Antero Resources Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports unaudited fourth-quarter results. The company is an Appalachian Basin oil and gas producer operating mainly in the Marcellus and Utica formations. Consolidated results include Antero Midstream Partners LP.
Financial and operating performance
- Revenue: Total operating revenue was $3.955 billion, up 45% from 2014. This included $2.382 billion of commodity derivative fair-value gains, most of which were unrealized. Natural gas, NGL and oil sales totaled $1.375 billion, down 21% despite higher production.
- Profit: Operating income was $1.790 billion and net income attributable to Antero was $941 million, versus $674 million in 2014. Results included $857 million of realized derivative gains and $1.525 billion of unsettled derivative gains; net income also included $576 million of income tax expense, largely deferred and noncash. Fourth-quarter 2015 revenue was $905 million and net income attributable to Antero was $158 million.
- Cash flow and investment: Operating cash flow was $1.006 billion, compared with $998 million in 2014. Investing cash outflow was $2.298 billion; capital expenditures were approximately $2.348 billion. Financing provided $1.069 billion, and cash declined by $223 million to $23 million.
- Production and realized prices: Production rose 48% to 545 Bcfe, or 1,493 MMcfe/d. Average realized price before settled derivatives fell 47% to $2.52/Mcfe; after settled derivative effects it fell 20% to $4.10/Mcfe. Total product revenue declined as lower prices more than offset volume growth.
- Costs: DD&A was $710 million, or $1.31/Mcfe. Gathering, compression, processing and transportation costs were $1.21/Mcfe; lease operating costs were $0.07/Mcfe. Marketing activities had a $123 million net loss, including costs for excess transportation capacity.
- Debt and liquidity: Consolidated long-term debt was $4.709 billion, including $3.375 billion of Antero senior notes, $707 million drawn on Antero’s revolver and $620 million drawn by Antero Midstream. Cash was $23 million. Antero’s revolver had a $4.5 billion borrowing base and $4.0 billion in lender commitments; $707 million was borrowed and $702 million of letters of credit were outstanding. The company reported compliance with covenants and a 4.93x interest coverage ratio.
- Reserves: Proved reserves increased 4% to 13.215 Tcfe; 44% were developed and 56% undeveloped. PV-10 fell to $3.634 billion from $11.320 billion in 2014, and the standardized measure fell to $3.233 billion from $7.635 billion, principally reflecting lower SEC pricing. PV-10 is non-GAAP.
Material changes versus 2014
- Production increased 48%, but realized price after settled derivatives declined 20%; product sales fell 21%.
- Reported revenue and earnings benefited substantially from derivative mark-to-market gains: fair-value gains increased from $868 million to $2.382 billion. Those unrealized gains do not provide cash until settlement.
- Capital spending for drilling, completions and land was reduced approximately 44%; 50 well completions were deferred. Proved undeveloped reserves fell from 8.880 to 7.377 Tcfe, including a 2.332 Tcfe reduction because certain dry-gas locations were no longer expected to be developed within five years.
- Unproved-property impairment rose to $104 million from $15 million. The company did not record proved-property impairment at year-end, but reported Utica properties could approach carrying value if commodity prices declined further.
- Interest expense rose 46% to $234 million. The company issued $750 million of 5.625% notes due 2023 and raised approximately $538 million in a common-stock offering, using proceeds principally to repay revolver borrowings.
- In September 2015, Antero contributed its water business and related assets to Antero Midstream for cash, units and contingent consideration. Antero Midstream assumed $171 million of debt; additional payments of up to $250 million depend on future water-delivery thresholds.
Outlook, risks and contingencies
- 2016 plan: Antero budgeted $1.4 billion for drilling, completions and land, excluding Antero Midstream’s approximately $435 million budget. It planned an average of seven rigs and 115 completed horizontal wells, versus 14 rigs and 130 wells in 2015. Management expected the budget to be funded by operating cash flow, borrowing capacity or capital-market transactions, and reserved the right to revise spending with market conditions.
- Hedges: At year-end, the company had natural-gas and propane hedges extending through 2022; its 2016 positions included 590.2 Bcf of natural gas at a weighted-average index price of $3.92/MMBtu and 461.2 million gallons of propane at $0.59/gallon. The estimated derivative fair value was approximately $3.1 billion, creating significant counterparty exposure as well as protection from lower prices.
- Commitments: Long-term minimum-volume obligations, mainly for firm transportation, processing, gathering and compression, are substantial. The filing estimates more than $17 billion over contract terms; its contractual-obligations table totals $23.873 billion, including debt principal and interest. Estimated 2016 net marketing costs for unused transportation capacity were $95 million to $125 million.
- Key risks: Continued low commodity prices could reduce cash flow, reserve values and the revolver borrowing base at its scheduled April 2016 redetermination; access to high-yield financing could remain constrained. The business also faces development-funding needs, lease expirations, reserve-estimation uncertainty, concentrated Appalachian operations and regulatory, environmental, hydraulic-fracturing and transportation risks.
- Legal and environmental matters: In a New Jersey contract dispute, purchasers allegedly changed contract price indexes; Antero claimed approximately $39 million in short payments as of year-end. Separate environmental matters included a $203,000 settlement of a West Virginia drilling incident, and other notices that management expected could result in monetary sanctions exceeding $100,000. The filing says the potential aggregate exposure in certain property-damage lawsuits could not yet be estimated.
- Other items: The company reported no proved-property impairment in 2015 and said estimated undiscounted cash flows exceeded carrying value at year-end. KPMG issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Investor verification checklist
- Separate cash realized from derivative settlements from noncash mark-to-market gains when assessing earnings quality and cash-generating capacity.
- Review the April 2016 borrowing-base redetermination, actual revolver availability after letters of credit, and compliance with credit-facility covenants.
- Test whether the 2016 spending plan and the $5.1 billion five-year PUD development requirement can be funded under lower-price and lower-production scenarios.
- Assess utilization and marketability of firm transportation capacity against minimum-volume commitments and projected marketing costs.
- Check reserve revisions, SEC pricing assumptions, ethane-recovery economics and potential impairment sensitivity, particularly for Utica assets.
- Track the SJGC contract litigation, environmental proceedings and contingent payments tied to the water-asset transaction.