Antero Resources Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Antero is an Appalachian Basin oil and gas producer, with gathering, compression, water-handling and marketing operations. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial results and operating metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue, including derivative fair-value gains/losses | $1.443 billion | $762 million | $3.050 billion | $1.242 billion |
| Net income attributable to Antero | $534 million | $204 million | $783 million | $67 million |
| Operating income | $941 million | $381 million | $1.477 billion | $272 million |
| Adjusted EBITDAX (non-GAAP) | $291 million | $292 million | $914 million | $832 million |
| Cash flow from operations | $246 million | $301 million | $837 million | $799 million |
| Production | 139 Bcfe; 1,506 MMcfe/day | 99 Bcfe; 1,080 MMcfe/day | 407 Bcfe; 1,492 MMcfe/day | 251 Bcfe; 920 MMcfe/day |
Q3 net income included $1.079 billion of derivative fair-value gains, of which approximately $206 million came from settled derivatives. Nine-month net income included $1.836 billion of fair-value gains, including $587 million from settled derivatives. Fair-value changes on unsettled contracts are noncash until settlement; reported revenue and profit therefore materially reflect mark-to-market accounting.
Despite production growth, realized commodity prices fell sharply. Q3 realized price before settled hedges was $2.34/Mcfe, down 46%; after settled hedges it was $3.83/Mcfe, down 22%. For the nine months, those prices were $2.59/Mcfe, down 49%, and $4.03/Mcfe, down 24%, respectively. Q3 production grew 39% year over year and nine-month production grew 62%.
Operating costs increased with volumes and infrastructure: Q3 DD&A rose to $189 million and interest expense to $61 million. Q3 operating margin is not a clean measure of underlying production economics because total revenue includes substantial derivative gains. Adjusted EBITDAX was nearly flat in Q3 and increased 10% for the nine months.
Balance sheet, cash flow and financing
- At September 30, 2015, total assets were $13.577 billion, total liabilities $6.467 billion, and total equity $7.110 billion. Cash was $27 million, versus $246 million at year-end 2014.
- Long-term debt was $4.407 billion, including $500 million drawn under Antero’s revolver, $525 million at Antero Midstream, and senior notes. Antero’s standalone revolver had $535 million of letters of credit outstanding; its borrowing base and lender commitments were each $4.0 billion at quarter-end.
- On October 26, 2015, after quarter-end, the borrowing base was raised to $4.5 billion and the letter-of-credit sublimit increased to $750 million; lender commitments remained $4.0 billion. The next borrowing-base redetermination was scheduled for April 2016. Antero reported compliance with debt covenants and a 5.40x interest coverage ratio at quarter-end.
- Nine-month investing cash outflow was $1.837 billion, including $1.350 billion for drilling and completion. Financing cash inflow was $782 million; the company issued $750 million of 5.625% notes due 2023 and raised $538 million from a common-stock offering, alongside Antero Midstream unit proceeds and revolver repayments.
- Operating cash flow did not cover investing outlays during the period. Management said operating cash flow and available revolver capacity should meet cash requirements, including capital spending and debt service, for at least the next 12 months.
Material changes, outlook and risks
- Capital plan: Antero’s 2015 capital budget was $1.8 billion, 49% below 2014 capital expenditures, excluding Antero Midstream’s $425–$450 million budget. Management planned an average of 14 rigs and 130 completed horizontal wells in 2015, versus 21 rigs and 177 wells in 2014; 50 Marcellus completions were deferred to the first half of 2016. Management expected production growth to slow from 2014’s rate and said it could revise spending as conditions warrant.
- Commodity environment and hedges: Management described persistently low commodity prices. At quarter-end, Antero reported a $2.842 billion net derivative asset and hedge positions extending through 2021. Hedges mitigate downside exposure but also limit participation in price increases; fair values are sensitive to market prices and counterparty performance.
- Midstream asset contribution: On September 23, Antero transferred water assets and wastewater-treatment project assets to Antero Midstream. Consideration included cash and assumed debt, 10,988,421 Antero Midstream units, approximately $241 million of private-placement proceeds distributed to Antero, and potential future payments of up to $250 million tied to fresh-water purchase thresholds. Antero retained approximately 66.5% of Antero Midstream’s limited partner interests.
- Commitments and costs: Disclosed future minimum contractual payments totaled $17.902 billion, dominated by $15.300 billion of firm transportation commitments. Management estimated $100–$150 million of 2015 annual net marketing costs associated with unutilized transportation capacity. The company incurred $10.9 million in contract-termination and rig-stacking costs during the first nine months.
- Impairments and taxes: No impairment was recorded on proved properties in the first nine months, although $43.7 million was recorded for unproved properties. Management said depressed prices substantially reduced expected reserve PV-10, but did not expect a material change in year-end proved reserve quantities based on the then-current outlook.
- Contingencies: A dispute with South Jersey Gas and South Jersey Resources Group concerned contract pricing; Antero estimated it was owed approximately $33 million for short-paid gas through September 30 and had filed a separate breach-of-contract suit. Environmental and other property-damage litigation was also disclosed. The company stated that certain matters could result in sanctions exceeding $100,000, while it did not expect the identified matters to materially affect financial condition, results or liquidity.
- Other risks: Exposure includes commodity-price volatility, long-term transportation and processing commitments, variable-rate debt, derivative-counterparty and customer credit risk, and possible regulatory or tax changes. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of reported earnings and the $2.842 billion derivative asset is likely to convert to cash, and how sensitive are those amounts to commodity prices and counterparty credit?
- Whether production growth and realized prices can support the reduced capital program, contractual transportation costs and debt service; verify actual 2015 spending and completion deferrals.
- Available revolver capacity after borrowings and letters of credit, covenant headroom, and the effect of the October 2015 borrowing-base amendment.
- The economics and cash-flow consequences of the water-asset contribution, including the conditions for potential future payments and Antero Midstream’s separate debt.
- Developments in the South Jersey contract dispute, environmental matters, unproved-property impairments and any proved-property impairment indicators.