Antero Resources Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; financial statements are unaudited. Unless stated otherwise, dollar amounts below are in millions. Antero explores, develops and produces natural gas, NGLs and oil in the Appalachian Basin. It held approximately 536,000 net acres in West Virginia and Ohio.
Financial performance and position
- Revenue and other: $1,317, up from $1,037. The increase primarily reflects $566 of commodity-derivative fair-value gains, compared with $77 of losses in Q1 2019. Natural gas, NGL and oil sales totaled $704, down from $1,019.
- Operating results: Operating income was $262, versus an operating loss of $34. Net loss attributable to Antero was $339, or $1.19 per share, compared with net income of $979, or $3.17 per share. The prior-year result included a $1,406 gain on deconsolidating Antero Midstream Partners; Q1 2020 included a $611 impairment of the Antero Midstream Corporation investment and a $81 debt-extinguishment gain.
- Cash flow and capital spending: Operating cash flow was $201, versus $539. Investing cash outflow was $187; financing cash outflow was $14. Oil and gas capital expenditures were approximately $312. The cash-flow statement reported no cash and cash equivalents at period-end.
- Operating performance: Production was 306 Bcfe, or 3,366 MMcfe per day, up 9% in daily volume year over year. Average realized price was $2.30/Mcfe before settled derivatives and $2.99/Mcfe after them, versus $3.65 and $4.00, respectively. Adjusted EBITDAX, a non-GAAP measure, fell 45% to $244.
- Costs and margins: Operating expenses were $1,055. Reported operating margin was approximately 19.9% of total revenue and other, which includes derivative gains and is not directly comparable to a production-only margin. Gathering, compression, processing and transportation expense rose to $589 from $425; lease operating expense declined to $26 from $42.
- Debt and liquidity: Long-term debt was $3,708, including $882 outstanding on the credit facility; senior-note principal totaled approximately $2,841. The company repurchased $383 principal amount of notes at a 21% weighted-average discount. Current assets were $1,120 and current liabilities $972. The company reported covenant current and interest-coverage ratios of 2.28x and 5.06x, respectively, and said it was in compliance with applicable covenants.
- Other obligations: Operating lease liabilities were $2,815. Disclosed contractual obligations totaled $22,135, including $12,927 of firm transportation commitments; the filing notes these figures are gross commitments and actual recorded costs reflect working interests and, where applicable, marketed capacity.
Material changes versus Q1 2019
- Daily production increased 9%, but the weighted-average realized price before settled derivatives declined 37% per Mcfe. Lower prices drove reported natural gas sales down 37%, NGL sales down 18% and oil sales down 26%.
- Operating cash flow declined $338, and Adjusted EBITDAX decreased from $443 to $244. Management cited weaker commodity prices and higher gathering, compression and transportation costs.
- Comparability is affected by Antero Midstream Partners’ deconsolidation effective March 13, 2019. The 2019 quarter included its operations through that date; 2020 results account for Antero Midstream Corporation as an equity-method investment.
- Exploration and production capital spending declined, and the company reduced its 2020 drilling and completion budget from $1.15 billion to $750 million. Q1 2020 drilling and completion costs were $300, versus $369 in Q1 2019.
Outlook, risks and unusual items
- Management said operating cash flow, affiliate distributions, credit-facility borrowings or capital-market transactions were expected to meet cash requirements for at least 12 months. This outlook depends on volatile markets and execution of the company’s asset-monetization plans.
- COVID-19, the oil supply-demand imbalance and reduced commodity prices created market volatility and potential oil and NGL storage constraints. The company warned that it could constrain or shut in production, delay completions or further cut capital spending if markets or storage access worsen.
- The April 2020 credit-facility redetermination reduced the borrowing base to $2.85 billion; lender commitments remained $2.64 billion. A further redetermination was scheduled for October 2020. The facility’s maturity may accelerate to 91 days before the earliest senior-note redemption date; the 2021 notes mature November 1, 2021.
- At March 31, commodity derivatives had a net fair-value asset of approximately $1.1 billion. Q1 derivative gains included $211 of settled gains; the remaining fair-value changes are noncash until settlement or monetization. Hedges reduce exposure to falling prices but limit gains if prices rise.
- The company recorded $89 of oil and gas property impairment, primarily related to expiring leases and pads no longer planned for development. Management cautioned that further commodity-price declines could trigger additional impairment.
- Environmental proceedings with the EPA and West Virginia regulators allege air-permitting violations; management said monetary sanctions could exceed $100,000 but did not expect a material adverse effect. A separate WGL contract dispute resulted in a $96 jury award to Antero; WGL’s appeal was pending.
- Management reported effective disclosure controls as of March 31, 2020, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commodity prices, derivative settlements and counterparty performance support cash flow as hedges roll off or production changes.
- Whether the reduced capital budget and any storage or takeaway constraints affect production and cash generation in 2021 and beyond.
- Available credit-facility capacity after borrowings, letters of credit, borrowing-base limitations and future redeterminations.
- Funding and refinancing plans for the 2021 notes and the credit facility’s linked maturity provisions, including progress on asset monetizations.
- The valuation and impairment outlook for the Antero Midstream Corporation investment, and the status and potential financial outcomes of the EPA/WVDEP and WGL matters.
- The effect of the 2019 midstream deconsolidation when comparing operating results, cash flows and segment data across periods.