Antero Midstream Corp (AM) 2017 Q4 法說會逐字稿

Good day, and welcome to the Antero Midstream Fourth Quarter and Full year 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note today's event is being recorded.

At this time, I'd like to turn the conference over to Mr. Michael Kennedy, Chief Financial Officer. Please go ahead.

Thank you for joining us for Antero Midstream's Fourth Quarter 2017 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'd also like to direct you to the homepage of our website at www.anteromidstream.com or www.anteromidstreamgp.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, Antero Midstream and AMGP 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.

Before starting the call, I quickly want to address the recently published AR shareholder letter and our response press release. As stated in our press release, we are currently working with our board to evaluate various potential measures. There is no definitive timetable for completion of this evaluation, and there can be no assurances that any initiatives will be announced or completed in the future.

During today's call, we will not address any additional questions related to this matter.

Joining me on the call today are Paul Rady, Chairman and CEO of Antero Resources and Antero Midstream; and Glen Warren, President and CFO of Antero Resources and President of Antero Midstream. I'll now turn the call over to Paul.

Thanks, Mike, and thank you to everyone for listening in to the call today. I'll begin my comments today with a discussion on the 5-year outlook at AR and the benefits to AM. Mike will then walk through fourth quarter 2017 results and the 5-year outlook at AM.

First, I'd like to thank everyone that attended Antero's first-ever Analyst Day in New York this last month. We had almost 200 attendees in person and almost 300, who dialed into the webcast. So thank you to all the analysts and investors that attended or listened in.

The primary reason for hosting an Analyst Day is that we believe both AR and AM are at important inflection points, joining an elite group of E&Ps and MLPs. In addition to the inflection points, we wanted to publicly roll out our optimized 5-year upstream development and midstream infrastructure plans.

I'll begin my prepared remarks going through the 5-year plan at AR on Slide #3 titled AR's $3 Billion Capital Reduction to our 5-year plan.

On the left-hand side of the page, you can see AR's consolidated drilling and completion capital plan from a year ago in green compared to the current plan in orange. Comparing the 2 plans, we have reduced the drilling and completion capital by almost $3 billion over the next 5 years at the AR level. Importantly, on the right-hand side of the page, AR's production targets are essentially unchanged despite the significant reduction in capital. This step change is driven by longer lateral drilling, higher recoveries, and capital and operating efficiencies.

In addition, all of the development in the 5-year plan is focused on high rate of return liquids-rich locations of Antero Midstream dedicated acreage. AR's liquids-rich focused development plan underpins the gathering, compression, water, and processing and fractionation volume growth at AR -- at Antero Midstream over the next 5 years.

The primary result of AR's reduction in capital spending is highlighted on Slide #4 titled AR's Lower Capital and Higher Liquids Generates Free Cash Flow.

As depicted on the slide, AR is transitioning from a position of outspend to one of generating free cash flow for the first time in 2018 on a stand-alone E&P basis. Over the next 5 years, we estimate AR can generate over $1.6 billion of free cash flow at year-end 2017 strip prices.

If crude oil prices remain at the current $60 per barrel levels, we estimate AR can generate an additional $1.2 billion or a total of $2.8 billion of cumulative free cash flow over the next 5 years. The result of this development plan is a drilling and completion capital budget that is self-funded without the need to access the capital markets.

This derisked development plan at the sponsor ultimately benefits the midstream business at AM. In addition to the self-funded attribute of the upstream development plan, let's move to Slide #5 titled AR Free Cash Flow Drives Dramatic Deleveraging. This slide illustrates the measures taken over the last few years to improve the balance sheet at AR. AR's 5-year development plan is expected to deliver 23% debt-adjusted production growth per share, which in turn continues to drive down leverage below 2.0x by 2019 on a stand-alone E&P basis. This improvement in balance sheet strength and outlook has been further affirmed by Fitch's recent investment grade rating at AR of BBB- and S&P's upgrade to BB+. Ultimately, we believe that a strong sponsor generating free cash flow with a declining leverage profile is an important foundation that supports the strength at AM.

With that, I'll turn the call over to Mike.

Thank you, Paul. I'll first touch on the distributions for AM and AMGP for the fourth quarter. We recently announced an AM distribution of $0.365 per unit, a 30% increase year-over-year and a 7% increase sequentially. Additionally, AMGP announced the distribution of $0.075 per share or a 27% increase sequentially. The fourth quarter distribution at AM was the 12th consecutive distribution increase since its IPO, and AMGP distribution was the second consecutive distribution increase since its IPO.

For the full year 2017, AM delivered distribution growth of 29%, while maintaining a healthy coverage ratio of 1.3x, and AMGP distributions totaled $0.16 per share, the midpoint of the guidance range.

Now let's move on to the fourth quarter results beginning with Slide #6, titled High Growth Year-over-year Midstream Throughput. Starting in the top left portion of the page. Low-pressure gathering volumes were 1.7 Bcf per day in the fourth quarter, which represents a 12% increase from the prior year quarter. Compression volumes during the quarter averaged 1.4 Bcf per day, a 47% increase compared to the prior year quarter. The growth in compression volumes was driven by AM adding almost 600 million per day of compression capacity during 2017, including expanding a Marcellus compressor station by 25 million per day during the fourth quarter.

High-pressure gathering volumes were 1.8 Bcf per day, a 28% increase over the prior year. High-pressure volumes were in excess of low-pressure volumes due to Antero Resources utilizing AM high-pressure pipelines to avoid third-party downstream pipeline constraints on a temporary basis. Joint venture gross processing volumes were 425 million per day during the fourth quarter or over 100% of nameplate capacity of 400 million per day. Gross fractionation volumes were over 9,000 barrels per day. As Paul mentioned, the AM MPLX joint venture placed Sherwood 9 online in early January, which brings the joint venture's total processing capacity up to 600 million per day.

By year-end 2018, we expect to have 1 Bcf a day of processing capacity, which illustrates the significant growth and success we've achieved with the joint venture in just the first 2 years.

Moving on to the Water business. Freshwater delivery volumes averaged 149,000 barrels per day, in line with the prior year quarter.

Moving on to financial results. Adjusted EBITDA for the fourth quarter was $142 million, a 13% increase compared to the prior year quarter. Equity distributions from Stonewall and the processing and fractionation joint venture totaled $10 million during the fourth quarter, in line with expectations conveyed on the third quarter earnings call.

Distributable cash flow for the fourth quarter was $117 million, resulting in a healthy DCF coverage ratio of approximately 1.3x. For the full year 2017, adjusted EBITDA and distributable cash flow was $529 million and $421 million, respectively, resulting in DCF coverage of 1.3x. Our adjusted EBITDA DCF distribution growth and DCF coverage were all within our 2017 guidance ranges.

During the fourth quarter, Antero Midstream invested $91 million in gathering infrastructure and $52 million in Water Handling infrastructure, including $26 million for the construction of the Antero Clearwater Facility. In addition to the gathering and water, AM invested $18 million in the processing and fractionation joint venture during the fourth quarter.

Moving on to balance sheet and liquidity. As of December 31, 2017, Antero Midstream had $555 million drawn on its $1.5 billion revolving credit facility, resulting in $1 billion in liquidity and a net debt to LTM EBITDA ratio of 2.3x.

Now let's move to Slide #7 titled Credit Ratings Momentum, which illustrates AR's credit ratings in the solid lines and AM's credit ratings in the dash lines for each respective ratings agency.

AM's corporate ratings were recently upgraded by S&P to BB+, and AM received an investment-grade rating of BBB- by Fitch. The credit rating momentum is a function of delevering at AR and associated credit ratings upgrades Paul mentioned, in addition to AM's conservative financial profile.

Next, I'll provide a quick recap of AM's 5-year infrastructure plan that supports AR's 5-year development plan.

On Slide #8 titled 5-year Organic Project Backlog, you can see we have high-graded our organic project backlog, which now totals $2.7 billion from 2018 to 2022. Similar to AR's reduction in capital, while targeting the same production, AM was able to reduce its 5-year project backlog by $500 million, while targeting the same throughput volumes.

The capital reduction was driven by a reduction in pad service by Midstream infrastructure and a shift towards the Marcellus that leverages AM's existing rich gas infrastructure. This shift is illustrated on the left-hand side of the page, where almost 60% of the project backlog is focused on the Marcellus and another 30% is for the processing in fractionation JV.

Moving to Slide #9, titled Antero Midstream Return on Invested Capital. We can see the direct impact of the efficient capital investment. In just our fourth year since the IPO, we generated a 15% return on invested capital, which grows into the high-teens over the next few years, as we continue to leverage our existing infrastructure.

The ability to generate attractive return -- rate of returns were driven by AM's just-in-time capital investment philosophy and significant visibility into the development plan at AR.

I'll finish my comments on Slide #10 titled AM Is At An Inflection Point, with a summary of the main points from our Analyst Day and call today.

Our strategy has always been to efficiently invest capital supporting a strong and growing sponsor. Our organic strategy does not rely on the competitive acquisition market dropdowns or additional equity to fund organic project backlog. Additionally, the visibility into AR's development plan allows us to generate attractive project and corporate level rates of return and provide some of the longest dated distribution targets in an MLP space. The end result is a self-funding MLP with top-tier distribution growth and low leverage.

With that, operator, we're ready to take questions.

(Operator Instructions) And our first question comes from Jeremy Tonet with JPMorgan.

I was wondering for the guidance that you provide for AR as far as the production in the first quarter, with some of the issues there, if you could provide a bit more color on the readthrough impact to AM, with Sherwood downtime as well in the cold weather in January and the Seneca outage. Could you just give us some more color as how you think that impacts the AM operation?

Yes. The readthrough would be the throughput volumes for the first quarter will be similar to the fourth quarter of 2017.

Got you. I was wondering also as well, when you're looking at growth here, if you could just kind of refresh us as far as the appetite and ability to capture third-party business at this point? What's kind of the outlook on that front?

Well, related to our actual guidance and forecast, we did not include any third-party volumes or third-party opportunities in that guidance or outlook. We do see actually with the Clearwater Facility coming on, opportunities around that. The capacity when fully online will be 60,000 barrels and our initial amount used to be about 40,000 barrels per day. So there will be opportunities for third party with Clearwater Facility. So we do see some of those, but we have not forecast or included them in any of the outlooks that we provided.

And on the gathering side as well, it seems like you have some density in the area there. Do you see opportunities for winning business there, even if it's not in the budget at this point?

From a gathering, if you've seen our maps, we have a highly contiguous acreage position without really any other operators around our systems. There may be opportunities here and there, but it would be small just because of our dominant nature in our areas of operation.

Our next question comes from Vikram Bagri with Citi.

My first question is, you've talked about $1 billion in additional potential projects at AM. Is there any update on that backlog? And would you say, are you closer to deciding on a project today than you were 3 months ago, whether it's shales at (inaudible) or Mariner East project or any other downstream project? Are you closer to making a decision today than you were last quarter?

Yes, thanks. It's -- I think it's hard to characterize them that way right now. We're still having discussions and only time will tell. And I wouldn't really characterize this as a backlog. It's just an earmark for potential investment there. And we still have some confidence that that's all going to work out, but nothing to report today.

Okay. And the second question I had was about the processing disruptions you saw in fourth quarter. Would you look to build excess processing capacity given those disruptions? And also, given your volume expectations this year, is there a chance that your processing capacity gets tight later this year and you move forward the time line to bring those additional plants online?

Well, we, of course, have our production forecast and we're electing on plants as we go, and they generally come on -- right on time and are filled quite quickly. In terms of unfilled, we don't see that much unfilled and should be able to discontinue on our pace, where the plants are available just as we bring on the production. I think some of the production or the processing downtime over the course of this winter was just early-stage that Sherwood is relatively new and hadn't been tested like this before for freeze-offs. And so there was just not quite enough insulation and heating tape, but lessons learned there, and we don't project seeing anymore that I think the operators working hard to make sure that, that doesn't happen again.

Okay. And then just lastly on water. I noticed AR reported average proppant intensity of about 2,000 pounds per foot in fourth quarter. You've tested proppant intensities of as high as 2,500 pound per foot, and your type with higher proppant intensity was outperforming your base type. I don't see that slide in the deck anymore. Could you provide an update on what you're seeing in terms of EURs -- value EURs with high proppant loadings and would you continue to test higher proppant loadings going forward?

Yes, we continue to test higher proppant loadings. And so the highest we've done on a broad scale -- -- broader scale is 2,500 pounds. Our base design is 2,000, but we have a number of pilots where we've done 2,500 pounds right in the very same area, so say, off the North side of a pad, it's 2,500 pounds and the South side it's 2,000 pounds. And we do see better response with the 2,500 pounds, but time will tell as to whether it hangs in there and holds up. We've gone as high as 2,750, 2,800 pounds, and we'll continue to test that too. But it's a smaller proportion of even the 2,500 is relative to the 2,000 until we see slightly longer-term results there and see if it's merited.

Should we look for an update sometime during this year on higher proppant loadings, maybe middle of the year or third quarter conference call?

Yes, definitely. Yes, we usually wait at least 90 days to make a call on a well. But we'll know more and more as these different types of pilots show us the results. We also are doing where we're doing tighter cluster spacing, and we're doing 100-mesh only pilots as well. So we continue to learn to optimize.

Our next question comes from Ethan Bellamy with Baird.

Is there any potential for acreage sales of any magnitude at AR?

Probably not, not in the near term. We like everything that we have. We've done some big and some small acreage sales, whether it's $1 million or $170 million, like the one we did, I think it was last year at EQT. So we're always looking at that, but don't see anything on the horizon right now. We're pretty consolidated, don't have much outlying acreage.

Okay. And then hypothetically speaking, I couldn't see some strategic rationale for taking a stake in ME2 and potentially to investing with energy transfer further downstream at market Hook -- Marcus Hook. First, is that something that would appeal to you as regard to price? And second, for that or for any other potential third-party activity or M&A, should we presume that any Midstream investment you would make would be done at AM? Or is using AMGP for buying assets at AMGP an option?

Yes, Ethan, Good morning. GP is always a possibility, but I think you should presume AM would be the lead on that. But that's certainly possible as GP matures over time. And as to ME2, we're watching that project carefully like a lot of folks, but we have quite a stake in it in terms of being an anchor shipper. And so we're anxious to get that online this year. Continue to be interested in it from an investment standpoint just like a lot of other things that we're looking at. But we'll continue to watch that one and see how it plays out, but nothing to report there today.

(Operator Instructions) Our next question comes from Deanna Zhang with Tudor, Pickering, Holt and Company.

So just had a question on the Clearwater commissioning. So for the waste water flowing through the facility, is that purely flowback from the completion? Or is there an element of produced water in there as well? Just really trying to get a sense of how sensitive the contribution will be to the completion count versus aggregate?

Well, it is both flowback water and produced water. So there is a difference in salinity there. I would say, I don't have the proportions of produced relative to flowback, but it's probably 10% or 20% at most of total water going through would be produced water, the rest would be flowback. So that's going to be the higher proportion going forward.

Got it. And will that change with any third-party contributions?

Well, it would in that -- and mostly, what we would be getting from third parties would probably be flowback water, as they complete their pads and so on. So there can be quite a surge there. So I do think, yes, if it is third-party water, it will be mostly flowback.

Got it. That makes sense. And then going back to that Q1 guide. So given that AR has kept their kind of their whole year guide flat, I was wondering if we would see an uptick in the next couple quarters in throughput to make up for that Q1 flat growth?

Yes, that's what the guidance would imply.

Next question comes from J R. Weston with Raymond James.

I was just wondering if you could discuss maybe in a little bit more detail, the impact of the first quarter constraints on the water business and AM's well-serviced, I guess, cadence throughout the first quarter and then the rest of the year? Obviously, assume that there is probably a step-down in the first quarter, but then kind of wondering if it's a linear figure for the rest of the year or if it will continue to progress? So just any more color on the issues in the first quarter and how they might impact the water segment?

No, the actual production volumes didn't impact the water segment. During the winter, typically you have a bit less activity because it is cold. So it does slow down water a bit. But generally, throughout the year, it's a pretty linear well -- wells being serviced by the water segment.

Okay. So there were no, I guess, completions and then wells serviced that were slowed down as a result of the constraint?

No, absolutely not.

Okay. And then, I guess, maybe just one other. Second quarter in a row of high-pressure volumes above that of low pressure. I guess, you guys have kind of talked about that a little bit already. But just wondering, if we expect that to return to normal, I guess, in probably the second quarter?

We actually expect it to return to normal in the first quarter. But the fourth quarter, we put about a $125 million a day on the Bobcat versus $250 million in the third quarter. October was an active month, but then when it became cold weather, you use that lateral much less.

At this time, this will conclude our question-and-answer session. I'd like to turn the conference back over to Michael Kennedy for any closing remarks.

I want to thank you, everyone, for participating on our conference call today. If you have any further questions, please feel free to reach out to us. Thanks, again.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.