Business context and reporting period
Antero Resources Corporation’s Form 10-K covers the fiscal year ended December 31, 2016; it is an annual filing, not a standalone fourth-quarter report. Antero explores for and produces natural gas, NGLs and oil in the Appalachian Basin, and consolidates Antero Midstream Partners’ gathering, processing and water businesses.
The company held approximately 616,000 net acres in the Marcellus and Utica Shales. Production was 61% natural gas, 37% NGLs and 2% oil by energy-equivalent volume.
Financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total operating revenues and other | $1.745 billion | $3.955 billion |
| Natural gas, NGL and oil sales | $1.755 billion | $1.375 billion |
| Net income (loss) attributable to Antero | $(849) million | $941 million |
| Cash from operating activities | $1.241 billion | $1.016 billion |
| Adjusted EBITDAX, non-GAAP | $1.536 billion | $1.221 billion |
| Capital expenditures | $2.495 billion | $2.348 billion |
| Production | 676 Bcfe; 1,847 MMcfe/day | 545 Bcfe; 1,493 MMcfe/day |
| Average realized price per Mcfe, before / after settled derivatives | $2.60 / $4.08 | $2.52 / $4.10 |
| Cash and cash equivalents at year-end | $31.6 million | $23.5 million |
Reported revenue and earnings were heavily affected by commodity derivatives: 2016 included a $514 million fair-value loss, versus a $2.382 billion gain in 2015. The 2016 derivative result included approximately $1.0 billion of gains on settled contracts and a $1.5 billion noncash fair-value loss. Other notable 2016 items included a $163 million impairment of unproved properties, $102 million of equity-based compensation and a $496 million deferred tax benefit.
Operating costs per Mcfe included $1.31 for gathering, compression, processing and transportation; $1.20 for depletion, depreciation and amortization; $0.20 for general and administrative expense before equity compensation; and $0.07 for lease operations. Gathering and transportation costs per unit increased 8% from 2015.
Year-end total assets were $14.256 billion, total liabilities $6.527 billion and equity $7.729 billion. Reported long-term debt was $4.704 billion. Antero had $440 million outstanding on its revolving facility and $710 million of letters of credit; Antero Midstream had $210 million outstanding on its revolver. Antero’s borrowing base was $4.75 billion, with lender commitments of $4.0 billion. The company reported compliance with credit covenants; its stated covenant current ratio was 6.54 and interest coverage ratio 6.29.
Proved reserves increased 16% to 15.386 Tcfe; 6.914 Tcfe were proved developed and 8.472 Tcfe proved undeveloped. Year-end PV-10 was $3.676 billion, a non-GAAP measure, and the standardized measure was $3.287 billion.
Material changes versus the prior comparable period
- Production increased 24%, and product sales rose 28%, reflecting higher volumes and a 3% increase in the average unhedged realized price per Mcfe.
- Total reported operating revenues and other fell 56%, chiefly because the large 2015 derivative fair-value gain became a 2016 loss. Antero moved from $941 million of attributable net income in 2015 to an $849 million attributable loss in 2016.
- Operating cash flow rose 22% and Adjusted EBITDAX rose 26%. Capital spending remained high, with 2016 consolidated capex of approximately $2.5 billion.
- Reserves increased, supported by drilling additions, purchases, improved well performance and increased assumed ethane recovery. However, 2.478 Tcfe were reclassified from proved undeveloped reserves because of the SEC five-year development rule, primarily as development shifted toward liquids-rich acreage.
- In 2016 Antero issued approximately $1.0 billion of common stock and $600 million of 5.00% notes due 2025, using the note proceeds in part to retire $525 million of 6.00% notes due 2020. Antero Midstream issued $650 million of 5.375% notes due 2024 and reduced its revolver borrowings.
The unaudited fourth-quarter 2016 schedule reports total operating revenues of $156 million and a net loss attributable to Antero of $486 million. Quarterly results were volatile; the filing attributes this in part to commodity prices and derivative fair-value changes.
Outlook, risks, contingencies and unusual items
- 2017 plan: The consolidated capital budget was approximately $2.3 billion, comprising $1.3 billion for drilling and completion, $200 million for leasehold additions and extensions, and $800 million for Antero Midstream. Antero separately describes its E&P budget as $1.5 billion, excluding Midstream. It planned to complete 170 horizontal wells, versus 140 in 2016, with about 70% of drilling and completion spending allocated to the Marcellus.
- Funding and obligations: Management expected operating cash flow, revolver availability and capital-market access to meet requirements for at least the next 12 months. The filing estimates $3.8 billion of development spending over five years for proved undeveloped reserves. Long-term minimum-volume commitments exceed $17.8 billion; the contractual-obligations table totals $24.290 billion, including debt, interest and other commitments.
- Transportation exposure: Antero estimated 2017 net marketing costs of $60 million to $105 million from unutilized transportation capacity, depending on its ability to market capacity or use it for third-party gas. Firm transportation commitments increase in later years. Lower production could also leave the company paying minimum fees under transportation, processing, gathering and water agreements.
- Commodity hedging: At year-end, hedges extended through 2022; the estimated net fair value was a $1.6 billion asset. Hedges support cash-flow visibility but limit gains from higher prices and expose Antero to counterparty and basis risks. A significant portion of derivative asset value was concentrated among a small number of bank counterparties.
- Reserves and leases: Reserve estimates depend on prices, costs, performance and development timing. Approximately 82% of net leasehold acreage was undeveloped. Certain leases supporting 999 Bcfe of proved undeveloped reserves require renewal; Antero estimated $50 million to $65 million to renew them and stated that approximately 100 Bcfe could be at risk if leases could not be renewed.
- Other risks: The business is concentrated in the Appalachian Basin and depends on processing and takeaway infrastructure. Risks include commodity-price volatility, borrowing-base redeterminations, access to capital, water availability and disposal, regulatory and environmental changes, and potential impairment charges. Antero reported no proved-property impairment in 2016 but recorded $163 million of unproved-property impairments.
- Legal matters: Antero estimated it was owed approximately $55 million in a pricing dispute with South Jersey Gas and South Jersey Resources; recovery is uncertain. A January 2017 arbitration ruling favored Antero in a separate Washington Gas pricing dispute. Federal environmental compliance orders relating to West Virginia operations may result in monetary sanctions exceeding $100,000, while total sanctions and remediation costs were not estimable. The filing also describes environmental lawsuits seeking unspecified damages.
- Subsequent event: In February 2017, Antero Midstream formed a 50/50 processing joint venture with MarkWest and issued units generating approximately $223 million net proceeds; the proceeds included a $155 million initial joint-venture contribution.
Important facts for investors to verify
- Review the cash-flow outlook against the low $31.6 million year-end cash balance, the 2017 capital program and the April 2017 borrowing-base redetermination.
- Assess the quality and cash timing of derivative gains, the $1.6 billion net derivative asset, counterparty concentration and the extent to which hedges cover expected production.
- Reconcile reported debt and liquidity across Antero and consolidated Antero Midstream, including debt maturities, letters of credit and covenant definitions.
- Test whether production growth and pipeline utilization can support the substantial minimum-volume commitments and avoid forecast transportation costs.
- Evaluate reserve assumptions, the five-year development schedule, lease renewals and the potential for further reserve reclassifications or impairment.
- Track outcomes and potential cash effects of the South Jersey dispute, environmental orders and other litigation; the filing does not provide a clear estimate for some exposures.