ANTERO RESOURCES Corp quarterly report, Q2 FY2020

Antero Resources Corporation — Q2 2020 Form 10-Q

Business context and reporting period

Quarter ended June 30, 2020; financial statements are unaudited. Antero explores, develops and produces natural gas, NGLs and oil in the Appalachian Basin. It reported approximately 531,000 net acres in West Virginia and Ohio. Results are affected by commodity prices, and comparisons with 2019 are complicated by Antero’s March 2019 deconsolidation of Antero Midstream Partners.

Key financial and operating metrics

Amounts below are in millions of dollars except per-share and per-unit data.

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$484.9	$1,299.7	$1,802.0	$2,337.1
Operating income (loss)	$(606.9)	$100.0	$(344.5)	$66.3
Net income (loss) attributable to Antero	$(463.3)	$42.2	$(802.1)	$1,020.9
Net cash from operating activities	$116.0	$218.1	$316.6	$757.1
Adjusted EBITDAX	$186.4	$251.8	$430.2	$694.3

Operating margin was approximately negative 125% in Q2 2020 versus positive 8% a year earlier; for the first half it was negative 19% versus positive 3%. Margins were materially affected by derivative fair-value movements and impairment charges.
Q2 production was 320 Bcfe, or 3,521 MMcfe/day, up 9% year over year. First-half production was 627 Bcfe, or 3,444 MMcfe/day, up 10%.
Average realized price after settled derivatives was $2.81/Mcfe in Q2, down 13%, and $2.90/Mcfe for the first half, down 20%. Before settled derivatives, the corresponding prices were $1.83 and $2.06/Mcfe.
First-half capital expenditures were $575 million, primarily drilling and completion costs of $552 million. Cash used in investing was $449.6 million; cash provided by financing was $133.0 million. Reported cash and cash equivalents were nil.
At June 30, current assets were $842.3 million and current liabilities $864.2 million. Long-term debt carrying value was $3.518 billion; total debt including the revolver was $4.444 billion before cash. Separate lease liabilities totaled $2.565 billion. The reported current asset-to-current liability ratio was approximately 0.97.
The revolver had $926 million drawn, $730 million of letters of credit, a $2.64 billion lender commitment and a $2.85 billion borrowing base. Implied unused commitment after borrowings and letters of credit was approximately $984 million, subject to facility terms. Covenant current and interest coverage ratios were 2.37:1 and 5.22:1, respectively; the company reported compliance.

Material changes versus comparable periods

Q2 revenue fell sharply, with commodity sales pressured by lower prices and commodity derivative results changing from a $328.4 million fair-value gain in Q2 2019 to a $168.0 million loss in Q2 2020. For the first half, derivative fair-value gains were $397.8 million versus $251.1 million.
Gathering, compression, processing and transportation expense rose to $631.8 million in Q2 and $1.220 billion in the first half. Management cited higher production and, in part, costs previously eliminated in consolidation after the midstream deconsolidation.
First-half net loss includes a $610.6 million impairment of Antero’s Antero Midstream Corporation equity investment and a $126.6 million oil-and-gas property impairment. First-half 2019 net income included a $1.406 billion gain on deconsolidation, so the headline earnings comparison is not like-for-like.
During the first half, Antero repurchased $619 million principal amount of senior notes at an average 19% discount, recording a $119.7 million gain; it also repurchased and retired about 28.2 million shares for approximately $43 million.
In June, Sixth Street contributed $300 million for overriding royalty interests through Martica and may contribute up to a further $102 million if production targets are met. The company received the $300 million proceeds; the transaction also conveys specified royalty interests and future distribution rights.

Outlook, commentary, risks and contingencies

The 2020 drilling and completion capital budget was reduced 34% to $750 million. Management said further budget changes remain possible and reduced activity may affect production in 2021 and later.
Management said it expected no production shut-ins during 2020 and had not curtailed production due to pandemic-related demand issues as of the filing. It identified storage and takeaway constraints, weak commodity demand and price volatility as continuing risks.
Management reported hedges covering a substantial majority of expected 2020 natural gas production, including about 2.2 Bcf/day at a weighted average $2.87/MMBtu for the remainder of 2020. Hedges support cash flows but also limit gains if market prices rise. The net fair value of commodity derivatives was a $618.8 million asset at June 30.
The company had a previously announced $750 million to $1.0 billion asset-sale program. Management said operating cash flow, affiliate distributions, revolver availability or capital-market transactions should meet requirements for at least 12 months, while warning that market instability or failure to complete asset sales could require lower or delayed capital spending.
The 2021 notes mature November 1, 2021. If not repaid before August 1, 2021, the revolver may mature on that date under its terms. A borrowing-base redetermination was scheduled for October 2020.
COVID-19 and the oil-market shock contributed to volatility, lower realized prices and possible impairment or storage risks. Management said it did not anticipate further impairment of the Antero Midstream investment at that time, but further asset impairments could occur if prices or operating conditions deteriorated.
Environmental matters include EPA and West Virginia allegations involving air permitting and emissions controls; the company said monetary sanctions exceeding $100,000 were reasonably possible but did not expect a material adverse effect. In the WGL contract dispute, Antero had a $96 million jury verdict; WGL’s appeal was pending.
Management reported effective disclosure controls as of June 30, 2020 and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Revolver borrowing-base redetermination outcome, remaining liquidity after letters of credit, covenant compliance and the refinancing or repayment plan for 2021 maturities.
Progress, timing and realized proceeds from the $750 million to $1.0 billion asset-sale program, and whether the additional potential $102 million Martica contribution is earned.
Hedge settlements and mark-to-market changes, actual realized prices and exposure to basis differentials, NGL pricing and counterparty credit risk.
Whether lower capital spending, storage constraints or market conditions affect production, 2021 volumes, cash flow or additional impairment testing.
Outcome of the WGL appeal and resolution of EPA/WVDEP proceedings; also assess the terms and ongoing economic impact of the royalty-interest conveyance and related-party midstream commitments.
Adjusted EBITDAX is a non-GAAP measure; review the filing’s reconciliation and consider that it excludes items including impairments, interest and other costs.