Antero Resources Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Antero explores and produces natural gas, NGLs and oil in the Appalachian Basin and consolidates its Antero Midstream subsidiary. Unless otherwise stated, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Production | 160 Bcfe; 1,762 MMcfe/day, up 19% year over year | 320 Bcfe; 1,760 MMcfe/day, up 19% |
| Product sales, before derivative fair-value changes | $435.2 million | $679.3 million |
| GAAP total revenue | $(249.2) million, including $684.6 million derivative fair-value losses | $471.8 million, including $404.7 million derivative fair-value losses |
| Net income (loss) attributable to Antero | $(596.2) million; $(2.12) per diluted share | $(601.3) million; $(2.15) per diluted share |
| Adjusted EBITDAX, a non-GAAP measure | $332.1 million, up 24% year over year | $687.5 million, up 10% |
| Cash provided by operating activities | $238.5 million | $578.7 million, versus $595.1 million in 2015 |
Q2 production sales were $341 million, up 5% year over year as 19% volume growth more than offset lower pre-hedge realized prices. The average realized price was $2.13/Mcfe before settled derivative effects and $3.95/Mcfe after them. For the first half, those prices were $2.12/Mcfe and $4.05/Mcfe, respectively; the comparable 2015 after-settlement price was $4.14/Mcfe.
Six-month investing cash outflow was $1.038 billion and financing inflow was $464.4 million. Cash increased by $4.8 million to $28.3 million. Capital expenditures reported in the MD&A were approximately $945 million for the first half, including $710 million for drilling and completion. Q2 total operating expenses were $640.7 million; the reported operating loss of $889.9 million was heavily affected by derivative fair-value losses.
At June 30, total assets were $13.559 billion, total liabilities $5.958 billion, and equity $7.601 billion. Current assets were $669.8 million and current liabilities $569.4 million. Current assets included $429.9 million of current derivative assets. The company reported $2.096 billion of net derivative assets overall, down from $3.117 billion at year-end 2015.
Reported consolidated long-term debt was $4.244 billion, including Antero Midstream borrowings. Antero had $140 million drawn on its revolving credit facility and $708 million of letters of credit; Antero Midstream had $760 million drawn on its separate facility. Antero’s $3.375 billion of senior-note principal is due from 2020 through 2023. Cash interest paid in the first half was $121.1 million. Antero and Antero Midstream reported compliance with their respective debt covenants. Antero’s borrowing base was $4.5 billion, lender commitments were $4.0 billion, and the next borrowing-base redetermination was scheduled for October 2016.
The credit-facility covenant current ratio was 7.45:1 and interest coverage was 5.07:1 at June 30. The covenant current-ratio calculation includes unused borrowing base and excludes derivative assets, so it is not the same as the balance-sheet current ratio.
Changes versus the prior comparable period
- Production increased 19% in both Q2 and the first half, but first-half product sales fell 7% to $679 million as average pre-hedge realized prices declined 22% to $2.12/Mcfe.
- GAAP earnings shifted from first-half 2015 net income attributable to Antero of $249.1 million to a first-half 2016 loss of $601.3 million. A major driver was derivative accounting: first-half 2015 included a $757.3 million fair-value gain, while 2016 recorded a $404.7 million loss. These fair-value changes do not affect cash until contracts settle.
- First-half settled derivative gains were $616.8 million in 2016, compared with $380.7 million in 2015. Operating cash flow was $578.7 million, modestly below the prior-year $595.1 million.
- Debt declined from $4.669 billion at year-end 2015 to $4.244 billion at June 30, reflecting lower Antero revolver borrowings; Antero Midstream’s facility borrowings rose from $620 million to $760 million.
- First-half gathering, compression, processing and transportation expense increased to $414.8 million from $330.3 million. Marketing expense rose to $263.9 million from $152.4 million, while unutilized transportation costs increased.
Outlook, risks and unusual items
- Capital and activity: Management set a 2016 drilling, completion and land budget of $1.4 billion, down 24% from 2015 capital expenditures. It planned an average of seven rigs and 110 completed horizontal wells, and to defer completion of 70 wells until 2017. Antero Midstream’s separate 2016 budget was $435 million. Management said the budget was expected to be funded through operating cash flow, borrowing capacity and potential capital-market transactions, and could be revised with conditions.
- Acquisition and equity financing: Antero agreed to acquire approximately 55,000 net acres and 14 MMcfe/day of production for about $450 million. A third party’s July option exercise added approximately 11,500 acres and $95 million, bringing the expected purchase price to about $545 million. The acquisition was expected to close in Q3 2016. A June stock offering raised approximately $753 million net; an additional 3,012,500 shares sold in July generated about $85 million net. These proceeds were intended to fund the acquisition and general corporate purposes.
- Hedging and earnings volatility: At June 30, the company reported natural gas and NGL hedges extending through 2022, including approximately 3.3 Tcf of projected gas production at a weighted average index price of $3.72/MMBtu and 745 million gallons of propane at $0.48/gallon. Hedges reduce exposure to falling prices but also limit benefits from price increases. Derivative fair values depend on market inputs and can produce significant noncash earnings volatility.
- Transportation commitments: Contractual obligations totaled $22.775 billion, including $14.980 billion of firm transportation commitments. Management estimated 2016 net marketing expense of $95 million to $125 million for unutilized transportation capacity, depending on utilization and third-party marketing. Transportation commitments rise in later years.
- Other operating and valuation risks: Management said production growth was expected to slow from recent years. Lease operating expense per Mcfe may rise as wells mature. Commodity prices, reserve estimates, drilling results, transportation access and capital-market availability remain key uncertainties. Proved properties passed management’s impairment recoverability test at June 30, 2016; unproved-property impairment expense was $35.5 million for the first half.
- Legal and contingent matters: Antero’s two lawsuits against South Jersey Gas and South Jersey Resources Group allege contract underpayments; Antero estimated it was owed about $46 million through June 30. A separate WGL pricing dispute was submitted to arbitration. Environmental compliance orders concerning West Virginia sites could lead to monetary sanctions above $100,000, but total sanctions and remediation costs could not be estimated; management did not expect a material adverse effect.
- Liquidity and credit exposure: Derivative asset value is concentrated among financial counterparties, and the company noted that certain banks had been downgraded. It also identified customer concentration and collection risks. Management stated that available resources were expected to meet requirements for at least 12 months, subject to commodity prices, borrowing-base redetermination and access to financing.
Most important facts for investors to verify
- Whether the acquisition closed on schedule, its final acreage and purchase price, and the use of remaining equity-offering proceeds.
- The October 2016 borrowing-base outcome, covenant headroom and practical availability after outstanding letters of credit.
- Actual cash proceeds from settled derivatives versus mark-to-market changes, and hedge volumes, prices and counterparty exposure.
- Whether production, transportation utilization and marketing costs support the stated capital plan and the projected $95–$125 million 2016 net marketing expense.
- Developments in the SJGC lawsuits, WGL arbitration and environmental matters, including potential recoveries, sanctions and remediation costs.
- Future operating cash flow relative to capital spending, debt service and large long-term transportation commitments.