Antero Resources Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; financial statements are unaudited. Antero explores, develops and produces natural gas, NGLs and oil in the Appalachian Basin, alongside consolidated gathering, processing and water-handling operations through Antero Midstream.
Financial performance and liquidity
- Q2 revenue: $790 million, versus negative $249 million in Q2 2016, when a $685 million derivative fair-value loss drove reported revenue below zero. Q2 2017 included $652 million of natural gas, NGL and oil sales and an $86 million derivative fair-value gain.
- Q2 earnings: Operating income was $124 million and consolidated net income was $40 million; after $45 million attributable to noncontrolling interests, Antero reported a $5 million net loss, or $0.02 per share. Q2 2016 net loss attributable to Antero was $596 million, or $2.12 per share.
- First-half results: Revenue and other was $1.986 billion, including $524 million of derivative fair-value gains. Consolidated net income was $346 million; income attributable to Antero was $263 million, or $0.84 per basic share, compared with a $601 million attributable loss in first-half 2016.
- Cash flow and investment: First-half operating cash flow was $648 million, up from $579 million. Investing cash outflow was $1.398 billion, including $629 million for drilling and completions, $179 million for acquisitions and $191 million invested in the MarkWest joint venture. Financing provided $759 million; cash ended at $40 million.
- Operating scale: Q2 production increased 25% year over year to 200 Bcfe (2,200 MMcfe/day); first-half production rose 23% to 393 Bcfe. Q2 realized price before derivative settlements rose to $3.26/Mcfe from $2.13, but after settled derivatives fell to $3.41/Mcfe from $3.95.
- Costs and non-GAAP measure: Q2 operating expenses totaled $667 million. Gathering, compression, processing and transportation costs were $1.33/Mcfe, versus $1.29; DD&A was $1.01/Mcfe, versus $1.23. Adjusted EBITDAX was $321 million for Q2 and $686 million for the first half, approximately flat year over year; it is a non-GAAP measure and is not cash available for discretionary use.
- Balance sheet and debt: At June 30, total assets were $15.442 billion, total liabilities $7.139 billion and total equity $8.303 billion. Current assets of $736 million exceeded current liabilities of $693 million, but current assets included substantial derivative assets. Carrying-value long-term debt was $5.292 billion, including $930 million under Antero’s revolving facility and $305 million under Antero Midstream’s facility. Cash was $40 million.
- Credit capacity: Antero’s facility had a $4.75 billion borrowing base and $4.0 billion lender commitments; $930 million was drawn and $706 million of letters of credit outstanding. Antero Midstream had $1.5 billion of commitments and $305 million drawn. Both facilities mature in 2019. The company reported compliance with covenants; Antero’s covenant current ratio was 5.00 and interest coverage was 6.12 at quarter-end.
Material changes and notable developments
- Production growth and higher unhedged commodity prices lifted product sales; however, lower gains on settled derivatives reduced realized prices after settlements. Adjusted EBITDAX was nearly unchanged despite higher production.
- Reported earnings were materially affected by non-cash derivative remeasurement: first-half 2017 gains included $448 million from unsettled contracts and $76 million from settled derivatives. Derivatives are not designated for hedge accounting, so fair-value changes flow through earnings and may reverse.
- Antero Midstream and MarkWest formed a 50/50 processing joint venture in February 2017. Antero Midstream invested in the venture and issued units, contributing to the decline in Antero’s ownership of Midstream from 60.9% to 58.4% and the reduction in reported noncontrolling interests.
- Firm transportation and related commitments are substantial: the filing lists $15.166 billion of firm transportation payments and total contractual obligations of $25.490 billion, including debt principal and interest. Amounts include gross commitments and may not equal Antero’s proportionate costs.
Outlook, risks and contingencies
- Capital plan: 2017 consolidated capital budget was $2.3 billion: approximately $1.5 billion for Antero (including drilling, completions and land) and $800 million for Antero Midstream. Plans included seven average drilling rigs and 170 well completions, with 30 completions deferred to 2018. Management expected funding from operating cash flow, credit availability and potential capital markets, and said spending could be adjusted to conditions.
- Marketing and transportation: Management estimated 2017 net marketing expense of $60 million to $105 million, depending on the ability to use or resell excess firm transportation. Obligations increase after 2017, and future net marketing costs could rise.
- Hedges and commodity risk: At June 30, the company reported a net derivative asset of about $2.0 billion and hedges extending through 2023. Hedges reduce exposure to price declines but limit upside if prices exceed contracted prices. Commodity volatility, regional price differentials, customer credit and derivative counterparty risk remain material risks.
- Legal matters: A jury found for Antero in its South Jersey Gas contract cases; the company estimated it was owed about $60 million through June 30. The court entered final judgment July 21, 2017, after quarter-end, and an appeal remained possible. Antero prevailed in a separate WGL pricing arbitration, but WGL also brought a lawsuit seeking more than $30 million; Antero counterclaimed for cover damages of approximately $17 million through June 30. Outcomes and recoveries are uncertain.
- Environmental and other risks: Federal compliance orders concerning West Virginia sites could result in monetary sanctions exceeding $100,000; the company could not estimate total sanctions or remediation costs, though it did not expect a material financial impact. Other key risks include reserve estimation, operating and development costs, access to capital, regulatory changes, and Antero Midstream-related conflicts of interest. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Most important facts for investors to verify
- How much of reported earnings and derivative assets reflect cash settlements versus non-cash fair-value estimates, and how sensitive future results are to commodity prices.
- Whether production growth and realized pricing can support the planned capital program while managing the $5.292 billion carrying-value debt and 2019 facility maturities.
- Actual utilization or monetization of firm transportation capacity and whether net marketing costs remain within management’s $60 million–$105 million 2017 estimate.
- Resolution, appeal status and collectible amounts in the SJGC and WGL disputes, including the timing and accounting for any recovery.
- Progress and returns from the MarkWest joint venture and Midstream capital spending, as well as the effects of Antero’s reduced ownership and related-party governance considerations.