Greetings, and welcome to the Antero Midstream First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn this conference over to our host, Brendan Krueger, Vice President of Finance. Thank you. You may begin.

Thank you for joining us for Antero Midstream’s First Quarter 2021 Investor Conference Call. We’ll spend a few minutes going through the financial and operational highlights, and then we’ll open it up for Q&A. I would also like to direct you to the homepage of our website at www.anteromidstream.com, where we have provided a separate earnings call presentation that will be reviewed during today’s call. Before we start our comments, I would first like to remind you that during this call, Antero management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Antero Resources and Antero Midstream and are subject to a number of risks and uncertainties, many of which are beyond Antero’s control. Actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements. Today’s call may also contain certain non-GAAP financial measures. Please refer to our earnings press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. Joining me on the call today are Paul Rady, Chairman and CEO of Antero Resources and Antero Midstream; Glen Warren, President and CFO of Antero Resources; and President of Antero Midstream; and Michael Kennedy, CFO of Antero Midstream. With that, I’ll turn the call over to Paul.

Thanks, Brendan. I’d like to start on Slide number 3, highlighting the step change improvement to AR, that’s Antero Resources’ balance sheet. During the first quarter of 2021, AR generated over $400 million of free cash flow. As depicted on the top left portion of the slide, AR used this free cash flow to reduce total debt from $3.0 billion to $2.6 billion during the first quarter. The top right quadrant of the slide illustrates the LTM EBITDA improvement from $1.0 billion to $1.3 billion. This improvement was a direct result of AR’s liquids focus and scale, which allowed it to take advantage of the improvement in C3+ NGL and oil prices. This total debt reduction, combined with an improvement in AR’s LTM EBITDAX, decreased AR’s leverage by over a turn to 2.0x. Lastly, during the spring redetermination period, AR’s borrowing base was reaffirmed at $2.85 billion, supported by the deep drilling inventory of liquids-rich locations in AR’s portfolio. This reaffirmation, along with the $700 million senior note issuance and debt reduction during the quarter, resulted in AR’s liquidity doubling to $1.8 billion. Looking ahead, we expect AR to continue generating free cash flow and reducing total debt, which is expected to result in a completely undrawn credit facility balance over the next few quarters. This significant improvement in the financial strength of AM’s primary customer, AR, continues to strengthen the outlook at AM. To put AR’s first quarter financial results into perspective, let’s turn to Slide number 4. Since we are early in the reporting cycle, most of these figures are based on consensus estimates. The top of the slide highlights AR’s balance sheet positioning compared to its E&P peers in Appalachia. On the top left, you can see AR’s $2.6 billion of total debt ranks third amongst its…

Thanks, Paul. I’ll begin my AM comments with first quarter operational results, beginning on Slide number 6 titled Year-Over-Year Midstream Throughput. Starting in the top left portion of the page, low-pressure gathering volumes were 2.9 Bcf per day in the first quarter, which represents a 5% increase from the prior year quarter. Compression volumes during the quarter averaged 2.7 Bcf per day, an 8% increase compared to the prior year quarter. Our 50-50 joint venture gross processing volumes averaged 1.4 Bcf per day, an 8% increase compared to the prior year quarter. Processing capacity was 100% utilized during the first quarter. JV gross fractionation volumes averaged 38,000 barrels per day, a 15% increase from the prior year quarter. Fresh water delivery volumes averaged 104,000 barrels per day, a 43% decrease from the prior year quarter, driven by lower completion activity by Antero Resources as it transitioned to a maintenance capital development program. Adjusted EBITDA for the quarter was $219 million, a 1% increase year-over-year. Capital expenditures were $30 million, a 64% decrease year-over-year. Looking ahead, we expect an increase in our quarterly capital expenditures as we begin construction on infrastructure supporting the drilling partnership that we expect to drive throughput growth over the next several years. Specifically, we expect to invest roughly 2/3 of our 2021 budget of $240 million to $260 million in the second and third quarter combined as we take advantage of better weather during the summer months. Importantly, a third drilling rig has already arrived in the Utica to commence development by the drilling partnership, utilizing midstream infrastructure that is largely in place. We expect completion activities using AM’s freshwater delivery system to begin on those 2 pads in the back half of the year and expect to turn in line those wells by year-end to…

[Operator Instructions] Our first question is from Brian Reynolds with UBS.

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

Yes. No, we talked in the other call, the first order of business for AR is to pay down debt below $2 billion, and then we’ll assess at that time whether further debt paydown or return of capital or what form of return of capital, combination of both. We do have a slide out there on AR’s website that walks through all the reductions in the firm transport volumes over that period. So that’s step down between now and ‘24 and ‘25 and it’s more rightsized to what our actual production at this maintenance capital level add in ‘24 and ‘25. But for the next 3 to 4 years, I would say AR is in the maintenance capital mode.

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

We look at the drilling JV as that. I mean that’s really third-party volumes and third-party business. So that was terrific for AM. As I mentioned in my comments, AM have 2%, 3%, 4% throughput growth over the next 3 years, is somewhat unique in the midstream -- for a midstream company. So I think AM is well positioned from a growth standpoint. And with the capital being very efficient and having just-in-time visibility into that, that will deliver that free cash flow growth of $200 million, net of that $175 million of capital. So AM is in good shape from that. And without the system being almost fully built out, has very low capital over the next couple of years as well. So generating free cash flow after dividends in the $500 million-plus range and generating free cash flow -- I’m sorry, before dividends in the $500 million-plus range and then after dividends this year and next kind of flat to $25 million positive, but then after that, about $100 million a year. So very attractive profile for Antero Midstream.

Our next question is from Jeremy Tonet with JP Morgan.

This is James on for Jeremy. Just 2 quick ones for me. I guess just starting on the gathering, OpEx seemed to tick up this quarter. Just looking past the run rate from last year. Maybe just looking forward, is that a run rate to use? Or how are you guys thinking about that?

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

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

Yes, right now, Q4 is about neutral. There is a step down in the water activity in Q4. So you’re correct. Q2, Q3, there is a bit of a negative just because the capital steps up in that $80 million to $90 million range for those 2 quarters. Capital does step down a bit in Q4, but with a little bit less water, you have a little bit less EBITDA in that quarter. So it’s about flat. So very positive this quarter, $39 million, a little bit negative in second and third quarter and then neutral in the fourth. That’s the cadence.

Got it. And sorry, just one more if I could. I noticed the asset sale recorded in the quarter. I think you shared there and if there’s a potential down the road for similar sales.

Yes. That was just some sale of some excess pipe that we did not need anymore. We had some gains on some sale of pipes that showed up in 4Q ‘20 and so a little loss here. So net breakeven when we just sell some excess pipe, so nothing further.

Our next question is from John Mackay with Goldman Sachs.

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

Yes. I think in our call, I didn’t hear growth was on the table, but maybe after like 3 to 4 years growth, just depending on what kind of environment we’re in, because with the amount of free cash flow generation we have at AR over that time frame, it’s just somewhat astounding how much it is. So after 3 or 4 years, maybe you would think about it. But until then, it’s very focused on paying down debt and returning capital to shareholders. Yes. I think the growth is really coming from the drilling partnership. I think that’s a key takeaway of this for AM is AM does have growth. Its volume throughput is growing. The gross volumes from this -- from Antero’s field is growing. It’s just from a net perspective, Antero’s had maintenance capital.

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

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

Great. All right. And then maybe I’ll just squeeze 1 more in since we’re on the JV assets. Just any update on Smithburg timing? And it also looks like maybe the Sherwood margin stepped up a little bit or at least the processing margin overall. So maybe just anything else going on there would be helpful.

Nothing there, but on Smithburg it’s July 1. Hoping Smithburg will be coming on.

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

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

Yes. I wouldn’t really say it was a lumpiness of spend this year. I mean they have $80 million to $90 million in the second and third quarter and, call it, $60 million in the fourth. And those are the quarters post the drilling JV. I mean that’s not terribly lumpy. I think it’s fairly consistent. There’s always a little less in the winter because it’s a little harder to build in the winter. The projects -- it’s not really any more processing. There’s one processing plant like we just mentioned in the last question with Smithburg really just building out the low pressure, high pressure and compression to serve the increased drilling pace that occurs because of the drilling JV. It’s about 60 more wells over the next 4 years, so just gathering though it’s kind of our bread and butter and then also providing freshwater distribution to those wells for completions. So right within our existing system, really just building it out a little bit more on an accelerated time fashion to meet the accelerated volumes.

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

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

Our next question is from Timm Schneider with Citi.

Just a really quick one for me. Just confirming that you’re not a cash taxpayer through ‘25 still? Or if anything has changed there?

Yes. That’s correct.

Got it. That was it, quick and easy.

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

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

Yes. They’re flat. They pick up a bit in -- they’re relatively flat throughout the year.

Okay.

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

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

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

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

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

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

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

Yes. No, it was not.

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

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

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.