Antero Midstream Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited figures; dollar amounts below are in millions unless stated otherwise.
Business context
Antero Midstream owns and operates gathering, compression and water-handling infrastructure in the Appalachian Basin, primarily serving Antero Resources. The company depends on Antero Resources for substantially all its revenue. Its six-month 2019 reported results are not directly comparable with 2020 because Antero Midstream Partners was consolidated only from March 13, 2019; management also presents pro forma 2019 comparisons.
Financial and operating results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $219.7 | $255.6 | $463.4 | $309.7 reported |
| Operating income (loss) | $134.7 | $117.6 | ($384.4) | $128.2 reported |
| Net income (loss) | $88.4 | $69.3 | ($304.5) | $78.9 reported |
| Adjusted EBITDA | $201.3 | $206.2 | $418.6 | $408.6 pro forma |
| Operating cash flow | Not stated separately | Not stated separately | $362.1 | $252.2 reported |
Q2 revenue fell 14% year over year, while operating income rose 15% and net income rose 28%. Adjusted EBITDA declined 2%. Approximate Q2 operating and net margins were 61% and 40%, respectively. Revenue softness reflected lower water-handling activity and $12 million of low-pressure gathering rebates, partly offset by higher gas throughput. Gathering and compression volumes increased year over year; fresh-water deliveries fell 16% in Q2.
On management’s pro forma comparison, six-month revenue declined 8% to $463.4 million, while Adjusted EBITDA increased 2% to $418.6 million. The reported six-month net loss primarily reflects noncash impairments: $575.5 million of goodwill and $89.1 million of property and equipment. The company also recorded a $112.9 million income-tax benefit, including a CARES Act-related refund receivable of $55 million; $39 million had been received by June 30.
Cash flow and investment: First-half operating cash flow was $362.1 million; investing cash outflow was $143.3 million and financing cash outflow was $217.0 million. Capital spending was approximately $145 million, including $93 million of expansion capital, $30 million of maintenance capital and $22 million invested in the Joint Venture.
Balance sheet and liquidity: At June 30, cash was $3.0 million, total assets $5.72 billion, and stockholders’ equity $2.52 billion. Long-term debt was $3.09 billion, including $1.155 billion drawn on the revolving credit facility. The facility had $2.13 billion of commitments and no letters of credit outstanding; the company reported covenant compliance. Current assets were $100.7 million and current liabilities $98.1 million.
Material changes, outlook and risks
- The Clearwater wastewater facility remained idled, with management expecting it to remain so for the foreseeable future. First-half facility-idling costs were $11.2 million.
- The 2020 capital budget was reduced to $200–$215 million. Management said capital plans may be further adjusted in response to Antero Resources’ plans, market conditions and liquidity needs.
- Antero Resources reduced its 2020 drilling and completion budget by approximately 34% from the beginning-of-year budget. Lower future drilling or production curtailments could reduce midstream throughput and water-handling revenue. Management noted potential storage constraints for oil and certain NGL products, though no significant supply-chain interruption or material throughput reduction was reported in the period.
- The gathering agreement was extended to 2038 and includes incentive-based low-pressure fee reductions through 2023. Antero Resources met the Q2 volume target, triggering a $12 million rebate; first-half rebates totaled $24 million.
- The board declared a common dividend of $0.3075 per share for Q2, payable August 12, 2020. Management expected operating cash flow, cash and revolver availability to fund operations, capital needs and dividends for at least the next 12 months, while noting uncertainty from COVID-19, commodity markets and customer activity.
- Interest-rate exposure is material: a 1 percentage-point increase in the revolver rate was estimated to raise first-half interest expense by $5.7 million. The company also faces significant customer concentration and risk of Antero Resources nonpayment or reduced activity.
- Antero Treatment’s consolidated lawsuit against Veolia alleges contract and design failures and seeks at least $457 million, or alternative relief. Veolia asserts claims against the Antero defendants, including an alleged unpaid contract balance of approximately $26 million. The court dismissed certain claims in July 2020; other claims remained pending. These are disputed claims, not established liabilities or recoveries.
Important facts for investors to verify
- Whether Antero Resources’ drilling, production and customer-storage position support the throughput assumptions underlying midstream cash flows and the 2020 capital plan.
- Available revolver capacity, covenant headroom, refinancing needs and sensitivity to floating interest rates.
- Cash generation after capital spending, dividends, share repurchases and other financing commitments; first-half dividends paid were $296.4 million.
- The assumptions and valuation inputs behind the goodwill and asset impairments, and whether further impairment charges arise.
- Developments in the Veolia litigation, including potential financial exposure or recovery.
- Comparability of periods: reported first-half 2019 results cover a different consolidation period; use the company’s pro forma comparison with its stated limitations.