Antero Midstream Corporation (NYSE:AM) Q4 2023 Earnings Call Transcript
Antero Midstream Corporation (NYSE:AM) Q4 2023 Earnings Call Transcript February 15, 2024
Antero Midstream Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Antero Midstream's Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Justin Agnew, Director of Finance and Investor Relations for Antero Midstream. Thank you. You may begin.
Justin Agnew: Good morning and thank you for joining us for Antero Midstream's fourth quarter 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've provided a separate earnings call presentation that will be reviewed during today's call. 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 CEO and President of Antero Resources and Antero Midstream; Brendan Kruger CFO of Antero Midstream; and Michael Kennedy CFO of Antero Resources and Director of Interim Midstream. With that, I'll turn the call over to Paul.
Paul Rady: Thanks, Justin, and good morning, everyone. In my comments, I will discuss the financial and operational success at Antero Midstream since our IPO in 2014. I'll also discuss the 2024 capital budget and the capital efficiency of our primary customer, Antero Resources, or AR. Brendan will then highlight our 2023 results, 2024 guidance and long-term outlook, and Antero Midstream's capital allocation strategy. I will start my comments on slide number three titled, A Decade of Success Since Our 2014 IPO. In 2023, we generated a company record $981 million of EBITDA at an 18% return on invested capital. Additionally, since the IPO in 2014, EBITDA has grown by an impressive 18% compound annual growth rate. This is a testament to AM's world class assets, operational success and the visibility it has into the development plans of Antero resources, who is one of the premier E&P operators in North America.
Looking ahead to 2024, we are guiding to a midpoint of $1.04 billion of EBITDA based on a maintenance capital program at AR. This program is expected to generate high teens ROIC in the 2024, as well as later, our capital budget declines and EBITDA increases. Now let's dive into AM's 2024 capital budget by turning to slide number four titled, Unparalleled Capital Flexibility. 2023, our capital expenditures were $185 million, which was at the lower half of our guidance range, at a 30% reduction compared to 2022. Looking ahead to 2024, we had budgeted $150 million to $170 million of capital, substantially all of which is invested in the Marcellus liquids-rich midstream corridor. This is below our previous target of flat year-over-year capital in 2024 and illustrates the flexibility of our capital budget to changes in the development plans.
At the midpoint, this represents a 14% decrease compared to 2023. The right side of the page depicts the breakout of the capital budget by segment. As you can see, our compression capital declines year-over-year. This is driven by our compression, what we call relocation and reuse savings, and the completion of our Grays Peak compressor station, which will add 160 million cubic feet of compression capacity in the second quarter. In addition, Ontario's midstream fresh water delivery and water blending capital declines in 2024 as a result of modestly lower activity levels than the completion of a main water pipeline artery in the liquids rich Marcellus Shale. On a quarterly basis, it is worth noting that AM expects to invest approximately 60% to 65% of its full year capital budget in the second and third quarters during the summer months, which are more favorable for infrastructure build-up.
One of the foundations of AM's flexible and capital efficient investment approach is the visibility it shares with AR. The chart on slide five titled, Most Capital Efficient Customer compares the Capital Efficiency of the Natural Gas Peer Group. Based on expected 2024 drilling and completion capital budgets relative to its production, AR will have the lowest capital per unit of production of the peer group at just $0.55 per Mcf equivalent. This is 40% below the natural gas peer average of 62% per Mcf. This measure is important when comparing the asset quality and operational efficiency of each company. In the case of AR, the quality and depth of the inventory along with its operational efficiencies achieved in 2023 provides tremendous ability for AM's long-term operations.
I'll finish my comments on slide number six titled, AR Benefiting from Liquids Pricing Improvement. The left-hand side of the page depicts year-to-year propane inventories relative to 2023 and the five-year average. As a result of strong exports and winter weather, inventories have declined by more than 45 million barrels since October. In just a few months, propane stocks have moved from the high end of the five-year range to five-year average levels. This return of propane inventories to the historical average has tightened the market and driven bullish sentiment from Mont Belvieu propane prices as a percent of WTI increasing from 43% last fall to 57% today as prices have risen above $0.90 a gallon. This pricing uplift uniquely benefits AR due to its productivity diversity compared to traditional dry gas producers.
Approximately 50% of AR's 2023 revenues were derived from liquids including NGLs. To put a dollar value on the pricing uplift, each dollar per barrel change in C3+ NGL pricing results in approximately $40 million of incremental free cash flow for AR since AR will produce about 40 million barrels of C3+ NGLs. Pricing improvement combined with the reduced maintenance capital at AR more than offsets the impact from the decline in natural gas prices and supports the stable development plan at AR that underpins AM's 2024 guidance. With that, I'll turn the call over to Brendan.
Brendan Krueger: Thanks, Paul. I will begin my comments on slide number seven titled 2023 highlights. During the fourth quarter, we generated a company record $254 million of EBITDA which was a 10% increase year-over-year. We also generated $156 million of free cash flow before dividends and $48 million of free cash flow after dividends during the quarter. These financial achievements were a direct result of Antero Midstream's organic growth strategy and operational success. During the fourth quarter, low pressure gathering and compression volumes increased by 10% and 14% respectively compared to last year. Both throughput measures set company records for Antero Midstream. As Paul mentioned, full year 2023 EBITDA was $989 million, a 12% increase compared to 2022.
Full year free cash flow before and after dividends were company records at $587 million and $155 million respectively. Free cash flow after dividends was at the top of our updated guidance range of $145 million to $155 million and nearly 50% above our initial guidance range. This free cash flow was utilized to reduce absolute debt by approximately $150 million in 2023 and resulted in leverage declining to 3.3 times at year end 2023. Now let's discuss our 2024 outlook by turning to slide number eight titled 2024 EBITDA increasing and capital declining. For 2024, we are forecasting over $1 billion of EBITDA or 5% growth in 2023 at the midpoint of guidance. The EBITDA growth is driven primarily by flat to low single digit throughput growth, the expiration of the LP gathering fee rebates with AR and annual inflation adjustments to our fixed fees.
As Paul discussed earlier, we are also forecasting $160 million of capital investment at the midpoint of our guidance, which represents a 14% decrease from 2023. This is the second year in a row with EBITDA growth and capital declining by double digits and illustrates the significant operational leverage of our assets. This 2024 plan allows us to generate over $250 million of free cash flow after dividends or a 65% increase compared to 2023. Slide number nine illustrates our capital allocation strategy for 2024 with sources on the left and uses on the right. Starting at the top, we are forecasting $190 million of interest payments at the midpoint of guidance, which is a 13% reduction year-over-year and is driven by lower absolute debt levels and interest savings from the successful senior note issuance in January of this year.
Next are the highly economic blocking and tackling capital investments that are the foundation of our capital allocation strategy. A peer leading return on capital supports our return of capital to shareholders. In 2024, we plan on maintaining our stable $0.90 per share dividend, which represents an attractive 7% yield at today's share price. The remaining discretionary cash flow will first be allocated towards debt reduction to achieve our three times leverage target in 2024. Thereafter, we plan to utilize any excess cash flow for further debt reduction and opportunistic share repurchases under our new $500 million open market share repurchase program. We believe this balanced approach to reducing both the debt and equity components of the capital structure is the most efficient way to accrue value to our shareholders.
I'll finish my comments in slide number 10 titled Delivering on Five-Year Outlook. Our transition to sustainable free cash flow after dividends over the last several years has allowed us to reduce absolute debt and leverage, execute accretive bolt-on acquisitions, and now announce a sizable $500 million share repurchase program. Looking ahead, despite the volatile commodity price environment, Antero Midstream remains on track to achieve its previously disclosed five-year targets from 2023 through 2027. Our highly economic organic project backlog of $900 million to $1 billion is expected to continue to drive high teams' return on invested capital and generate $1.0 billion to $1.3 billion of free cash flow after dividends. Excluding our 2023 actual results, our $500 million share repurchase program represents approximately 50% of our remaining $1 billion of free cash flow after dividends from 2024 through 2027.
This program will allow AM to supplement its stable dividend with flexible and opportunistic share repurchases in order to maximize value for our shareholders. Importantly, debt reduction will continue to be an integral part of our overall capital allocation strategy to maintain a strong balance sheet, provide flexibility, and de-risk our business. The goal of this balanced capital allocation strategy is to ultimately provide the highest risk-adjusted return profile for our shareholders. In summary, 2023 was a fantastic year for AM, both operationally and financially. We have been discussing our inflection point of expanding free cash flow, and we are now delivering on that plan in 2024 and beyond. Our balance sheet strength, combined with multiple avenues to return capital to shareholders, positions AM as one of the most unique investment opportunities, not only in the midstream industry, but in the domestic mid-cap investment universe.
With that, operator, we are ready to take questions.
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