Antero Resources Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 27, 2014. This is an annual filing, not a quarterly filing. The company is an Appalachian Basin oil and gas producer with gathering, compression and water-distribution operations, focused on the Marcellus and Utica shales.
Business context and operating scale
- Held approximately 450,000 net acres in the Appalachian Basin at year-end and reported 4,778 identified potential horizontal well locations.
- Year-end proved reserves were 7.632 Tcfe, 88% natural gas; 2.022 Tcfe, or 27%, were proved developed. Approximately 73% of proved reserves were undeveloped.
- 2013 production was 191 Bcfe, averaging 522 MMcfe/day, up 119% from 2012. Natural gas, NGL and oil production revenues were approximately 84%, 14% and 2% of production revenue, respectively.
Financial and liquidity highlights
| Metric | FY 2013 / year-end | Comparison or context |
|---|---|---|
| Total revenue | $1.313 billion | Up 78% from $736 million in 2012; includes $492 million of noncash commodity derivative fair-value gains. |
| Production sales | $821 million | Up 210% from $265 million in 2012, reflecting higher volumes and prices. |
| Operating income | $341 million | Down from $444 million; affected by a $365 million noncash stock-compensation charge tied principally to the IPO-related vesting of employee profits interests. |
| Net loss | $19 million | Compared with a $285 million loss in 2012, which included a large loss on sales of the Arkoma and Piceance properties. |
| EBITDAX | $649 million | Non-GAAP; up 50% from $434 million. Not a substitute for operating cash flow or earnings. |
| Cash from operations | $535 million | Up from $332 million. |
| Capital expenditures | $2.672 billion | Net cash used in investing activities was $2.674 billion. |
| Cash and current assets | $17 million cash; $334 million current assets | Current liabilities were $622 million. |
| Debt | $2.079 billion long-term debt | Includes $288 million drawn on the revolving facility; senior notes principal outstanding was $1.785 billion. |
Reported operating margin was approximately 26% of total revenue, but revenue includes substantial derivative fair-value gains and operating expenses include the IPO-related stock-compensation charge; the figure is therefore not a clean measure of underlying operating profitability. Cash at year-end was low relative to current liabilities, although the company reported $1.18 billion of available revolver capacity. The facility had a $2.0 billion borrowing base, $1.5 billion of lender commitments, and matures in May 2016. The company stated it was covenant-compliant at year-end.
Material changes versus 2012
- Production more than doubled, while realized combined price after settled derivatives edged up 2% to $5.17/Mcfe. Gathering, processing and transportation cost rose to $1.15/Mcfe from $1.04.
- Proved reserves increased 55% as reported. On a more comparable ethane-rejection basis, the company said reserves increased 78%; the year-over-year comparison is affected by a change in reserve assumptions from ethane recovery to ethane rejection.
- IPO completed October 16, 2013: the company received approximately $1.6 billion net proceeds, principally used to repay revolver borrowings and redeem $140 million of 7.25% notes. A selling stockholder also sold shares.
- Issued $1.0 billion of 5.375% senior notes due 2021 and used proceeds in part to retire $525 million of 9.375% notes due 2017. Debt-extinguishment charges were $43 million; interest expense rose to $137 million from $98 million.
- Capital spending increased substantially from 2012. Midstream gathering and fresh-water distribution became separately reportable segments in 2013.
Outlook, risks and contingencies
- The 2014 capital budget was $2.6 billion: $1.8 billion for drilling and completion, $600 million for midstream expansion and $200 million for core leasehold acquisitions. Management planned an average of 14 Marcellus rigs and 4 Utica rigs and said it may adjust spending for liquidity, drilling results and commodity prices.
- Management expected operating cash flow, revolver availability and proceeds from a proposed midstream partnership IPO to fund requirements for at least the next 12 months. The midstream IPO was proposed, not completed as of the filing; its proceeds were expected to repay debt and reimburse pre-contribution spending.
- Developing proved undeveloped reserves was estimated to require $5.3 billion over five years. Reserve estimates and schedules are uncertain; wells not drilled within five years of booking may be reclassified.
- Hedges covered projected natural gas and oil production through 2019; year-end derivative assets were approximately $861 million net. Hedges reduce downside exposure but limit upside and create counterparty-credit exposure. The company also noted that earlier hedge benefits were expected to decline over time.
- Minimum-volume transportation, processing, gathering and compression commitments were approximately $3.5 billion. Total listed contractual obligations were $6.629 billion, including debt principal and interest; amounts are gross commitments and may differ from the company’s proportionate recorded costs.
- Key exposures include commodity-price volatility, Appalachian takeaway and processing constraints, financing and borrowing-base redetermination, lease expirations, development costs, and environmental, hydraulic-fracturing and regulatory risks. One customer accounted for 30% of 2013 sales; the company said alternative markets were available.
- A West Virginia environmental matter was resolved with a $102,795 fine paid in December 2013; further remediation costs were expected. Management did not expect a material financial effect. The filing also describes other ordinary-course claims, including environmental lawsuits for which aggregate exposure was not estimable.
Fourth-quarter context: The unaudited quarterly table reports Q4 2013 revenue of $480 million and net loss of $223 million. The filing provides annual explanations for the IPO-related stock-compensation charge and derivative accounting, but the supplied quarterly table does not clearly allocate those items to Q4.
Important facts for investors to verify
- Reconcile reported revenue and EBITDAX to cash generation, separating production sales, settled hedge receipts and noncash derivative fair-value gains.
- Review the reserve-engineering report and test the sensitivity of reserves and PV-10 to ethane assumptions, prices, performance revisions and development timing.
- Assess whether the proposed midstream IPO proceeds and operating cash flow can support the $2.6 billion 2014 budget and five-year PUD development needs.
- Examine minimum-volume commitments, transportation capacity and the April 2014 borrowing-base redetermination, including available lender commitments versus borrowing-base size.
- Evaluate hedge counterparty concentration, hedge coverage and the effect of lower prices or higher costs; confirm the status and estimated costs of environmental remediation and other litigation.