ANTERO RESOURCES Corp quarterly report, Q3 FY2020

Antero Resources Corporation — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. Unaudited; amounts are in U.S. dollars. Antero explores and produces natural gas, NGLs and oil in the Appalachian Basin, with approximately 522,000 net acres in West Virginia and Ohio.

Financial performance and position

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Total revenue	$381 million	$1.119 billion	$2.183 billion	$3.456 billion
Operating loss	$754 million	$986 million	$1.099 billion	$920 million
Net income (loss) attributable to Antero	$(536) million	$(879) million	$(1.338) billion	$142 million
Operating cash flow	$176 million	$198 million	$493 million	$956 million
Adjusted EBITDAX (non-GAAP)	$272 million	$258 million	$703 million	$952 million

Q3 production was 347 Bcfe, or 3.772 Bcfe per day, up 12% year over year. Nine-month production was 974 Bcfe, up 10%.
Average realized price after settled derivatives was $2.92/Mcfe in Q3, down 7%; for nine months it was $2.91/Mcfe, down 15%.
Q3 revenue included a $515 million commodity-derivative fair-value loss, versus a $221 million gain a year earlier. These mark-to-market amounts add earnings volatility and are distinct from cash settlements. Q3 settled derivative gains were $234 million.
Nine-month impairment charges included $156 million for oil and gas properties and $611 million for the Antero Midstream Corporation investment. The 2019 comparison included a $1.406 billion gain on deconsolidating Antero Midstream Partners and substantial property impairments, making reported earnings comparisons unusually affected by nonrecurring items.
At September 30, total assets were $13.350 billion, total liabilities $7.366 billion and total equity $5.984 billion. Long-term debt carrying value was $3.158 billion; principal outstanding was $3.260 billion. No cash or cash equivalents were reported on the balance sheet.
Current assets of $522 million were below current liabilities of $1.035 billion. Separately, management reported a 2.41-to-1 current ratio under the Credit Facility covenant calculation; this is not the simple balance-sheet current ratio.
Nine-month capital expenditures were $726 million; operating cash flow less that spending was approximately negative $234 million. Net cash used in investing was $384 million, including VPP proceeds and the water earnout settlement.

Material changes versus comparable periods

For the first nine months, total revenue fell 37% and operating cash flow fell 48%, while daily production rose 10%. Lower commodity prices, higher gathering, processing and transportation costs, and working-capital changes weighed on cash generation.
Gathering, compression, processing and transportation expense increased 18% to $1.877 billion for nine months, partly reflecting higher production and the post-2019 deconsolidation accounting structure. Lease operating expense fell to $72 million from $119 million; G&A excluding equity compensation fell to $84 million from $127 million.
The company reduced its drilling and completion budget to $750 million from $1.15 billion, a 34% reduction. Nine-month capital spending was down 30% from 2019.
Debt principal declined from $3.778 billion at year-end 2019 to $3.260 billion at September 30, 2020. Antero repurchased $1.1 billion principal amount of notes during the first nine months at a weighted average 17% discount, recognizing a $175 million gain on extinguishment.

Outlook, management commentary and risks

Management said available operating cash flow, affiliate distributions, Credit Facility borrowings or capital-market transactions should cover requirements for at least 12 months. It intends to repay the $315 million remaining 2021 notes before August 1, 2021, using asset-sale proceeds, operating cash flow and available revolver borrowings.
The Credit Facility borrowing base was reaffirmed at $2.85 billion in October 2020, with lender commitments of $2.64 billion; $827 million was drawn and $730 million of letters of credit were outstanding at September 30. The next borrowing-base redetermination is scheduled for April 2021.
Antero reported $751 million of asset sales announced since December 2019, including up to $51 million of contingent consideration, with proceeds intended for debt reduction. Execution and timing remain subject to market conditions.
The August 2020 volumetric production payment generated approximately $215 million net proceeds, recorded as deferred revenue and recognized as production is delivered over an expected seven-year term. The company also became entitled to a further $51 million distribution from the Sixth Street overriding-royalty transaction, payable in Q4 2020.
Management expected Q4 2020 well costs to average $675 per lateral foot based on a 12,000-foot lateral. It expected full-year realized oil differentials near the high end of its $10–$12/Bbl range, expected to sell at least 50% of 2020 C3+ NGL production for export, and did not expect COVID-related production shut-ins in 2020. These are forward-looking expectations, not guarantees.
COVID-19, commodity-price volatility, demand and storage constraints, and potential production shut-ins could harm prices, cash flow and liquidity. Lower future commodity prices could also trigger further property impairments. Hedging reduces exposure to price declines but limits some gains from higher prices; net derivative fair value was a $130 million liability at quarter-end.
Firm transportation commitments totaled approximately $12.4 billion in scheduled gross future payments, before applicable working-interest shares and potential third-party marketing offsets. Operating lease liabilities were $2.660 billion.
Environmental notices from EPA and West Virginia authorities allege Clean Air Act and related violations; management said monetary sanctions exceeding $100,000 are reasonably possible but did not expect a material adverse effect. In a separate WGL contract dispute, Antero obtained a $96 million jury verdict; WGL’s appeal was pending, with oral argument scheduled for November 2020.

Important facts for investors to verify

Whether asset sales and operating cash flow can fund the planned 2021-note repayment and reduce debt as intended, particularly given no reported cash balance and upcoming borrowing-base redetermination.
How much of reported revenue and earnings reflects cash settlements versus derivative fair-value movements, and the production volumes covered by hedges.
Whether lower commodity prices, transportation and processing costs, or storage constraints affect future cash generation, capital spending and impairment testing.
The status and outcome of the WGL appeal and environmental matters, including any resulting cash exposure.
The effects of the convertible notes, including their cash repayment obligations, possible dilution and accounting treatment. The filing states that adoption of ASU 2020-06 is expected to reclassify approximately $62 million and alter interest and diluted-share accounting.