Antero Resources Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Antero explores and produces natural gas, NGLs and oil in the Appalachian Basin. Comparisons with 2018 are affected by the March 2019 deconsolidation of Antero Midstream Partners, so reported consolidated results are not fully comparable.
Key financial and operating metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue and other | $1,119 million | $1,077 million | $3,456 million | $3,094 million |
| Operating income (loss) | ($986 million) | $5 million | ($920 million) | $119 million |
| Net income (loss) attributable to Antero | ($879 million) | ($154 million) | $142 million | ($276 million) |
| Adjusted EBITDAX (non-GAAP) | $258 million | $419 million | $952 million | $1,242 million |
| Net cash provided by operating activities | Management reported $198 million | Management reported $421 million | $956 million | $1,260 million |
| Net cash used in investing activities | Not stated separately in the provided text | Not stated separately in the provided text | ($825 million) | ($1,770 million) |
Q3 production was 310 Bcfe, or 3,367 MMcfe per day, up 24%. The reported average realized price after settled derivative effects was $3.13/Mcfe, versus $3.98/Mcfe a year earlier. Nine-month production was 882 Bcfe, up 27%; average realized price after settled derivatives was $3.44/Mcfe versus $3.93/Mcfe.
Q3 included $1.041 billion of oil and gas property impairment, including an $881 million charge on proved Utica Shale properties. Nine-month impairment of oil and gas properties was $1.254 billion, compared with $406 million in the prior-year period. The nine-month 2019 result also included a $1.406 billion gain on deconsolidating Antero Midstream Partners; this gain substantially explains the reported net income and should not be read as recurring operating earnings.
At September 30, total assets were $16.120 billion, total liabilities $8.674 billion and equity $7.447 billion. Current assets were $730 million and current liabilities $1.171 billion. Cash and cash equivalents were zero. Long-term debt was $3.704 billion, including $275 million drawn on the revolver; reported debt excludes Antero Midstream Partners’ debt after deconsolidation. Operating lease liabilities totaled $3.230 billion.
Material changes and liquidity
- Effective March 13, 2019, Antero exchanged its controlling partnership interest in Antero Midstream Partners for $297 million cash and shares representing an approximately 31% interest in Antero Midstream Corporation. Antero now accounts for that investment under the equity method; its September 30 ownership was approximately 31.5%.
- Reported nine-month operating cash flow fell by $305 million year over year, and Adjusted EBITDAX declined 23%. Management attributed much of the cash flow and Adjusted EBITDAX decline to deconsolidation of the midstream business. The 2019 reported net income also reflects the one-time deconsolidation gain.
- The revolver borrowing base was $4.5 billion, with lender commitments of $2.5 billion; $275 million was drawn and $703 million of letters of credit were outstanding. The next borrowing-base redetermination was scheduled for April 2020. Antero reported compliance with applicable covenants and disclosed a covenant current ratio of 5.05 and interest coverage ratio of 8.15, calculated under facility definitions.
- Management said operating cash flows, available revolver borrowings, distributions from equity-method investments or capital-market transactions were expected to meet cash requirements for at least the next 12 months. The filing reports no cash balance at quarter-end, so liquidity depends on operating cash generation and available financing.
Outlook, risks and unusual items
- The 2019 exploration and production capital budget was $1.35–$1.40 billion, including $1.275–$1.30 billion for drilling and completion and $75–$100 million for leasehold spending. Management expected quarterly spending for the rest of 2019 to be closer to Q3’s $292 million than Q1 or Q2 levels, citing service-cost deflation, sand-logistics optimization and operational efficiencies.
- Antero agreed to release 250 MMcf/d of transportation capacity from September 2019 through March 2020, which management estimated would reduce net marketing expense by $15 million. It continued to evaluate ways to monetize or release excess capacity.
- Hedges covered portions of projected production through 2023 and were intended to support cash flow, but also limit gains if commodity prices rise. Derivatives were not designated as accounting hedges; fair-value changes therefore contribute to earnings volatility. Net commodity derivative assets were approximately $817 million at September 30.
- Long-dated transportation commitments are material: the filing lists approximately $13.4 billion of gross firm-transportation obligations, before applicable working-interest shares and fees from capacity marketed to third parties. Related-party gathering and compression agreements also include minimum-volume commitments on certain new capacity.
- In the SJGC litigation, Antero reported receiving $59 million during Q3 and another $23 million subsequently, for $82 million in aggregate settlement payments. It recognized $54 million in natural gas sales and $8 million in interest; $23 million remained in accrued revenue at quarter-end.
- Antero received a jury award of approximately $96 million in its dispute with WGL; WGL appealed in August 2019. The filing does not establish the ultimate outcome. Environmental notices from the EPA and West Virginia regulators remain under negotiation; management said monetary sanctions could exceed $100,000 but did not expect a material adverse effect.
- Management identified commodity-price volatility, transportation and marketing exposure, reserve-estimation uncertainty, operating and environmental risks, and access to capital as key risks. It reported no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- How much of reported earnings and asset value is attributable to the $1.406 billion deconsolidation gain, derivative fair-value movements and the Utica impairment, rather than ongoing operations.
- Standalone liquidity and borrowing availability, including the implications of zero cash, outstanding letters of credit, covenant calculations and the April 2020 borrowing-base review.
- Whether production growth and well-cost savings can offset lower realized prices and higher gathering, processing and transportation costs.
- The status and collectability of the WGL jury award, the remaining SJGC receivable at quarter-end, and the resolution of environmental matters.
- The economics and flexibility of firm-transportation commitments, lease liabilities and related-party minimum-volume obligations.