Antero Midstream Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and comparability
Antero Midstream owns and operates gathering, compression, water-handling and related midstream assets, primarily serving Antero Resources in the Appalachian Basin. On March 12, 2019, the company completed its simplification transaction and began consolidating Antero Midstream Partners from March 13. Accordingly, reported 2019 results include the acquired operations only from that date, while 2018 results do not; reported year-over-year comparisons are therefore not like-for-like. Management also presents illustrative pro forma comparisons assuming the transaction occurred January 1, 2018.
Key financial results and liquidity
| Metric | Q3 2019 | Nine months 2019 |
|---|---|---|
| Reported revenue | $243.8 | $553.5 |
| Operating income (loss) | $(334.1) | $(205.9) |
| Net income (loss) | $(289.5) | $(210.6) |
| Net interest expense | $36.1 | $73.9 |
| Cash provided by operating activities | Quarterly value discussed as $178; statement presents nine-month total | $429.9 |
| Capital expenditures and affiliate investments | — | $379.4 cash outflow for property additions and affiliate investments |
Q3 impairment charges totaled $457.5: $407.8 for property and equipment, $43.8 for goodwill and $5.9 for customer relationships, primarily related to Clearwater. The Q3 tax benefit was $62.3. The filing does not provide a clear quarterly cash-flow statement value; MD&A cites $178 million of operating cash flow for the quarter.
On a pro forma basis, Q3 revenue was $243.8 versus $248.4 in 2018, while Adjusted EBITDA was $217.6 versus $183.8, an 18% increase. For the nine months, pro forma revenue was $758.1 versus $693.8 and Pro Forma Adjusted EBITDA was $626.2 versus $517.6, a 21% increase. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
At September 30, 2019, cash was zero; current assets were $109.2 and current liabilities $259.6. Long-term debt, net of issuance costs, was $2,657.8. The revolving credit facility had $2.0 billion of commitments, with $725.5 million borrowed and no letters of credit outstanding; availability is subject to covenants. The company reported covenant compliance. Nine-month financing included $336.8 million of common-shareholder distributions, $25.5 million of share repurchases and issuance of $650 million of 2028 notes.
Material changes and operating trends
- Pro forma Q3 gathering and compression revenue rose 20%, supported by higher throughput; low-pressure, high-pressure and compression volumes grew 25%, 23% and 39%, respectively.
- Pro forma Q3 water-handling and treatment revenue fell 37%. Fresh-water deliveries declined 28%, reflecting fewer Antero Resources wells completed and lower drilling and completion activity.
- Water-handling and treatment recorded a $441.5 million Q3 operating loss, principally from Clearwater-related impairments. Gathering and processing generated $126.4 million of Q3 operating income.
- Pro forma nine-month gathering and compression volumes increased, while fresh-water delivery volumes declined 36%. Management attributed water-service revenue declines to lower completion activity and operating efficiencies.
Outlook, risks and unusual items
- Clearwater was idled on September 18 because it could not operate to its intended specifications and was expected to remain idle for the foreseeable future. The company estimated $10–$15 million in Q4 2019 idling costs; later costs were not estimable. Wastewater handling was shifted to third parties.
- The 2019 capital budget was reduced to $665–$685 million from $750–$800 million. Year-to-date capital expenditures were approximately $482 million, including $294 million of expansion capital, $46 million of maintenance capital and $142 million invested in the joint venture.
- Antero Resources expected to reduce completion water use by 5–7 barrels per foot from the then-current 40–45 barrels per foot beginning January 2020. Management said Antero Resources continued to target 10% production compound annual growth through 2022, based on then-current commodity-price assumptions, and expected expanded produced-water services to offset much of the cash-flow effect of reduced completion water use.
- The board declared a common dividend of $0.3075 per share for Q3, payable November 13, 2019. A $300 million repurchase program was authorized in August; 3.5 million shares were repurchased during Q3 for $25.5 million.
- The company expected to pay $125 million of contingent acquisition consideration tied to a 2017–2019 fresh-water delivery threshold. It did not expect to meet the separate threshold that could trigger an additional $125 million payment for 2018–2020 deliveries.
- Substantially all revenue depended on Antero Resources, exposing the company to its production, drilling plans, financial condition and ability to pay. Floating-rate credit-facility borrowings create interest-rate risk; management estimated a 1 percentage-point rate increase would have added $4.7 million of interest expense for the nine-month period.
- Management identified commodity prices, financing access, project execution, regulation, operating hazards and Antero Resources’ development plans among forward-looking risks. The company reported no material litigation, no material change to previously disclosed risk factors, effective disclosure controls and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Clearwater remains idle, its eventual disposition or remediation costs, and whether further impairments or idling expenses arise.
- Whether gathering volumes and Antero Resources’ drilling plan support contracted revenues, given the company’s customer concentration and forecast reductions in completion water use.
- Actual 2019 capital spending versus the revised $665–$685 million budget, and the funding mix for investment, dividends and repurchases.
- Available borrowing capacity under the credit facility after applying financial covenants, and the company’s ability to service approximately $2.66 billion of reported long-term debt.
- Whether the first $125 million water-delivery milestone payment is made and whether the second contingent payment is avoided.
- Pro forma operating trends separately from reported results, and the assumptions underlying non-GAAP Adjusted EBITDA.