Antero Midstream Corporation (NYSE:AM) Q3 2023 Earnings Call Transcript

Antero Midstream Corporation (NYSE:AM) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Greetings and welcome to the Antero Midstream's Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you Justin Agnew, Director of Finance. Thank you, Justin. You may begin.

Justin Agnew: Good morning and thank you for joining us for Antero Midstream's third 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.

A wide shot of a sprawling natural gas pipeline system, representing the company's energy infrastructure.

Paul Rady: Thanks Justin. In my comments, I will discuss the multi-decade inventory dedicated to AM and the AR capital efficiency achievements in 2023. Both of these attributes support the attractive and derisked long-term outlook at AM. Brendan will then discuss our third quarter financial results repeatable free cash flow business model and 2022 ESG highlights. Going to start my comments on Slide number 3 titled Consistent Growth and Large Low-cost Inventory Dedicated to AM. This slide highlights the throughput growth at AM and drilling inventory for the natural gas peers at a $2.75 breakeven NYMEX gas price. During the third quarter AM once again delivered double-digit year-over-year throughput growth. With gathering volumes well over three Bcf a day AM now gathers roughly 3% of the total natural gas production in the United States highlighting the growth and scale of AM's operations since 2021.

Similar to AM's organic growth strategy, AR has executed its organic leasing program investing $340 million in land capital since 2021. The result is over 22 years of inventory dedicated to AM based on the 2023 development pace as depicted on the right-hand side of the page. So, while Antero Midstream's gathering volumes have increased nearly 15% since 2021 AR has more than replenished the multi-decade inventory that drove the throughput growth over that time frame. This organic leasing strategy is not only cost-effective for AR. but incredibly capital efficient at AM. A majority of the land capital is invested to extend laterals, fill-in acreage positions, and block up AR's already contiguous acreage position. This results in more production and reserves per well for AM as well as more capital efficient infrastructure build-outs within the consolidated acreage position.

Now, let's move to Slide number 4 titled Most Capital-Efficient Customer in Appalachia. This slide illustrates the year-over-year change in production on the Y-axis and the year-over-year change in drilling and completion capital on the X-axis. While targeting a maintenance capital program, AR's third quarter 2023 production actually grew 9% year-over-year. This growth combined with the contributions from the bolt-on acquisitions and drilling partnerships translated to a 13% year-over-year increase in gathering volumes at AM. Conversely, when AR's peer group attempted to target a maintenance capital program, their volumes actually declined year-over-year. When you compare the production growth to the drilling and completion capital invested to deliver this growth, AR has been far and away the most capital-efficient operator in Appalachia over the last year.

For reference, AR is consistently running two to three rigs and one to two completion crews, which is a very manageable and balanced development program for one of the largest natural gas producers in the US. This peer-leading capital efficiency combined with strong balance sheet at AR underpins the consistent development program that drives repeatable results at AM. In summary, we continue to be one of the most capital-efficient midstream companies in the industry. The multi-decade repeatable low-cost inventory dedicated to AM combined with our unparalleled visibility consistently generates high-teens return on invested capital or ROIC. These peer-leading returns on invested capital further supported by AR's peer-leading capital efficiency continues to drive value for AM shareholders.

With that, I turn the call over to Brendan.

Brendan Krueger: Thanks, Paul. I will begin my comments on Slide number 5 titled Operational Success Drives Earnings Growth. During the third quarter, we generated a company record $251 million of EBITDA or over $1 billion on an annualized basis, which was a 12% increase year-over-year. We also generated $138 million of free cash flow before dividends and $30 million of free cash flow after dividends. This free cash flow is utilized to reduce absolute debt and resulted in leverage declining to 3.4x which is a reduction from 3.7x at year-end 2022. These financial achievements were a direct result of Antero Midstream's growth strategy and operational success. During the third quarter, low pressure gathering and compression volumes increased by 13% and 17% respectively compared to the prior year quarter.

Both throughput measures set company records for Antero Midstream. Of the 13% growth in low-pressure gathering volumes, approximately 6% was organic growth on our legacy assets and 7% was attributable to the Crestwood acquisition that closed in the fourth quarter of last year. The outperformance in AM's gathering and compression business, which drove the increase in our EBITDA guidance was a result of outperformance on wells turned to sales in 2023 as Paul discussed as well as the acceleration of completion throughout the year. Now let's move on to Slide number 6, titled Transition to Repeatable Free Cash Flow after Dividends. This quarter was our fifth straight quarter of generating free cash flow after dividends. Year-to-date free cash flow after dividends has totaled $107 million, which is above our original full year guidance midpoint of $105 million and we have achieved this in just three quarters.

Antero Midstream's 2023 free cash flow has benefited from a combination of outperformance in our base business, realizing synergies from our bolt-on acquisitions and optimizing our capital budget. Looking back at the Crestwood and EnLink acquisitions, we were well positioned to put both acquisitions on the balance sheet, given our leverage position and visibility over the near term. To put it into context, we expect to essentially pay off both of these acquisitions with just six to seven quarters of excess free cash flow after dividends. At the same time, we expect our leverage to decline by almost a turn over that period. This is an incredible feat and highlights just how strong AM's base business is as well as demonstrating how free cash flow accretive those acquisitions were.

Before finishing up our prepared remarks, I wanted to briefly touch on our 2022 ESG achievements on slide number 7. The data on this page was just recently published in our annual ESG report. In 2022, we delivered a methane leak loss rate of just 0.031% one of the lowest in the midstream industry. Our integrated water system the largest in Appalachia allowed us to reuse or recycle 86% of our wastewater and eliminated over 12 million miles of truck traffic in our local communities. Importantly, while we have delivered significant growth over the last year, we have delivered it safely. 2022 marked the eighth straight year without an employee lost time incident, which is an incredible achievement is something we are very proud of here at Antero Midstream.

We also had a 59% reduction in the total recordable incident rate in 2022, further highlighting the corporate focus on safe and efficient operations. I'll finish my comments on slide number 8 titled Antero Midstream Checking all the Boxes. The first three quarters of 2023 have been incredibly successful from an operating and financial standpoint which is reflected in the second guidance increase this year. The outperformance in our base business and successful integration of our complementary acquisitions, keep us on track to deliver a peer-leading, ROIC in the high-teens again in 2023. We have significantly de-risked the business by transitioning to generate consistent free cash flow after dividends, which we now expect to total $145 million at the midpoint of guidance, which is almost 40% above our initial guidance of $105 million.

As we look to 2024, we expect a further meaningful increase in free cash flow after dividends. This will position AM well to achieve our three time leverage target and increase our return of capital to shareholders. In summary, we continue to build on our track record of delivering on our stated guidance and financial targets. More importantly, we deliver these through safe and efficient operations, while being good stewards in our local communities. With that, operator, we are ready to take questions. Question-and-Answer Session

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