Antero Midstream Corporation — Q2 2022 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2022; unaudited. Antero Midstream owns and operates Appalachian Basin gathering, compression and water-handling infrastructure, primarily serving affiliate Antero Resources. Substantially all revenue is from Antero Resources.
Financial performance and liquidity
- Q2 revenue: $228.9 million, down 1.7% from $232.8 million a year earlier. Operating income was $128.4 million, down 15.2%; net income was $79.4 million, down 1.0%. Diluted EPS was $0.17, unchanged.
- Q2 margins: Operating margin was approximately 56.1%, versus 65.0% in Q2 2021; net margin was approximately 34.7%, versus 34.5%. Adjusted EBITDA, a non-GAAP measure, was $221.0 million, down 1.8%.
- First half: Revenue was $447.4 million, down 2.1%; operating income was $257.6 million, down 9.6%; net income was $159.4 million, down 2.6%; diluted EPS was $0.33 versus $0.34. Adjusted EBITDA was $430.1 million, down 3.2%.
- Cash flow, first half: Operating cash flow was $354.2 million, versus $360.4 million. Investing activities used $162.7 million, compared with $73.7 million, mainly reflecting higher infrastructure spending. Financing activities used $191.5 million, versus $286.6 million. Period-end cash was zero.
- Capital spending: First-half capital expenditures were $165 million. The 2022 capital budget is $275 million to $300 million.
- Debt and liquidity at June 30: Long-term debt carrying value was $3.158 billion; principal was $3.181 billion. The $1.25 billion revolving facility had $581 million drawn and $669 million available. The company reported compliance with facility covenants. Current assets of $77.1 million were below current liabilities of $123.8 million.
Material changes versus the prior comparable period
- Q2 gathering and compression revenue fell to $184.1 million from $192.7 million, principally reflecting a $12 million low-pressure gathering rebate to Antero Resources. First-half rebates totaled $24 million after the customer met the applicable volume target; the incentive program runs through 2023.
- Water-handling revenue rose to $62.5 million in Q2 from $57.8 million; first-half water-handling revenue increased to $116.2 million from $114.4 million. Q2 fresh-water delivery and other fluid-handling activity contributed to the increase.
- Operating expenses increased: Q2 direct operating costs rose to $43.3 million from $39.6 million, and depreciation rose to $35.7 million from $26.6 million. The filing attributes higher depreciation partly to the phased early retirement of an underutilized compressor station; related Q2 depreciation was $7 million. Q2 also included $3.7 million of property impairment and a $0.5 million asset-retirement settlement loss.
- Interest expense increased to $45.4 million in Q2 from $43.5 million, partly because of higher floating borrowing rates. The revolving facility’s weighted-average rate was 3.24% at June 30, 2022, versus 1.81% at December 31, 2021.
- Equity earnings from unconsolidated affiliates increased 6% in Q2 and 9% in the first half. No early debt-extinguishment loss was recorded in 2022; the 2021 periods included a $20.7 million loss related to redeeming 2024 notes.
Outlook, commentary, risks and contingencies
- Management expects operating cash flow and revolver availability to fund working capital, capital spending, dividends and share repurchases for at least the next 12 months. It may adjust capital spending in response to Antero Resources’ plans, commodity prices, costs, financing availability and other conditions. No specific revenue or earnings guidance is provided.
- The Board declared a common dividend of $0.225 per share for Q2, payable August 10, 2022. The $300 million share-repurchase authorization extends through June 30, 2023; no program repurchases occurred during Q2, and approximately $149.8 million remained available at quarter-end.
- Key risks include dependence on Antero Resources for substantially all revenue, potential changes in its production or drilling activity, customer credit and performance, inflation and labor costs, and floating-rate debt. Management noted June 2022 CPI was 9% higher year over year and warned that inflation and labor shortages could raise operating and capital costs.
- Veolia litigation: A consolidated lawsuit concerning the Clearwater wastewater facility remains unresolved. Antero Treatment sought approximately $450 million in project-related damages, or alternatively approximately $370 million for alleged contract breaches; Veolia sought approximately $118 million. A final judgment had not been rendered as of the filing.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Antero Resources sustains production and volumes sufficient to support gathering revenue, and the effect of the incentive-fee rebates through 2023.
- How capital spending tracks against the $275 million to $300 million budget and whether the expected returns support cash generation and dividends.
- Floating-rate exposure, debt maturities, facility availability and covenant headroom as interest rates and borrowing needs change.
- The outcome and potential financial impact of the Clearwater/Veolia litigation and related facility impairment or retirement costs.
- Whether the stated 12-month liquidity outlook remains supported by operating cash flow, revolver access and planned shareholder distributions.