaffirmed its borrowing base. The reaffirmation of the borrowing base is the direct result of the significant PDP reserve growth and significant value of our hedge position. Of note three of the five are Appalachia focused E&Ps highlighting the need to have the right rock oil for the right sponsor driving midstream volumetric growth. The significant liquidity position and healthy balance sheet allows AR to continue to develop its resource base and continued driving growth opportunities at AM. With that, I will turn it over to Paul.

Thanks Mike. Today I’ll discuss the outlook for the remainder of 2016 at AR and the significant operational improvements that AR achieved during the first quarter. Looking ahead to the rest of 2016 at AR, as you can see on Slide number 7 titled continued measured growth. One of the distinguishing characteristics of the AR 2016 development plan is the ability to grow both production and cash flow in line with each other versus peers with declining cash flow profiles. As I'm sure you saw in the AR earnings release, AR increased production growth guidance to 17% in 2016 versus the prior guidance of 15%. The unique ability to grow both production and cash flow in this commodity price downturn is a direct result of AR's industry-leading hedge book and firm transportation portfolio allowing over 99% of our production in the first quarter to be directed towards favorably priced markets. As you can see on the bottom half of the page, the result is a stable leverage profile which again speaks to the strength and stability at AR which ultimately benefits AM. Now, let's move on to AR’s well cost improvements. As you can see on Slide number 8 entitled proven track record of well cost reductions, AR's current total well costs in the Marcellus has declined to $0.95 million per thousand feet of lateral or 32% decline compared to 2014. Similar to the Marcellus, AR continues to see improvements in the Utica with total well costs averaging $1.14 million per thousand feet of lateral or a 29% decline compared to 2014. The reduction in well costs is primarily driven by reduced service costs as legacy contracts continue to roll off or have been restructured and Antero has begun to realize lower spot rates as well as a number of operational efficiencies. Speaking of operational efficiencies, if you can move on to Slide number 9 entitled continuous operating improvement, AR's drilling days during the first quarter in the Marcellus were reduced from 24 days in 2015 to 21 days and stages completed per day increased from 3.5 stages per day in the prior year to 3.8 stages per day. In the Utica, drilling days during the first quarter decreased from 31 days in 2015 to 24 days, and stages completed per day increased from 3.7 stages per day in the prior year to 4.4 stages per day. Additionally, during the quarter, AR set two new company records. First, we recently drilled and case the longest lateral in Company history at over 14,000 feet sideways. And second, AR drilled over a mile to be exact 5291 feet of lateral in a 24 hour period. And in fact if you look at all of AR's top drilling days in the Marcellus since we began in the project. The top 10 drilling days have occurred in the first quarter of 2016. The longer laterals and contiguous acreage position benefits AM through lower capital costs to connect individual wells and pads ultimately driving more attractive project rates of return. Building on the drilling and well cost improvements, as you can see in the blue box at the bottom of the slide, during the first quarter of 2016 AR attained a wellhead EUR per thousand feet of 1.6 Bcf in the Utica Shale and 2.0 Bcf in the Marcellus Shale, which were improvements of 14% and 33% respectively compared to 2015 EURs. The combination of well cost reductions and increased EURs drives better rates of return at AR continuing the incentive to maintain a robust development program that benefits AM. Moving on to Slide number 10, titled well economics Marcellus upside potential. This slide illustrates the impact of improving EURs per 1,000 feet from 1.7 Bcf to 2 Bcf in the Highly-Rich Gas and Highly-Rich Gas/Condensate windows seen on wells completed in the first quarter with at least 90 days - with at least 30 days of production. As you can see the increase in recoveries translates into 45% rates per turn on a pretax basis in the Highly-Rich Gas/Condensate areas and a 30% rates of return in the Highly-Rich Gas areas or increases of 10% and 6% respectively using 331 strip prices in both cases. Additionally these locations have very attractive breakeven prices. In the Highly-Rich Gas/Condensate area where we have over 600 locations the breakeven price is a $1.40 per MMBtu on NYMEX gas pricing. In the Highly-Rich Gas area where we have almost 1,000 locations the breakeven price is $2.05 per MMBtu on NYMEX gas pricing. It’s also worth pointing out that the well costs that are baked into the returns include $1.2 million for road, pad and production facilities in both the demand and variable costs of firm transportation are included. These attractive rates of return and low development costs ensure that AR continues to grow despite the decades low commodity price environment. In summary we remain very excited about the prospects of Antero Midstream particularly after another strong quarter at both AR and AM and the abundance of growth opportunities going forward. With that operator we are ready to take questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions]. The first question comes from Brandon Blossman of Tudor, Pickering, Holt, & Company. Please go ahead.

Good morning, gentlemen.

Good morning, Brandon.

Couple of quick ones. One is there any incremental color on kind of drivers of the Stonewall decision?

Any additional drivers.

Yes, what will take into account to make that decision?

Well, remember we have six-month options so we have the luxury I guess you could say of examining all the costs very thoroughly. And then we have a better picture also of projected volumes that are going through it both our own and third-party volume. So, having the six-month weight has been definitely a benefit. So those would be the things that we would consider as well as how does flow capacity look and options downstream of Stonewall but looks favorable at this point.

Okay. So, part of that is what projects look like six months from now in terms of getting done over the next two or three years?

Well, maybe I said that in a confusing way. So it’s not six months from now it's the project went into service on November 30 of last year. So that's - so we've been able to spend much of the last six months our option doesn't expire for another month or so. So we’d add the luxury of looking at costs and volumes for the last five plus months, that’s what I meant.

Okay. But downstream projects, correct?

Yes, as well as projects within, yes upstream as in what feeds into Stonewall as well as where Stonewall delivers to and how those projects look.

Fair enough. And then longer-dated question, any thoughts about third-party water volumes as we move kind of through the back end of this decade?

We model virtually no volumes. Our expectation at this point with us having such a dominant acreage position is that longer-term would be less than 5%. We've provided water to some of the other operators in the area and are happy to do it, but there's just not much activity at the moment and that is true both with fresh water delivery and then as our Clearwater Facility comes online before the end of next year that were open for business and would have room for a while for third-party volumes.

Okay. That’s helpful. Thank you very much.

Thank you.

The next question comes from Holly Stewart of Scotia Howard Weil. Please go ahead.

Hi, Holly.

Good morning. How are you all?

Good morning.

Good morning, good.

So well, thanks.

Great. So maybe just one quick one following up on the Stonewall option, have you said how much of that 15% would cost you?

Yes, we’ve talked, it’s around $45 million of capital, and it should be included in – with the additional authority stated 2016 capital budget.

Okay, great. And then Mike maybe following up on your comments on just M&A opportunities and what's out there. We know there is a lot out there on the upstream side, just trying to get a sense for – on the midstream side as this infrastructure is a upstream company that are looking to divest the raised capital that midstream company that are just trying to right size the portfolio, and we heard console say these all the small gathering line in Monroe County a few days ago. So just trying to get a sense of what’s kind of out there in size and all that?

The comments we’re talking around is really around acreage around our areas in the Marcellus and Utica and just that Antero Midstream owns or it has all the acreage from Antero resources current and future acreage, so the Antero Midstream would get the opportunity to develop that and put in the low pressure, high pressure and compression associate without acreage.

Okay, so this is sort of outside – that’s what you are looking at, okay. And then just one more on your comments on being sort of full-service midstream company, I’m assuming the processing plant construction is sort of being taken into account now. Can you remind us where you stand currently on both the Utica and Marcellus in terms of what type of processing capacity is still available for you?

Yes, so in the Marcellus there are six plants at the Sherwood site and we filled up just at five plants, so each plant is 200 million a day so we are right at about a Bcf a day and about to turn on the sixth plant it’s there and installed. So we’ve got that capacity now to be able to fill. And I think there is four plants at Seneca and so our 600 million a day can do the math and see that that is threefold plants were actually there's some people that have part of the first plant, so we are into the fourth plan, but that won’t be the constraint I think near-term that we have more than 100 million a day of ability to process more and so really it's 600 million a day lid that we have right now that that is our REX capacity both on the REX mainline as well as the so-called REX lateral that goes from the plant to the mainline. And so will be capped at 600 million a day until the Rover Pipeline comes in and then we can expand. And so that's probably a year away, energy transfer projects it to be mid-2017, and so as we get more confidence that that's the right date will start putting to together our development plan to fill it over the next year and a half or so beginning in mid-2017. And with that we will work on any more processing capacity that we might need in Seneca.

Great, thanks guys.

Thank you.

The next question comes from Helen Ryoo of Barclays. Please go ahead.

Thank you. Good morning. Your question regarding the you know you guys talked about using more water that's driving the guidance up curious is the – that is there any CapEx associated with more water and if so is that for by AR versus AM?

Yes, there is no additional CapEx to AM for the water is entirely borne by AR.

Okay. Great and then this kind of level of higher water usage is this a trend that you expect to go you know continue into the rest of the year and then potentially in 2017?

Probably it is what we're going to do through 2016 of that will give us a nice base of completed wells and so will see over time whether the upsides fracs are the perfect design or weather will go larger or downsize them a little bit, but at least through 2016 and probably first half of 17 anyway that's our plan is to go with these upsides fracs we believe it'll make a nice uptick but we always like to see the production to make sure.

Okay and then on the Stonewall project what's the return profile there and you know the contracting profile could you share a little bit more detail on what – are these back by long-term contract.

Yes, we have a page in the presentation outlines returns I think its 15% to 25% for regional pipelines. The contracting there is 900 million affirm sales to Antero Resources and then some additional firm from another third-party so there is a nice underpinning of firm sales and from capacity. So terrific return of 15% to 25% and some firm volumes are come with it.

All right. Great thank you very much.

Thank you.

The next question comes from Jeremy Tonet of JPMorgan. Please go ahead.

Hi, this is [Jim] on for Jeremy. I guess I appreciate the detail for on third-party completions in the east, but can you add some detail on the volumetric outlook for the third-party dedication for the rest of 2016?

Well, right now what we due diligence we’ve done we’ve got all the $900 million obviously from Antero Resources in our valuation and what we’re working with is generally approximately 100 million a day of additional volumes for the year.

Gotcha. And I guess the Clearwater facility you will have third parties for the first two year’s. So what kind of upside is possibly there from additional volume?

While we provide a short on the presentation which is our outlook for our own produced and flow back water volume so you can see the room we have I think it goes in the third year actually there's bit of capacity for third parties and I think it will be a very attractive solution for other operators in the in the area for their produced flow backwaters to were excited about third-party opportunities which is having put that any of our projections.

That’s helpful. Thank you.

Thank you. End of Q&A

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

Thank you for joining us on our conference call today. Please reach out if you have any further questions. Thanks again.