Antero Resources Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated results include Antero Midstream Partners LP. Antero explores and produces natural gas, NGLs and oil in the Appalachian Basin and operates gathering, processing, water and marketing businesses.
Financial highlights
Amounts below are in millions of dollars except per-share amounts, production, and prices. Consolidated revenue includes derivative fair-value changes and marketing activity.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue and other | $1,076.5 | $647.9 | $3,094.0 | $2,633.8 |
| Operating income (loss) | $4.8 | $(72.1) | $118.5 | $553.0 |
| Net income (loss), including noncontrolling interests | $(78.0) | $(90.0) | $(64.4) | $255.5 |
| Net income (loss) attributable to Antero | $(154.4) | $(135.1) | $(276.0) | $128.2 |
| Loss per share | $(0.49) | $(0.43) | $(0.87) | $0.41 |
| Adjusted EBITDAX (non-GAAP) | $497.7 | $336.4 | $1,453.5 | $1,022.4 |
| Net cash from operating activities | $421.5 | $1,045.2 | $1,260.4 | $1,692.8 |
| Capital expenditures and investments, approximately | Not stated for quarter | Not stated for quarter | $1,770.3 used in investing activities | $1,948.3 used in investing activities |
- Production and realized prices: Q3 production was 250 Bcfe, up 17% year over year; nine-month production was 693 Bcfe, up 14%. Average realized price after settled derivative gains was $3.98/Mcfe in Q3 and $3.93/Mcfe for the nine-month period, versus $3.39 and $3.53, respectively, in 2017.
- Margins and costs: Q3 operating margin was approximately 0.4% of revenue; the nine-month operating margin was approximately 3.8%. Q3 gathering, compression, processing and transportation costs were $326.5 million; lease operating expense was $36.3 million. Management cited higher production, water use, fuel costs and Rover Pipeline transportation costs.
- Balance sheet and liquidity: At September 30, total assets were $15.80 billion, total liabilities $7.13 billion, and equity $8.67 billion. Current assets of $906.6 million exceeded current liabilities of $813.9 million. Cash and cash equivalents were zero; the filing reports book overdrafts of $38.4 million within payables.
- Debt: Consolidated long-term debt carrying value was $5.49 billion, up from $4.80 billion at year-end 2017. It included $547 million drawn on Antero’s credit facility and $875 million on Antero Midstream’s facility, plus senior notes. Antero reported covenant compliance and a 7.74x interest coverage ratio. Antero’s facility had $2.5 billion of lender commitments and a $4.5 billion borrowing base; $692 million of letters of credit were outstanding. Antero Midstream’s facility commitments were increased from $1.5 billion to $2.0 billion in an amendment after quarter-end.
- Derivative position: Net derivative assets were approximately $1.16 billion at quarter-end. Q3 commodity derivative fair-value gains were $57.0 million; nine-month commodity gains were $134.8 million, with an additional $94.1 million marketing-derivative gain. These fair-value amounts can fluctuate and are not equivalent to cash received.
Changes versus prior periods
- Q3 revenue rose 66% year over year, supported by higher production and realized prices and a swing from commodity derivative losses to gains. Production sales increased across natural gas, NGLs and oil.
- Despite stronger revenue and higher Adjusted EBITDAX, Antero reported a larger net loss attributable to the parent in Q3 and a $276.0 million attributable loss for the first nine months, versus attributable income of $128.2 million in the prior-year nine-month period. The increase in impairment charges was a major factor.
- Nine-month operating cash flow fell 26% to $1.26 billion. The prior-year comparison included $750 million of proceeds from partial monetization of natural gas hedges. Nine-month investing outflows decreased to $1.77 billion; financing provided $481.5 million, primarily reflecting $682 million of net credit-facility borrowings, partly offset by distributions to noncontrolling interests.
- Unproved-property impairment increased to $221.1 million in Q3 and $406.1 million for nine months, mainly for Utica acreage nearing lease expiry outside the primary development plan. The company also recorded $9.7 million of gathering-system impairment for nine months.
Outlook, risks and unusual items
- Capital program: 2018 consolidated capital budget was approximately $2.1 billion, including $1.3 billion for drilling and completion, $150 million for leasehold expenditures, and $650 million for Antero Midstream capital spending (including $215 million for unconsolidated affiliates). Management expected drilling and completion spending to decline substantially in Q4 after efficiency gains and reductions in rigs and completion crews. Spending remains subject to commodity prices, liquidity and operating conditions.
- Liquidity outlook: Based on September 30 strip pricing, management believed operating cash flow, available facility borrowings or capital-market transactions would cover operating needs, debt service, capital expenditures and commitments for at least 12 months. This outlook is exposed to commodity-price, credit-market and capital-access risks.
- Hedges and market exposure: Fixed-price swaps covered portions of projected natural gas production through 2023 and limited portions of oil and propane production in 2018. Hedges reduce downside exposure but also limit gains if market prices exceed fixed prices. The company disclosed material counterparty exposure and significant customer concentration.
- Transactions and buyback: Announced October 9, 2018, the proposed Antero Midstream simplification was expected to close in Q1 2019, subject to approvals and customary conditions. Antero expected to receive cash and New AM shares for its units; the cash consideration could depend on unitholder elections and proration. Antero also authorized up to $600 million of share repurchases through March 31, 2020, expected to be funded by transaction proceeds and future free cash flow. Both plans are contingent; transaction delays or leverage and financial considerations could affect funding.
- Legal and environmental contingencies: Antero reported approximately $82 million of gross claimed damages, including interest, against SJGC, substantially unaccrued; SJGC’s appeal remained pending. It also claimed approximately $105 million of gross damages against WGL, unaccrued, while WGL litigation continued; an appellate court had reversed dismissal of a WGL claim and remanded it for further proceedings. EPA matters involving alleged water and air compliance violations could result in monetary sanctions, but amounts were not estimable; management did not expect a material adverse effect.
- Other unusual items: A severe-weather-related marketing transaction generated a $78.1 million cash gain during the first nine months. The Q3 loss also included a $19.0 million deferred tax expense, primarily from a valuation allowance on certain state tax-loss carryforwards. The company adopted revenue-recognition guidance in 2018 with no reported financial-statement impact; it expected the 2019 lease standard to increase reported assets and liabilities, with the amount not yet determined.
Important facts for investors to verify
- Whether the proposed simplification closes on schedule, its final cash-versus-stock consideration and funding, and the resulting leverage and ownership structure.
- Whether production growth translates into sustainable operating cash flow after capital spending, transportation commitments, distributions and debt service; note that quarter-end cash was zero.
- The composition and realizability of derivative assets, hedge settlements and counterparty credit exposure, alongside sensitivity to commodity prices and regional basis differentials.
- Developments in the SJGC and WGL claims, including the unaccrued claimed amounts, and resolution or potential penalties from EPA matters.
- The impact of lease expirations and impairments, utilization of firm transportation capacity, and delays in reaching contracted capacity at the wastewater treatment facility.
- Non-GAAP Adjusted EBITDAX is not a substitute for GAAP earnings or cash flow; review the filing’s reconciliations and the substantial noncash impairment and derivative effects.