Antero Midstream Corporation — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2023. Antero Midstream owns and operates Appalachian Basin gathering, compression and water-handling assets, primarily serving affiliated producer Antero Resources. Substantially all revenue is from Antero Resources, creating significant customer concentration.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $258.3 million | $228.9 million | $517.8 million | $447.4 million |
| Operating income | $145.5 million | $128.4 million | $293.9 million | $257.6 million |
| Net income | $87.0 million | $79.4 million | $173.5 million | $159.4 million |
| Diluted earnings per share | $0.18 | $0.17 | $0.36 | $0.33 |
| Adjusted EBITDA (non-GAAP) | $242.5 million | $221.0 million | $484.3 million | $430.1 million |
- Q2 revenue increased 13%, operating income 13%, net income 10% and Adjusted EBITDA 10% year over year. Higher gathering and compression volumes, CPI-related fee increases, water-handling activity and affiliate earnings contributed to growth.
- Q2 operating margin was approximately 56% of reported revenue, versus 56% in the prior-year quarter; net margin was approximately 34%, versus 35%.
- For the first half, operating cash flow was $368.3 million, compared with $354.2 million. Investing cash outflow was $84.2 million, versus $162.7 million; financing cash outflow was $284.1 million, versus $191.5 million. Cash was zero at both period ends.
- First-half capital spending on gathering and water systems was $84.7 million. Common and preferred dividends paid were approximately $219.2 million.
- At June 30, total assets were $5.75 billion and stockholders’ equity was $2.15 billion. Debt principal was $3.33 billion, including $725.5 million drawn on the revolving credit facility. The facility had $524 million of available capacity; its weighted-average borrowing rate was 6.96%. Current assets of $93.9 million were slightly below current liabilities of $96.6 million.
Material changes versus the prior comparable period
- Q2 gathering and compression revenue rose 15%; water-handling revenue rose 4%. First-half segment revenue increased 13% and 26%, respectively.
- Q2 low-pressure gathering volumes increased 11% and compression volumes 17%. Growth reflected additional connected wells and fourth-quarter 2022 asset acquisitions, including 12 compressor stations.
- Direct operating expenses rose 21% in Q2 and 29% in the first half, reflecting acquired compressor stations, heavier maintenance, and higher water-handling costs. Interest expense increased 22% in Q2 and 23% in the first half, primarily from higher benchmark rates and credit-facility borrowings.
- First-half G&A expense excluding equity compensation declined 19%, partly due to lower legal costs related to the Veolia matter. Equity-based compensation increased, to $8.5 million in Q2 and $14.8 million for the first half.
- The company repaid $56.5 million net on its credit facility in the first half, compared with net borrowings of $33.3 million in the prior-year period.
Outlook, commentary, risks and unusual items
- Management expects available operating cash flow and credit-facility capacity to fund working capital, capital spending and expected quarterly dividends for at least the next 12 months. The 2023 capital budget, revised April 26, is $180 million to $200 million, including growth capital and maintenance spending.
- Management expects no significant throughput variability from commodity-price volatility in the near term, citing Antero Resources’ maintenance-capital program and improved liquidity and leverage. However, commodity prices can affect the customer’s development activity and therefore Antero Midstream’s volumes.
- The $12 million quarterly low-pressure gathering rebate was earned in Q2 2023, as in Q2 2022. The growth-incentive program expires December 31, 2023; remaining 2023 quarterly rebates range from $12 million to $19 million depending on volume targets.
- Most revenues are under fixed-fee or cost-of-service arrangements, with CPI adjustments, but inflation, operating costs and higher interest rates remain risks. A 1 percentage-point increase in the credit-facility rate would have added an estimated $4 million of interest expense in the first half.
- Veolia appealed an amended final judgment awarding Antero Treatment $280 million, including prejudgment interest through April 30, 2023. Antero Treatment filed a cross-appeal; costs and attorneys’ fees are to be determined separately. The filing does not provide a clear value for any recovery ultimately expected or realized.
- The board declared a $0.2250-per-share common dividend for Q2, payable August 9, 2023. The company’s share-repurchase authorization expired June 30, 2023.
Important facts for investors to verify
- Whether Antero Resources sustains production, drilling activity and payment performance, given the company’s substantial reliance on this single customer.
- Progress and outcome of the Veolia appeals, including the separate determination of costs and attorneys’ fees and any related financial-statement treatment.
- Execution of the $180 million to $200 million capital budget, funding of dividends, and credit-facility borrowing costs and covenant compliance.
- Whether operating-cost inflation and higher interest rates offset growth in volumes and CPI-adjusted fees; the filing reports compliance with credit-facility financial covenants at June 30, 2023.
- Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP net income and operating cash flow.