Antero Resources Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Antero explores, develops and produces natural gas, NGLs and oil in the Appalachian Basin, and also operates gathering, compression, water distribution and marketing businesses. It reported approximately 550,000 net acres in West Virginia, Ohio and Pennsylvania.
Financial performance and position
- Revenue: $1.230 billion, versus $168 million. The increase mainly reflects a $760 million commodity-derivative fair-value gain, compared with a $249 million loss in Q1 2014. Natural gas, NGL and oil sales were about $406 million, down approximately 1% from $410 million.
- Profit: Net income attributable to Antero was $394 million, or $1.49 per diluted share, versus a $95 million net loss. Operating income was $700 million; both results were materially affected by derivative accounting. Income tax expense was $247 million, primarily deferred.
- Cash generation: Operating cash flow was $351 million, compared with $274 million. Adjusted EBITDAX, a non-GAAP measure, was $355 million, up 30%. Investing cash outflow was $739 million, leaving operating cash flow below investment spending by approximately $388 million.
- Production and prices: Production rose 89% to 134 Bcfe, or 1,485 MMcfe per day. Average realized price before settled hedges fell 48% to $3.04/Mcfe; after settled hedges it fell 24% to $4.42/Mcfe.
- Costs: Gathering, compression, processing and transportation cost was $1.22/Mcfe versus $1.18. DD&A was $1.37/Mcfe versus $1.29. General and administrative expense before equity compensation declined to $0.23/Mcfe from $0.31.
- Liquidity and debt: Cash was $185 million at March 31, down from $246 million at year-end. Long-term debt was $4.172 billion, down from $4.363 billion. The company reported a $4.0 billion borrowing base and $4.0 billion in lender commitments; borrowings were $790 million and letters of credit $474 million. Covenant current and interest-coverage ratios were 4.02x and 6.93x, respectively; Antero reported compliance.
- Balance sheet: Total assets were $12.482 billion and total equity $6.434 billion. Derivative assets totaled $2.167 billion, all reported as assets at quarter-end.
Material changes versus Q1 2014 and year-end 2014
- Production grew sharply, but lower commodity prices largely offset the resulting increase in product sales.
- Net income swung from a loss to a profit, principally due to the reversal from derivative fair-value losses to gains. Q1 2015 included $185 million of cash receipts on settled derivatives; the larger fair-value gain was not itself current-period cash flow.
- Operating cash flow increased, while capital investment remained substantial. Q1 capital expenditures were approximately $771 million.
- In March, Antero issued $750 million of 5.625% senior notes due 2023 and raised approximately $538 million net from a common-stock offering. Proceeds were used to repay revolving-credit borrowings. The offering included 14.7 million shares, increasing shares outstanding.
- At quarter-end, cash was lower and derivative assets were higher than at December 31, 2014. Long-term debt declined by approximately $190 million.
Outlook, management commentary and risks
- 2015 plan: Management set a $1.8 billion Antero capital budget, excluding Antero Midstream, whose budget was $425–$450 million. Antero planned an average of 14 rigs and 130 horizontal well completions, versus 21 rigs and 177 wells in 2014. Management said the budget was expected to be funded by operating cash flow and available revolver capacity, while reserving the right to adjust spending as conditions change.
- Management expected production and product-revenue growth rates to slow from 2014 levels. It estimated 2015 marketing expense of $100–$150 million related to potentially underused firm transportation capacity. The filing disclosed $15 million of costs for unutilized excess capacity in Q1.
- Hedges covered projected production through 2020. These reduce exposure to falling prices but also limit gains when market prices exceed hedge prices. Derivative fair-value changes can cause substantial earnings volatility without affecting cash until settlement.
- Firm transportation, gathering, processing and compression commitments totaled approximately $17.0 billion in the contractual-obligations table. The filing cautions that amounts represent gross commitments and that recorded costs depend on working interests and other terms.
- Legal and other contingencies: South Jersey Gas and South Jersey Resources Group disputed contract pricing; Antero said it was owed approximately $14.3 million in short-paid amounts through March 31 and filed a breach-of-contract action. Environmental compliance matters could result in monetary sanctions exceeding $100,000, but the total could not be estimated. Separate personal injury and property-damage lawsuits seek unspecified relief.
- Other risks include commodity-price volatility, access to capital, reserve and production uncertainty, transportation capacity, customer and derivative-counterparty credit risk, and possible Ohio severance-tax changes. Management said it believed liquidity was adequate for at least the next 12 months. No material changes to the risk factors in the 2014 Form 10-K were reported.
Important facts for investors to verify
- How much of reported earnings and revenue reflects cash-settled hedge receipts versus noncash derivative remeasurement, and how the hedge book evolves with commodity prices.
- Whether operating cash flow can support the capital program, debt service and large transportation and midstream commitments, particularly if prices remain weak.
- Actual utilization or third-party marketing of firm transportation capacity, and resulting transportation and marketing costs.
- Borrowing-base redetermination outcomes, revolver availability after letters of credit, and compliance with debt covenants.
- Developments in the South Jersey contract dispute, including recovery of the claimed shortfalls, and outcomes of environmental and other litigation.
- Production growth, realized prices and unit costs relative to the 2015 drilling and completion plan.