Antero Resources Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; dollar amounts below are in millions unless noted. Antero explores, develops and produces natural gas, NGLs and oil in the Appalachian Basin, with approximately 584,000 net acres in West Virginia and Ohio.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue and other | $1,300 | $989 | $2,337 | $2,017 |
| Operating income (loss) | $100 | $(33) | $66 | $114 |
| Net income (loss) attributable to Antero | $42 | $(136) | $1,021 | $(122) |
| Net cash provided by operating activities | $218 | $297 | $757 | $839 |
| Adjusted EBITDAX (non-GAAP) | $252 | $335 | $694 | $823 |
- Q2 production was 294 Bcfe, or 3,226 MMcfe/day, up 28% year over year. First-half production was 572 Bcfe, up 29%.
- Average realized production price after settled derivative effects was $3.24/Mcfe in Q2 and $3.61/Mcfe for the first half, versus $3.77 and $3.90, respectively, a year earlier.
- Reported Q2 operating margin was approximately 7.7% of revenue, versus a 3.3% loss margin a year earlier. The six-month operating margin was approximately 2.8%, versus 5.6% in 2018. These reported margins include derivative fair-value gains.
- Q2 commodity derivative fair-value gains were $328 million; first-half gains were $251 million. The fair-value changes are noncash until settlement or monetization and add earnings volatility.
- First-half capital expenditures were approximately $814 million. Operating cash flow less this reported capital spending was approximately negative $57 million; this is a simple calculation, not a company-reported free-cash-flow measure.
- At June 30, total assets were $17.3 billion, total liabilities $9.0 billion, and equity $8.3 billion. The balance sheet reported $3.60 billion of long-term debt carrying value; senior-note principal was $3.45 billion and revolver borrowings were $175 million.
- Revolver borrowing base was $4.5 billion and lender commitments $2.5 billion; $701 million of letters of credit were outstanding. The company reported covenant compliance and a covenant current ratio of 4.94x and interest coverage of 8.54x. These are facility-defined measures, not standard balance-sheet ratios.
- Ending cash and cash equivalents were reported as zero after the midstream deconsolidation. Net derivative assets were $716 million.
Material changes and comparability
- On March 12, 2019, Antero exchanged its approximately 53% limited-partner interest in Antero Midstream Partners for $297 million cash and 158.4 million Antero Midstream Corporation shares, representing approximately 31% ownership. From March 13, Antero ceased consolidating the midstream business and accounted for its investment using the equity method.
- The transaction produced a $1.406 billion accounting gain, driving much of the $1.021 billion first-half net income. It is not representative of recurring operating earnings. Midstream revenue, expenses, assets and debt are not consolidated for the post-transaction period, making year-over-year comparisons less directly comparable.
- Q2 revenue growth reflected higher production and derivative gains, while prices received per Mcfe fell. Q2 Adjusted EBITDAX declined 25% and first-half Adjusted EBITDAX declined 16%, which management attributed primarily to the midstream deconsolidation.
- Operating-lease accounting adopted January 1, 2019 added $3.331 billion of right-of-use assets and corresponding operating-lease liabilities; management said the change materially affected the balance sheet but not the income statement.
- Gathering, compression, processing and transportation expense per Mcfe rose to $1.93 in Q2 from $1.79, partly reflecting NGL mix and new pipeline transportation. Marketing activity recorded a Q2 operating loss of $74 million.
Outlook, risks and contingencies
- Capital plan: 2019 exploration and production budget is $1.4–$1.6 billion, including $1.3–$1.45 billion for drilling and completion and $75–$100 million for leasehold expenditures. After Q2 spending fell to $342 million from $399 million in Q1, management expected remaining-quarter spending to be generally consistent with Q2 levels, citing cost savings and efficiency gains. The budget may change with prices, liquidity and operating conditions.
- Liquidity view: Management believed operating cash flow, revolver availability, distributions from equity-method affiliates or capital-market transactions would meet operating, debt-service, capital and other needs for at least 12 months. This is subject to commodity prices and access to capital.
- Hedging: The company reported substantial natural-gas, oil and NGL hedges extending through 2023, intended to reduce—but not eliminate—price exposure. Hedges also limit some gains if market prices rise; counterparty credit exposure remains.
- Contract commitments: Disclosed future contractual obligations totaled $21.7 billion, including $13.7 billion for firm transportation. The company also has gathering and compression minimum-volume commitments with Antero Midstream Corporation; fees paid in Q2 were $163 million.
- Legal matters: A WGL jury awarded Antero approximately $95.9 million in June 2019; WGL may appeal. Antero separately reported approximately $109 million of gross damages, including interest, in consolidated WGL claims, not accrued. In the SJGC disputes, Antero estimated approximately $88 million of gross underpayments and damages, substantially unaccrued; an appeal and a second suit remained pending. These are claims, not assured recoveries.
- Environmental: Antero paid a $3.15 million settlement and agreed to restoration and mitigation under a consent decree. EPA air-permit allegations remained unresolved; the filing said monetary sanctions exceeding $100,000 were reasonably possible, while management did not expect a material adverse effect.
- Other key risks include commodity-price volatility, production and reserve-estimation uncertainty, transportation capacity and costs, operating and environmental risks, and access to capital. The company reported no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- How much of reported earnings and revenue reflects noncash derivative fair-value movements, settled hedge results and the one-time $1.406 billion deconsolidation gain.
- Post-deconsolidation cash generation and costs on a stand-alone basis, including the effect of midstream fees, leases and transportation commitments.
- Actual availability under the revolver after borrowings and letters of credit, and compliance with facility covenants as borrowing-base redetermination approaches.
- Outcomes and timing of the WGL and SJGC cases, including appeals and the recoverability of the unaccrued claims.
- Execution of the 2019 capital budget and production plan, and sensitivity of returns and liquidity to commodity prices, hedge settlements and firm-transportation obligations.