ANTERO RESOURCES Corp annual report, FY2018

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Business context and reporting period

Antero Resources Corporation filed this Form 10-K for the fiscal year ended December 31, 2018. It explores for and produces natural gas, NGLs and oil in the Appalachian Basin, principally the Marcellus and Utica Shales. The consolidated results include Antero Midstream, its publicly traded midstream subsidiary; the proposed simplification transaction, if completed, would end that consolidation.

Financial and operating performance

  • Revenue: Consolidated revenue and other was $4.14 billion, up 13% from $3.66 billion in 2017. Natural gas, NGL and oil sales were $2.29 billion, $1.18 billion and $187 million, respectively.
  • Production and realized prices: Production rose 20% to 989 Bcfe, or 2,709 MMcfe per day. Average sales price before derivative settlements increased to $3.69/Mcfe from $3.34; after settled derivatives, it was $3.94/Mcfe versus $3.60.
  • Profitability: Operating income fell to $72 million from $740 million. Net loss attributable to Antero was $398 million, compared with net income of $615 million in 2017; diluted loss per share was $1.26. The 2018 result included a $549 million unproved-property impairment and an $88 million commodity-derivative fair-value loss.
  • Cash flow and spending: Operating cash flow was $2.08 billion, compared with $2.01 billion in 2017. Investing cash outflow was $2.35 billion; reported capital expenditures were $2.21 billion. Financing cash inflow was $240 million. Cash at year-end was zero.
  • Debt and liquidity: Consolidated long-term debt was $5.46 billion, including $405 million drawn on Antero’s revolver and $990 million on Antero Midstream’s revolver. Antero’s senior notes totaled $3.45 billion principal; Antero Midstream also had $650 million of senior notes. Antero reported compliance with credit covenants; its revolver borrowing base was $4.5 billion, against $2.5 billion of lender commitments, with $685 million of letters of credit outstanding.
  • Reserves: Proved reserves increased 4% to 18.0 Tcfe; 58% were proved developed and 42% proved undeveloped. PV-10 was $12.59 billion, a non-GAAP measure based on SEC pricing assumptions.

Material changes versus the prior comparable period

  • Production and product sales increased, but higher operating costs, derivative accounting volatility and a substantially larger unproved-property impairment reduced operating income and drove a return to a net loss attributable to Antero.
  • Commodity derivative fair-value results shifted from a $658 million gain in 2017 to an $88 million loss in 2018. Antero received $370 million from derivative monetizations in 2018, down from $750 million in 2017; monetization proceeds are not the same as recurring operating performance.
  • Consolidated debt rose from $4.80 billion to $5.46 billion. Share repurchases totaled approximately $129 million for 9.1 million shares during the fourth quarter.
  • Proved undeveloped reserves declined to 7.62 Tcfe from 8.77 Tcfe, reflecting development-plan changes and conversions to developed reserves, among other adjustments.
  • Fourth quarter: Revenue was $1.05 billion versus $1.02 billion in Q4 2017. Net loss attributable to Antero was $122 million, versus net income of $487 million in Q4 2017.

Outlook, risks and unusual items

  • 2019 plan: The company reduced its consolidated capital budget to $1.9–$2.2 billion following oil and NGL price declines. This includes $1.1–$1.25 billion for drilling and completions, $75–$100 million for leasehold spending, and $750–$800 million for Antero Midstream. Antero planned five average drilling rigs, four completion crews and 115–125 completed horizontal wells. Management said expected operating cash flow and available credit were sufficient for obligations over at least the next 12 months, based on year-end strip prices.
  • Hedging: At year-end, natural-gas swaps and collars covered production through 2023. The filing describes approximately 70% of projected 2019 production as hedged. Hedges limit downside exposure but also constrain gains if prices rise; fair value and counterparty risks remain.
  • Contract commitments: Long-term minimum-volume commitments are substantial. The contractual-obligations table lists $14.1 billion of firm transportation and $3.7 billion of processing, gathering and compression commitments, excluding certain intracompany and other obligations. Unused transportation capacity could cost an estimated $0.175–$0.225/Mcfe in 2019.
  • Proposed simplification: AMGP, Antero Midstream and affiliates proposed a transaction expected to close after the March 8, 2019 votes, subject to conditions. If completed, Antero expected to account for its interest in the resulting company under the equity method rather than consolidate Antero Midstream.
  • Disputes and contingencies: Antero reported approximately $86 million of claimed SJGC underpayments and approximately $109 million of claimed WGL cover damages, neither accrued; WGL also seeks approximately $40 million from Antero. WGL trial was scheduled for June 2019. A separate environmental consent decree provided for a $3.15 million settlement and restoration, pending court approval. An EPA air-permitting notice and information request could result in monetary sanctions; the company saw a reasonable possibility they could exceed $100,000.
  • Other items and risks: The wastewater treatment facility operated below designed capacity, with higher volumes anticipated in 2019. About 19,400 net acres underlying proved undeveloped reserves required renewal before scheduled drilling; estimated renewal cost was $42 million. Key risks include commodity-price declines, reserve and development uncertainty, regional concentration, takeaway and processing capacity, regulatory and environmental exposure, and the proposed transaction’s completion.

Important facts for investors to verify

  1. Confirm the cash-flow and funding outlook against capital spending, zero year-end cash, debt maturities and the April 2019 borrowing-base redetermination.
  2. Assess the quality and sustainability of earnings apart from derivative fair-value changes, monetizations, impairments and noncontrolling interests.
  3. Review the size, utilization and economics of firm transportation and other minimum-volume commitments relative to production plans.
  4. Track the outcome and recoverability of the SJGC and WGL claims, WGL’s counterclaim, and the EPA matters.
  5. Verify the simplification transaction’s approval, financing, closing and effects on Antero’s debt, cash flows and consolidated reporting.