Antero Resources Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 25, 2015. The filing reports full-year results and unaudited quarterly data, including the fourth quarter. Antero is an Appalachian Basin oil and gas producer, with operations in the Marcellus and Utica Shales and related gathering, compression, water distribution and marketing businesses.
Key financial and operating metrics
| Metric | 2014 | Comparison or context |
|---|---|---|
| Production | 368 Bcfe; 1,007 MMcfe/d | Up 93% from 191 Bcfe in 2013 |
| Oil, gas and NGL sales | $1.737 billion | Up 111% from $821 million in 2013; production growth was the principal driver |
| Total operating revenue | $2.721 billion | Includes $868 million of commodity derivative fair-value gains and a $40 million gathering-asset sale gain |
| Operating income | $1.300 billion | Compared with $341 million in 2013; influenced by derivative accounting gains |
| Net income attributable to Antero | $674 million; $2.57 per diluted share | Compared with a net loss of $19 million in 2013 |
| Adjusted EBITDAX | $1.162 billion | Non-GAAP; up 79% from $649 million in 2013 |
| Cash from operations | $998 million | Compared with $535 million in 2013 |
| Capital expenditures | $4.087 billion | Investing cash outflow was $4.090 billion |
| Cash and current liquidity | $246 million cash; $1.252 billion current assets; $1.155 billion current liabilities | Current ratio under the credit agreement was 2.57x at year-end |
| Debt | $4.363 billion long-term debt on the balance sheet | Includes $1.730 billion of revolving and water-facility borrowings and $2.625 billion principal of senior notes |
| Proved reserves | 12.683 Tcfe; PV-10 of $11.320 billion | Reserves up 66%; PV-10 is a non-GAAP measure and excludes income taxes |
Reported earnings included $732 million of unrealized hedge gains, a $446 million noncash income tax expense and $112 million of equity-based compensation expense. The $868 million reported derivative gain included $136 million of cash settlements; the remainder was largely noncash mark-to-market movement. Cash-settled hedge-adjusted realized price was $5.10/Mcfe, versus $5.17/Mcfe in 2013. Before realized hedge effects, the average was $4.73/Mcfe, versus $4.31/Mcfe.
Fourth-quarter results
For Q4 2014, operating revenue was $1.482 billion, operating income was $1.028 billion, and net income attributable to Antero was $607 million ($2.31 per share). The filing attributes substantial earnings volatility to commodity-derivative fair-value changes; quarterly revenue and earnings should therefore be assessed alongside production sales and cash settlements, not as cash operating performance alone.
Material changes versus 2013
- Production rose 93%, while production sales increased 111%; greater liquids production supported the higher pre-hedge realized price.
- Net income improved from a 2013 loss to $674 million. The comparison is affected by 2013’s $365 million equity-based compensation charge and by volatile derivative valuations in both years.
- Operating cash flow increased to $998 million, but capital spending also increased to $4.087 billion, leaving the development program reliant on external financing and borrowing capacity.
- Long-term debt increased from $2.079 billion to $4.363 billion. Antero issued $1.1 billion of 5.125% notes due 2022 and retired $260 million of 7.25% notes due 2019.
- Antero Midstream Partners completed its IPO in November. Antero retained approximately 69.7% of its limited partner interests; the public held 30.3%. IPO net proceeds were approximately $1.1 billion, including about $843 million used to repay assumed debt and reimburse Antero for capital expenditures.
- Proved reserves increased to 12.683 Tcfe. Additions and performance revisions were partly offset by 1.417 Tcfe reclassified out of proved reserves because 191 dry-gas locations were no longer expected to be drilled within five years.
- Marketing of excess transportation capacity became a reportable segment in 2014. It reported $54 million of revenue and $103 million of expense.
Outlook, risks and contingencies
- 2015 plan: Antero budgeted $1.8 billion of capital spending, excluding Antero Midstream’s $425–$450 million budget; planned an average of 14 rigs and 130 horizontal completions, down from 21 rigs at year-end 2014 and 177 wells completed in 2014. Management expected the budget to be funded by operating cash flow and available revolver capacity, while reserving the right to revise it as conditions change.
- Commodity environment and hedges: Management cited sharp late-2014 and early-2015 price declines, including WTI below $50/Bbl in January 2015 and Henry Hub gas around $3/MMBtu. Year-end hedges covered production through 2020; 2015 coverage included about 423 Bcf of gas at a weighted average index price of $4.34/MMBtu, plus oil and propane hedges. Hedging reduces downside exposure but limits upside and entails counterparty and basis risk.
- Liquidity and borrowing base: The $4.0 billion borrowing base was subject to semiannual redetermination, next scheduled for October 2015. At year-end, Antero had $1.73 billion drawn and $387 million of letters of credit. Management reported compliance with covenants; a lower borrowing base or reduced access to capital could constrain spending.
- Long-term commitments: Disclosed contractual obligations totaled approximately $16.7 billion, primarily firm transportation and processing, gathering and compression commitments. Antero estimated $100–$150 million of 2015 marketing expense could arise from unused and unmarketed transportation capacity. The filing notes that contractual table amounts are gross and that recorded costs depend on working interests.
- Development burden: Proved undeveloped reserves were 8.880 Tcfe, about 70% of proved reserves, with estimated development costs of $8.2 billion over five years. Delivery depends on capital, drilling results, prices, infrastructure and lease retention; reserves not developed within five years may be reclassified.
- Legal and environmental matters: Federal compliance orders concerning alleged wetland or water discharges remained unresolved; the company expected monetary sanctions exceeding $100,000 and additional remediation costs, but could not estimate total exposure. Separate lawsuits in several states alleged personal injury or property damage and sought unspecified relief; the company said it could not estimate potential damages.
- Other risks: Operations are concentrated in the Appalachian Basin and depend on gathering, processing and takeaway capacity. Other material risks include commodity volatility, title and lease-expiration issues, environmental and hydraulic-fracturing regulation, customer and hedge-counterparty credit risk, and possible impairment of properties.
Most important facts for investors to verify
- Separate cash-settled hedge proceeds from the much larger noncash fair-value gains when assessing earnings quality and cash generation.
- Confirm revolver availability, borrowing-base outcomes, covenant headroom and debt balances after the October 2015 redetermination.
- Track actual 2015 capital spending, drilling and production against the reduced budget and management’s funding assumptions.
- Evaluate utilization costs and remaining exposure under long-term transportation, processing and gathering commitments, including the estimated $100–$150 million 2015 excess-capacity expense.
- Test reserve additions, PUD conversion pace and the economics and financing required for the disclosed $8.2 billion development program.
- Monitor outcomes and costs of environmental orders and lawsuits, and review the company’s disclosures on remediation and any resulting sanctions.
KPMG issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2014.