Antero Resources Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Antero explores, develops, and produces natural gas, NGLs, and oil in the Appalachian Basin. Comparisons with Q1 2018 are affected by the March 2019 deconsolidation of Antero Midstream Partners.
Key financial results
| Metric | Q1 2018 | Q1 2019 |
|---|---|---|
| Total revenue and other | $1,028 million | $1,037 million |
| Operating income (loss) | $146 million | $(34) million |
| Net income attributable to Antero | $15 million | $979 million |
| Adjusted EBITDAX | $488 million | $443 million |
| Cash provided by operating activities | $542 million | $539 million |
| Cash used in investing activities | $(564) million | $(205) million |
- Production was 279 Bcfe, or 3,099 MMcfe per day, up 30% year over year. Natural gas production rose 26%, C3+ NGL volumes 54%, and oil volumes 92%.
- Product sales increased: natural gas to $657 million from $498 million; NGLs to $314 million from $234 million; and oil to $48 million from $30 million. Marketing revenue fell to $91 million from $144 million.
- Average realized price before settled derivatives rose to $3.65/Mcfe from $3.56; after settled derivatives it was $4.00/Mcfe versus $4.04.
- Operating expenses totaled $1,071 million, exceeding reported revenue. Gathering, processing, and transportation expense increased to $425 million from $292 million; impairment of unproved properties was $81 million, and contract termination and rig-stacking costs were $8 million. Operating margin was approximately negative 3%.
- Q1 2019 net income includes a $1.406 billion noncash gain on deconsolidation of Antero Midstream Partners. It is not a measure of recurring operating performance; Adjusted EBITDAX declined about 9% year over year.
Balance sheet, debt, and liquidity
- At March 31, 2019, total assets were $17.3 billion, current assets $545 million, current liabilities $1.267 billion, and equity $8.293 billion. The reported current ratio is below 1, while the company reported a credit-facility covenant current ratio of 4.93, calculated using the facility’s specified adjustments.
- Reported long-term debt was $3.476 billion, versus $5.462 billion at year-end 2018. The decrease principally reflects deconsolidation of midstream debt, rather than solely debt repayment. The balance includes $3.45 billion of Antero senior-note principal and $50 million drawn on the revolving facility.
- The revolving facility had a $4.5 billion borrowing base and $2.5 billion of lender commitments, reaffirmed in April 2019; $50 million was drawn and $687 million of letters of credit were outstanding. The filing reported covenant compliance. Management said available operating cash flow and borrowing or capital-market access should meet requirements for at least 12 months.
- The cash-flow statement reports no ending cash after deconsolidation. Operating leases recognized upon adoption of the new lease standard added $3.434 billion of right-of-use assets and corresponding liabilities; these are contractual lease obligations, not funded debt.
Material changes and transactions
- On March 12, Antero exchanged its roughly 53% limited-partner interest in Antero Midstream Partners for $297 million cash and 158.4 million Antero Midstream Corporation shares, representing an approximately 31.3% interest. From March 13, Antero no longer consolidated the midstream business and accounts for its investment under the equity method.
- Reported Q1 revenue, expenses, assets, and debt therefore include the midstream business only through March 12. Comparisons with Q1 2018 and year-end 2018 are not fully like-for-like.
- Adoption of lease accounting Topic 842 on January 1 materially increased reported assets and liabilities, without a material income-statement impact.
- Production growth and higher natural gas volumes supported sales, but lower NGL and oil prices, elevated transportation costs, and marketing-segment operating losses pressured results. Management attributed higher per-unit transportation costs partly to Mariner East 2 entering service and greater compression use.
Outlook, risks, and contingencies
- The 2019 exploration-and-production capital budget was $1.4–$1.6 billion, including $1.3–$1.45 billion for drilling and completion and $75–$100 million for leasehold spending. Management may adjust spending for prices, liquidity, drilling results, and costs.
- Hedges as of March 31 included fixed-price natural-gas swaps through 2023 and 2019 collars; management said hedges support cash-flow predictability but limit upside if commodity prices rise. Net derivative fair value was a $432 million asset, subject to commodity-price and counterparty risk.
- Contractual commitments included $13.848 billion for firm transportation and $17.670 billion in total scheduled obligations across debt, leases, transportation, processing/gathering, land payments, and other listed items. Firm transportation agreements generally require minimum volumes or deficiency payments.
- Two material customer disputes remain unresolved. Antero estimates approximately $86 million of gross damages, including interest, in its dispute with South Jersey Gas; substantially all is unaccrued. In the WGL disputes, Antero claims about $109 million of cover damages and unpaid amounts, also unaccrued; WGL seeks approximately $40 million from Antero, and trial was scheduled for June 10, 2019.
- Antero entered a $3.15 million environmental consent decree with state and federal regulators, pending court approval. A separate EPA air-compliance matter could result in monetary sanctions exceeding $100,000; the amount was not yet known. Management did not expect these matters to materially affect financial condition, results, or cash flows.
- Other principal risks include commodity-price volatility, transportation and marketing constraints, drilling and operating risks, reserve-estimation uncertainty, access to capital, and regulatory or environmental developments. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Separate recurring operating performance from the $1.406 billion deconsolidation gain, and assess the decline in Adjusted EBITDAX and the operating loss.
- Review the post-transaction debt, lease liabilities, credit-facility availability, letters of credit, and ongoing firm-transportation commitments; account for the change in consolidation when comparing periods.
- Track the outcome and possible recoveries or liabilities in the South Jersey Gas, WGL, and EPA matters, which include amounts not accrued in the financial statements.
- Assess whether the 2019 capital budget and hedge coverage remain consistent with production growth, commodity prices, and liquidity needs.