Antero Resources Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The financial statements are those of Antero Resources LLC, whose operations became part of Antero Resources Corporation after a reorganization and merger completed October 16, 2013.
Business context and key financial metrics
Antero explores for and produces natural gas, natural gas liquids (NGLs), and oil in the Appalachian Basin. At September 30, it reported approximately 330,000 net Marcellus acres and 103,000 net Utica acres. Nine-month production was 128 Bcfe, or 470 MMcfe per day.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue, including derivative fair-value changes | $384.5 million | $(92.0) million | $833.1 million | $500.6 million |
| Continuing-operations income (loss) | $117.8 million | $(113.9) million | $201.0 million | $140.4 million |
| Net income (loss), including discontinued operations | $120.9 million | $(127.7) million | $204.1 million | $(278.0) million |
| EBITDAX from continuing operations (non-GAAP) | $182.8 million | $70.5 million | $434.2 million | $198.4 million |
| Cash flow from operating activities | Not provided for the quarter | Not provided for the quarter | $331.9 million | $225.4 million |
| Cash used in investing activities | Not provided for the quarter | Not provided for the quarter | $1.865 billion | $295.2 million |
Q3 production was 52 Bcfe, up 128% year over year; average realized price before hedges was $4.27/Mcfe versus $2.94, and after settled hedges was $5.18/Mcfe versus $4.90. For the nine-month period, production increased 120%; average price before hedges rose to $4.27/Mcfe from $2.70, while the after-hedge price was $5.12/Mcfe in both periods. The filing does not provide a single comparable operating-margin measure.
At September 30, cash was $11.6 million, current assets were $359.5 million, and current liabilities were $586.9 million. Total assets were $5.672 billion and total liabilities were $3.794 billion. Debt was approximately $2.995 billion, including $1.513 billion outstanding under the credit facility. The company reported compliance with credit-facility financial covenants.
Material changes and financing
- Natural gas, NGL, and oil sales for Q3 rose to approximately $223 million from $67 million, reflecting higher production and prices. For nine months, commodity sales rose to approximately $548 million from $157 million.
- Derivative fair-value gains materially affected reported results: $162 million in Q3 2013 versus losses of $159 million in Q3 2012; $286 million for nine months 2013 versus gains of $52 million in the prior-year period. These marks are not equivalent to current-period cash receipts. Cash settled derivative gains were $47 million for Q3 2013 and $109 million for the nine-month period.
- Operating expenses rose with the expansion in production. Nine-month gathering, compression, processing, and transportation expense increased to $148 million from $57 million; DD&A rose to $159 million from $65 million. Gathering and transportation costs per Mcfe increased, while lease operating and general and administrative costs per Mcfe declined.
- Investing outflows increased substantially, including $1.267 billion of development costs, $343 million of undeveloped-property additions, and $240 million of gathering-system and facility additions during the first nine months.
- On October 16, the IPO generated approximately $1.58 billion of net proceeds from 37.7 million newly issued shares; proceeds were initially used to pay down the credit facility. On November 5, Antero Finance issued $1.0 billion of 5.375% notes due 2021, with net proceeds of approximately $987 million intended for refinancing, credit-facility repayment, and development spending. The filing does not provide post-transaction debt balances.
- Management increased the 2013 capital expenditure plan by $200 million to $2.65 billion: $1.55 billion for drilling and completion, $450 million for leasehold acquisitions, and $650 million for water-handling and gas-gathering infrastructure.
Outlook, risks, and unusual items
- Management said operating cash flow and available credit-facility borrowings should be sufficient for at least the next 12 months. The credit facility had a $2.0 billion borrowing base; lender commitments were reduced from $1.75 billion to $1.5 billion after the IPO. Its maturity is May 2016, and the next borrowing-base redetermination was scheduled for April 2014.
- The company had hedged approximately 1,131 Bcfe of production from October 2013 through 2019 at a weighted average index price of $4.73/Mcfe. Hedging reduces exposure to falling prices but limits gains from price increases; mark-to-market changes create earnings volatility.
- The October reorganization and IPO were expected to trigger approximately $297 million of non-cash stock-compensation expense in Q4 2013, with approximately $217 million more recognized over the remaining award-service period.
- As of September 30, contractual obligations totaled approximately $6.982 billion, including $1.603 billion of firm-transportation commitments and $1.430 billion for gas processing, gathering, and compression services. These long-term commitments include minimum-volume or payment obligations.
- Key risks include commodity-price volatility, drilling and reserve-estimation uncertainty, access to capital, cost inflation, transportation and processing capacity, and environmental or regulatory developments. Derivative assets were approximately $708 million and exposed the company to counterparty credit risk; certain bank counterparties had experienced credit-rating downgrades. The company also noted customer concentration risk.
- Antero reported ordinary-course legal proceedings and claims, but did not expect them to have a material adverse effect. It reported no material changes to the risk factors in its prior annual report and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the IPO and subsequent $1.0 billion note issuance affected debt, interest costs, and remaining credit-facility capacity.
- How much of reported earnings and revenue reflects derivative fair-value marks versus physical sales and settled hedges.
- Whether production growth and the $2.65 billion capital plan can be funded while meeting debt service and long-term transportation and gathering commitments.
- The expected timing and total impact of the approximately $514 million of stock-compensation expense disclosed for Q4 and future service periods.
- Current hedge coverage, counterparty exposures, and the effect of future borrowing-base redeterminations on liquidity.