ANTERO RESOURCES Corp quarterly report, Q3 FY2016

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Business context and reporting period

Antero Resources Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. The company explores for and produces natural gas, NGLs, and oil in the Appalachian Basin, and consolidates its majority-owned Antero Midstream Partners business.

Unless stated otherwise, financial amounts below are in U.S. dollars; financial statement amounts are in millions. Management reported approximately 618,000 net acres and production from the Marcellus and Utica Shales.

Financial results and liquidity

  • Third quarter: Revenue was $1,116.5 million, down 23% from $1,443.3 million. Net income attributable to Antero was $238.3 million, down 55% from $533.8 million; diluted earnings per share were $0.77 versus $1.93. Operating income was $467.3 million. Adjusted EBITDAX, a non-GAAP measure, was $372.8 million versus $290.8 million.
  • First nine months: Revenue was $1,588.3 million, down 48% from $3,049.7 million. Antero reported a net loss of $363.0 million, or $1.26 per diluted share, versus net income of $782.9 million, or $2.87 per share. Operating loss was $343.8 million. Adjusted EBITDAX was $1,060.3 million, up 16%.
  • Production and realized prices: Third-quarter production increased 25% to 172 Bcfe (1,875 MMcfe/day); nine-month production rose 21% to 493 Bcfe (1,799 MMcfe/day). Average realized price after settled derivatives was $3.96/Mcfe for the quarter and $4.02/Mcfe year to date. Before derivative settlements, the respective prices were $2.82 and $2.36/Mcfe.
  • Cash flow and spending: Operating cash flow was $327.0 million in the quarter and $905.7 million for nine months, versus $246.0 million and $841.2 million in the comparable 2015 periods. Nine-month investing cash use was $1,974.7 million, including $1,009.9 million for drilling and completion. Financing provided $1,064.0 million. Cash declined by $5.0 million to $18.5 million.
  • Margins and costs: Third-quarter gathering, compression, processing, and transportation expense rose to $1.36/Mcfe from $1.16; the nine-month figure was $1.32/Mcfe versus $1.20. DD&A per Mcfe declined to $1.16 for the quarter and $1.20 year to date. Marketing activities recorded net losses of $18 million in the quarter and $92 million year to date.
  • Balance sheet and debt: At September 30, total assets were $14,629.3 million, total liabilities $6,649.0 million, and total equity $7,980.3 million. Long-term debt carrying value was $4,759.9 million. Current assets were $695.5 million and current liabilities $611.9 million; cash was $18.5 million. The company reported compliance with credit-facility covenants, a covenant current ratio of 5.69x and interest coverage ratio of 7.63x.
  • Liquidity facilities: Antero had $605 million drawn and $709 million of letters of credit under its revolving facility, with $4.0 billion of lender commitments and a $4.5 billion borrowing base at quarter-end. Antero Midstream had $170 million drawn under its $1.5 billion facility. Antero Midstream issued $650 million of 5.375% notes due 2024 and used the proceeds to repay facility borrowings.

Material changes versus the prior comparable periods

  • Reported revenue and earnings were strongly affected by noncash derivative fair-value movements. Third-quarter derivative gains were $530.3 million versus $1,079.1 million a year earlier. Nine-month gains were $125.6 million versus $1,836.4 million; the 2016 total included $813.6 million of settled-derivative gains and an approximately $688 million loss from changes in fair value.
  • Underlying production sales improved in the third quarter: natural gas, NGL, and oil sales totaled about $486 million, up 50%, reflecting 25% production growth and a higher pre-settlement realized price. For nine months, production sales rose about 10% despite lower pre-settlement prices.
  • Nine-month operating expenses increased 23% to $1,932.1 million, driven notably by gathering/transportation and marketing costs. The prior-year $10.9 million contract-termination and rig-stacking charge did not recur.
  • Capital investment shifted toward leasehold additions: nine-month spending included $559.6 million on unproved properties, compared with $170.3 million in 2015. Management cited $518 million of leasehold acquisition spending within the 2016 amount.
  • Equity and asset-level financing supported investment: Antero raised $837.4 million in a common-stock offering and sold Antero Midstream units for $178 million during the first nine months. Common shares outstanding increased from 277.0 million at year-end 2015 to 307.2 million at September 30, 2016.

Outlook, commentary, risks, and unusual items

  • 2016 plans: Management set a $1.4 billion drilling, completion, and land budget, including $1.3 billion for drilling and completion and $100 million for core leasehold acreage; Antero Midstream’s 2016 capital budget was $480 million. Plans included an average of seven rigs, 110 horizontal well completions, and deferring 70 completions into 2017. The company said its budget was expected to be funded by operating cash flow, revolver capacity, and potential capital-market transactions, and believed resources would cover requirements for at least 12 months.
  • Transportation commitments: Management estimated 2016 net marketing expense of $100–$130 million related to unutilized transportation capacity, depending on third-party marketing and utilization. Firm transportation obligations total $15.5 billion in the contractual-obligations schedule, with commitments extending beyond 2021; future net marketing expense could increase.
  • Hedging and price exposure: At quarter-end, contracts covered projected production through 2022, including approximately 3.3 Tcf of natural gas. Hedges reduce exposure to falling prices but also limit gains if prices rise. Derivative positions were a net asset of $2.43 billion, exposing the company to counterparty credit risk and substantial earnings volatility. Management noted a $5.1 million change in income before taxes for each specified $0.10/MMBtu gas and $1.00/Bbl oil and NGL price decrease, based on the disclosed sensitivity calculation.
  • Debt and subsequent events: In October 2016, Antero raised $175 million gross in a private stock placement and said proceeds would repay revolver borrowings and support general corporate purposes. Also in October, the borrowing base increased to $4.75 billion; a credit amendment increased the facility’s face amount to $5 billion and extended hedging authority through 2023. These were subsequent to the reporting date.
  • Legal and environmental matters: Antero estimates it is owed about $51 million in a gas-contract pricing dispute with South Jersey Gas and South Jersey Resources Group; the company is pursuing litigation. A separate Washington Gas pricing dispute is in arbitration. Environmental compliance orders concerning West Virginia well sites could result in monetary sanctions exceeding $100,000, but the amount and remediation costs were not estimable; management did not expect a material adverse effect.
  • Other risks and accounting: The filing highlights commodity-price volatility, production and reserve-estimation uncertainty, access to capital, transportation commitments, and operational and regulatory risks. Management found no proved-property impairment necessary at September 30 using its futures-price assumptions, while recording $47.2 million of unproved-property impairments for the nine months. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting.

Important facts for investors to verify

  1. How much of reported earnings and revenue reflects settled cash hedge gains versus noncash fair-value changes, and how the hedge book changes over time.
  2. Whether production growth and realized prices can support the $1.4 billion E&P budget and the separate $480 million Midstream budget.
  3. Actual utilization and third-party marketing of firm transportation capacity, and the resulting net marketing costs against the disclosed estimate and long-term commitments.
  4. Liquidity after the October equity placement and credit amendment, including revolver availability, letters of credit, debt service, and covenant headroom.
  5. Progress and potential financial effects of the SJGC litigation, WGL arbitration, and West Virginia environmental matters; the filing does not establish recoveries or final liabilities.