Antero Resources Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; balance-sheet amounts are as of June 30, 2018. Dollar amounts below are in millions unless otherwise noted. Antero explores for and produces natural gas, NGLs and oil in the Appalachian Basin, and consolidates its majority-owned Antero Midstream subsidiary.
Financial performance and operating metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue and other | $989.3 | $790.4 | $2,017.4 | $1,986.0 |
| Operating income (loss) | ($32.8) | $123.7 | $113.7 | $625.1 |
| Net income (loss), including noncontrolling interests | ($67.3) | $40.0 | $13.5 | $345.5 |
| Net income (loss) attributable to Antero | ($136.4) | ($5.1) | ($121.6) | $263.3 |
| Cash from operating activities | $297.4 | $253.6 | $838.9 | $647.6 |
| Adjusted EBITDAX (non-GAAP) | $405.1 | $320.8 | $955.9 | $686.1 |
Q2 production was 229 Bcfe, or 2,520 MMcfe/day, up 15% year over year. Average realized price was $3.35/Mcfe before settled commodity derivatives and $3.77/Mcfe after them. For the first half, production was 443 Bcfe, up 13%; realized prices were $3.45/Mcfe before and $3.90/Mcfe after settled derivatives.
Q2 revenue rose 25%, driven by higher production and liquids prices, including a 50% increase in NGL sales and higher marketing revenue. However, higher costs and a $134.4 million unproved-property impairment contributed to the operating loss. The operating margin was approximately negative 3.3% in Q2 2018 versus positive 15.7% a year earlier. For the first half, operating margin was approximately 5.6% versus 31.5%; the comparison is affected by much larger derivative fair-value gains in 2017.
First-half operating cash flow increased 29%. Investing cash outflow was $1,172.3 million, versus $1,397.5 million in 2017; financing provided $355.6 million. Cash increased $22.2 million to $50.6 million. The difference between operating cash flow and investing outflow was approximately negative $333.4 million.
Balance sheet, debt and liquidity
- Total assets were $15.69 billion; current assets were $834.9 million and current liabilities $788.7 million. The reported current-asset-to-current-liability ratio was approximately 1.06.
- Total long-term debt was $5.29 billion, up from $4.80 billion at year-end 2017. This includes $455 million drawn on Antero’s revolver and $770 million on Antero Midstream’s revolver, as well as senior notes. Cash less reported debt was approximately negative $5.24 billion.
- Antero’s credit facility had a $4.5 billion borrowing base and $2.5 billion in lender commitments; $455 million was drawn and $692 million of letters of credit was outstanding. Antero Midstream had $1.5 billion of commitments and $770 million drawn. Both entities reported compliance with financial covenants.
- Management stated that operating cash flow, available facility borrowings or capital-market transactions should cover requirements for at least the next 12 months, based on June 30 strip pricing. This is management’s assessment, not a guarantee.
Changes, outlook and material items
- Management’s 2018 consolidated capital budget was $2.1 billion: $1.3 billion for drilling and completion, $150 million for leasehold expenditures and $650 million for Antero Midstream, including $215 million for unconsolidated-affiliate investments. First-half capital expenditures were approximately $1.1 billion. Management expected about four completion crews in the second half, down from an average of six in the first half, after operational efficiencies pulled spending forward.
- Impairments included $185.0 million for unproved properties in the first half, principally leases in the Utica not in the current development plan and expiring in Q2 2019, and $8.5 million for gathering systems. No proved-property impairment was recorded.
- Commodity derivatives were not designated as accounting hedges, so fair-value changes flow through earnings. The company reported a $1.2 billion net derivative asset at quarter-end. First-half commodity derivative fair-value gains were $77.8 million, including $197.2 million of settled gains and a non-cash loss on unsettled positions. Derivative marks can make reported earnings volatile; hedges also limit benefit from prices above fixed levels.
- A separate marketing-derivative position generated $94.2 million in settled first-half gains, following unusually wide local basis premiums during January cold weather. The remaining contracts had an estimated $21.4 million liability, expected to settle as losses through October 2018. Q2 Adjusted EBITDAX was also affected by $16 million of settled marketing-derivative losses.
- Firm transportation commitments totaled $14.39 billion over their stated terms; total listed contractual obligations, including debt principal and interest, were $24.59 billion. Management cited increased costs for unused excess transportation capacity following the Rover Pipeline’s late-2017 start-up. These commitments are a significant fixed-cost exposure.
- Antero had hedged approximately 2.3 Tcf of projected natural gas production through 2023, plus propane and oil volumes through 2018. The special committee formed in February 2018 to evaluate measures addressing the perceived trading-value discount had reached no decision by the filing date.
- Two disputed customer matters involve claimed damages not substantially accrued: approximately $79 million against SJGC, with an appeal pending, and approximately $106 million against WGL, with litigation pending. Outcomes and recoveries are uncertain. Environmental matters include alleged Clean Water Act and Clean Air Act compliance issues; potential sanctions are uncertain, and management did not expect a material adverse effect.
- Revenue recognition standard adoption had no impact. The company expected the new lease standard, effective January 1, 2019, to increase reported assets and liabilities; the adjustment had not been quantified.
Important facts for investors to verify
- Reconcile the Q2 and first-half losses attributable to Antero with consolidated results and the substantial income allocated to noncontrolling interests in Antero Midstream.
- Assess cash generation after capital spending, debt growth, revolver availability and the company’s capacity to fund its development program.
- Review the economics and utilization of firm transportation commitments, including the extent and cost of excess capacity.
- Track production and realized prices, hedge settlements and mark-to-market exposure, and the remaining marketing-derivative liability.
- Monitor the SJGC and WGL litigation, the unaccrued claimed damages, environmental proceedings and any further impairment charges.
- Confirm progress and decisions from the special committee and the eventual balance-sheet impact of lease-standard adoption.