Antero Resources Corporation (NYSE:AR) Q4 2023 Earnings Call Transcript
Antero Resources Corporation (NYSE:AR) Q4 2023 Earnings Call Transcript February 15, 2024
Antero Resources 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: Hello, and welcome to the Antero Resources Fourth Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Brendan Krueger, Vice President of Finance. Please go ahead, Brendan.
Brendan Krueger: Thank you. Good morning, everyone. Thank you for joining us for Antero's fourth quarter 2023 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 homepage of our website at www.anteroresources.com, where we have provided a separate earnings call presentation that will be reviewed during today's call. Today's call may 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; Michael Kennedy, CFO; Dave Cannelongo, Senior Vice President of Liquids Marketing and Transportation; and Justin Fowler, Senior Vice President of Natural Gas Marketing. I will now turn the call over to Paul.
Paul Rady: Thanks, Brendan. Good morning, everyone. I'll start my comments on Slide number 3 of our presentation, titled Drilling and Completion Efficiencies. 2023 was a transformational year for Antero as our operating performance made significant advances. Our drilling and completions teams set a number of company and industry records throughout the year. As an example, days per 10,000 feet of lateral drilled averaged 5.5 days in 2023, a decline of 14% since 2019. On the completion side, 2023 completion stages per day averaged nearly 11 stages a day, 35% improvement compared to the 2022 average and more than an 80% increase from 2019 levels. The result of these operational improvements was significantly shorter cycle times, as shown on the bottom of the page.
These cycle times reflect the total number of days it takes on average from first spudding a pad to turning that entire pad to sales. Since 2019, our cycle times have decreased by an impressive 65% and averaged just 160 days in 2023, shorter cycle times means higher capital efficiency of course. In addition, our well performance continues to improve. This operating momentum is highlighted by the fact that while targeting a maintenance capital program this last year, our volumes actually grew 6% in 2023 compared to 2022. Most importantly, these capital efficiencies and well productivity gains drive a reduced maintenance capital budget. Now let's turn to Slide number 4 titled, Efficiencies Translate to Lower Maintenance Capital in 2024. In 2024, we expect production to be flat, averaging between 3.3 and 3.4 Bcf equivalent a day.
Meanwhile, our drilling and completion capital is expected to be down over 25% compared to the prior year. Our maintenance capital budget midpoint of $675 million to -- is over $225 million below the $909 million that we spent in 2023. The operating efficiency gains captured in 2023 allowed us to drop one drilling rig at the end of last year and then to drop a completion crew at the beginning of this year. We now plan to average two drilling rigs and just over one completion crew for our maintenance capital program in 2024. Also contributing to our reduced capital budget is a lower base decline rate. As we enter year four of our maintenance capital program, our decline rate is substantially lower in the mid- to low 20% range. This low decline rate requires less capital to hold production flat.
In addition, our land capital budget midpoint of $88 million is down over $60 million compared to 2023. In total, this will result in $275 million to $300 million of reduced capital spending compared to last year while maintaining the same production level. This significant reduction in capital highlights the high-quality asset base at Antero and the flexibility that we have. As we look ahead to 2024, these significant capital savings, combined with the recent increase in NGL prices, is expected to generate free cash flow during the year. This positive free cash flow generation is expected to occur despite being unhedged in today's challenging natural gas price environment. This positive free cash flow outlook is even more impressive when considering that the current strip is at the lowest natural gas price for any calendar year outside of the COVID year in the last 25 years.
Now, to touch on the current liquids and NGL fundamentals, I'm going to turn it over to our Senior Vice President of Liquids Marketing and Transportation, Dave Cannelongo for his comments.
Dave Cannelongo: Thanks, Paul. The macro picture for NGLs has improved materially this winter due to a combination of strong domestic demand and consistently high export levels despite the challenges seen in the global waterborne shipping environment. Focusing on propane, as a result of the strong exports and winter weather, inventories have declined by 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, as shown on Slide number 5. This return of propane inventories to the historical average has tightened the market and driven bullish sentiment with C3+ NGL prices as a percent of WTI increasing from 43% last fall to 57% today, driven largely by propane prices rising to above $0.90 a gallon.
Slide number 6 illustrates the strengthening relationship we've seen between WTI and C3+ NGLs in recent months as Antero's NGL price has increased from $38 per barrel on average during 2023 to over $43 per barrel currently. In addition to the strong domestic fundamentals, propane exports have continued to impress. Last year was a record year for propane exports, which averaged 1.62 million barrels per day for the full year 2023, as shown on Slide number 7. 2024 has also started off strong with exports averaging 1.72 million barrels per day year-to-date, an increase of nearly 200,000 barrels per day, above the same weeks last year. These strong exports are occurring despite major volatility in global shipping routes, including restrictions on passage through the Panama Canal and rising geopolitical risks in the Middle East affecting passages through the Suez Canal and Red Sea.
The Baltic LPG rate, which is a metric of the shipping cost of liquefied petroleum gas on a VLGC or very large gas carrier, increased to record levels at the end of 2023, primarily due to limitations on Panama Canal transits that resulted in shipping capacity being tied up in longer routes around the Cape of Good Hope as shown on the graph on the right of Slide number 8. However, this trend has reversed recently as the effects of the Panama Canal restrictions on LPG carriers have eased with Canal passages increasing in January, as a result of the global shipping reshuffling. Additionally, last year was a banner year for VLGC new build deliveries with 41 deliveries in 2023, as seen on the graph on the left of Slide number 8 which is more than double the typical yearly delivery.
VLGC supply is expected to continue to grow in 2024 with 21 more ships being delivered. These deliveries are occurring at the right time in the market with U.S. LPG export growth and the current challenges facing global shipping that have increased transit times in altered routes. As a reminder, Antero exports over 50% of our C3+ production, skewed heavily towards propane and butane directly out of the Marcus Hook terminal in Pennsylvania and has the ability to price our barrels on international indices. Antero will benefit from the current lower shipping rates by being able to capture more of the spread between domestic and international pricing for propane and butane. Also, Antero's export volumes are not impacted by potential constraints at the Gulf Coast export docks, which are at high utilization rates with current export levels and limited capacity expansions expected until 2025.
I'll conclude my remarks this morning acknowledging that with these fundamentals I have just discussed, 2024 is poised to be yet another year in which our exposure to NGL pricing will be a supportive differentiator when compared to other natural gas producers. With that, I'll turn it over to our Senior Vice President of Natural Gas Marketing, Justin Fowler to discuss the natural gas market.
Justin Fowler: Thanks, Dave. I will start on Slide number 9 titled, Growing Global LNG market. This is a slide that we have shown in the past but is updated to reflect the potential impacts from the recent pause on LNG facility approvals from the U.S. government. Regardless of the duration of this pause, we expect very little impact on LNG demand growth into the end of this decade. In fact, only three LNG facilities in our stack chart could be impacted. You see those highlighted by the red boxes. The remaining projects still result in over 10 Bcf of incremental demand by the end of 2027. This would bring the current U.S. LNG export capacity of 14.5 Bcf per day to nearly 25 Bcf per day during that time. This is a substantial demand increase that we expect to tie U.S. natural gas prices more closely to the higher international prices.
Antero is uniquely positioned to benefit from these higher expected U.S. natural gas prices, particularly prices linked to LNG demand growth near Henry Hub. Next, let's turn to Slide number 10 titled, Not All Transport to the U.S. Gulf Coast is Equal. As a reminder, we sell substantially all of our natural gas out of basin, including approximately 75% to the LNG corridor. Our firm transportation portfolio provides us with direct exposure to growing LNG demand along the Gulf Coast and importantly, into Tier 1 pricing points along the LNG corridor. This slide illustrates the significant benefit in selling our gas at Tier 1 Gulf Coast pricing. Based on the current strip, Tier 1 prices reflect increasing premiums to NYMEX in 2025 and beyond, including the TGP 500 Index, which represents 30% of the 2.0 Bcf per day of Antero directed Gulf firm transportation, where premiums have increased to $0.29 above NYMEX in 2026.
Antero also delivers to ANR Southeast and Columbia Gulf Onshore points, which represents an additional 60% of premium delivery that over time will also appreciate with the current LNG export buildout. Meanwhile, there are a number of peers that sell their gas in Tier 3, which is currently trading almost $0.25 back of NYMEX in both 2025 and 2026. Further, we think Tier 3 pricing could continue to widen as LNG facilities are placed in service and Tier 1 pricing pushes higher. Yellow stars on the map highlight Antero sales points, which were strategically negotiated to bring our volumes directly to the LNG doorstep. As depicted in the pie chart on the top left-hand side of the slide, Antero sell 90% of its gas at Tier 1 pricing. This compares to the average of our peers, which sell 67% of their Gulf directed volumes in Tier 2 and Tier 3 pricing.
Looking ahead over the next two years as LNG export capacity increases by nearly 6 Bcf, we expect Antero sales points to be priced even higher first NYMEX at these LNG facilities as they compete for supply. The premium received at these sales points could also see further upside due to the delays on certain downstream pipelines that had previously been expected in the Haynesville by the end of this year. Delays into 2025 or 2026 would make our already existing firm transportation that much more valuable in the growing LNG market. Lastly, I would like to touch on power burn demand trends. Slide number 11 titled, Power Burn Demand Continues to Outperform. This slide illustrates color burn demand over the last 10 years. Continued coal to natural gas switching, along with higher electrification demand for everything from electric vehicles to high-powered AI data centers leads to increasing natural gas power generation demand.
Despite the majority of forecast that you see, which project flat or even lower power burn demand, power burn demand in 2024 is once again outperforming expectations. We believe there has been a structural shift toward reliable, clean and affordable natural gas that will continue to increase power burn demand annually going forward. This demand growth, combined with rising LNG and Mexico exports creates a significantly higher base demand level than we have ever experienced in the past. While there are certainly near-term storage challenges, we expect these fundamentals will provide support to natural gas prices and lead to periods of higher prices in the coming years. With that, I will turn it over to Mike Kennedy, Antero's CFO.
Michael Kennedy: Thanks, Justin. First, I'd like to discuss our multi-decade inventory position. Turning to Slide number 12 titled AR Has the Largest Low Cost Inventory. This chart compares inventory positions across our natural gas peer group based on data from a third-party report. Antero has the most sub $2.75 per Mcfe drilling inventory at 22 years. It is important to note that this inventory comparison is after our peers have spent a combined $30 billion on acquisitions over the past three years. In contrast, through our organic leasing efforts, we have invested $340 million over that time to acquire targeted drilling locations within our development footprint. On average, we have been able to add locations for less than $1 million per location through this program.
This is less than half of the nearly $2 million average cost per location for the peer acquisitions. In 2023, Antero organically added over 100 premium core locations at an average cost per location of less than $1 million, more than offsetting its 2023 drilling program. Next, I'd like to go a little deeper on the capital efficiency improvements that Paul touched on in his comments. The chart on Slide number 13 compares capital efficiency of the natural gas peer group or the amount of capital required to achieve production targets. Antero has the lowest capital per Mcfe of its peer group at just $0.55 per Mcfe. This is 40% below the peer average of $0.92 per Mcfe. This capital efficiency measure is important when comparing asset quality and operating capabilities of each company.
The scatter plot on Slide number 14 really magnifies the peer-leading capital efficiency at Antero. This chart shows 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 for the natural gas peers. These estimates are based on company guidance for those that have announced 2024 guidance and consensus estimates for those that have not. When you compare the production targets for the drilling and completion capital invested to deliver that production, we are by far and away the most capital-efficient operator in Appalachia. Let's turn to Slide number 15 titled Free cash Flow Breakeven, which summarizes the benefits of our combined capital efficiency gains and high NGL exposure.
Beginning at the top left-hand side of the slide, our total capital budget, drilling and completion plus land capital is expected to be down nearly $300 million in 2024 compared to last year. Moving down to the bottom left-hand side of the slide, the 2024 NGL strip is more than $3 per barrel higher than in 2023. As a rule of thumb, every dollar change in NGL prices results in $40 million change in cash flow. Thus, higher NGL prices in 2024 drive $135 million increase in cash flow. In combination, the result is approximately $430 million of incremental cash flow in 2024 compared to 2023 from our capital efficiencies and NGL focus and more than offset the weakness in the natural gas market, even while being unhedged. Turning to Slide number 16.
This slide compares free cash flow breakeven levels. Our low maintenance capital requirements and high exposure to liquids results in the lowest unhedged free cash flow breakeven price among our natural gas peers. As we look ahead, we believe Antero is best positioned to create significant shareholder value. We have product diversity as the largest NGL producer and exporter of LPG, the highest exposure of natural gas production to the LNG demand center and the lowest amount of hedge volumes, which creates substantial leverage to rising Henry Hub prices. In addition, our realized prices have basis upside due to our premium sales points along the LNG fairway. Finally, we are the most capital efficient natural gas producer in the U.S. with the lowest free cash flow breakevens.
Combination of downside protection from our liquids production, a strong balance sheet and lowest breakeven price combined with the upside exposure through our takeaway to the LNG demand center, places Antero on a significant competitive advantage as we move towards the substantial increase in demand expected from near-term LNG projects. With that, I will now turn the call over to the operator for questions.
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