Antero Midstream Corporation — Q2 2019 Form 10-Q
Business context and reporting period
For the quarter ended June 30, 2019. Antero Midstream provides gas gathering and compression, water handling and treatment, and related services, primarily to Antero Resources in the Appalachian Basin.
The March 12, 2019 simplification transaction converted AMGP into a corporation and brought Antero Midstream Partners under its control. Accordingly, Q2 2019 includes the acquired business, while Q2 2018 reported results do not. Six-month 2019 reported results include Antero Midstream Partners only from March 13; reported year-over-year comparisons are therefore not like-for-like. Management also presents pro forma comparisons assuming the transaction occurred January 1, 2018.
Key financial metrics
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Revenue | $255.6 million | $309.7 million |
| Operating income | $117.6 million | $128.2 million |
| Net income | $69.3 million | $78.9 million |
| Net income per share | $0.14 | $0.21 |
| Interest expense, net | $31.5 million | $37.7 million |
| Operating cash flow | Not separately stated for Q2 | $252.2 million |
| Capital additions to property and equipment | Not separately stated for Q2 | $141.2 million |
Cash used in investing activities was $221.4 million and cash used in financing activities was $25.8 million for the six months. Ending cash was $7.8 million. At June 30, total assets were $6.77 billion, total liabilities $2.80 billion, and long-term debt, net of issuance costs, $2.53 billion. Debt included $594.5 million drawn on the revolving facility and $1.96 billion of senior notes. The $2.0 billion facility had no letters of credit outstanding; availability is subject to covenants. The company reported compliance with its financial covenants.
Q2 operating income was about 46% of revenue and net income about 27% (calculated from reported figures). Revenue is substantially dependent on Antero Resources. Q2 revenue included $168.9 million from gathering and compression and $95.2 million from water services; third-party revenue was minimal.
Material changes versus comparable periods
On a pro forma basis, Q2 revenue rose 5% year over year to $255.6 million, net income rose 32% to $69.3 million, and Adjusted EBITDA rose 18% to $206.2 million. For the six months, pro forma revenue rose 12% to $521.4 million, net income rose 43% to $151.4 million, and Pro Forma Adjusted EBITDA rose 22% to $408.6 million. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
Pro forma Q2 gathering and processing revenue increased 40%, supported by higher throughput and new infrastructure. Water handling and treatment revenue decreased 33%: fresh water deliveries fell 46% as Antero Resources reduced drilling and completion activity, partly offset by higher wastewater treatment volumes. Q2 operating income in gathering and processing increased to $131.2 million; water handling and treatment operating income declined to $6.5 million.
Six-month operating cash flow increased from $34.6 million in 2018 to $252.2 million in 2019, but the periods are not comparable because of the acquisition. The company issued $650 million of 5.75% notes due 2028 in June and $650 million of 5.75% notes due 2027 in February; it also had $650 million of 5.375% notes due 2024.
Outlook, management commentary and risks
- The 2019 capital budget was $750–$800 million, including approximately $710 million of expansion capital and $65 million of maintenance capital at the midpoint. The company reported approximately $347 million of year-to-date Antero Midstream Partners capital spending, including $128 million invested in the processing and fractionation joint venture.
- Planned investment included gathering and compression infrastructure, fresh water delivery infrastructure, and joint-venture processing plants. Management said capital spending may be adjusted in response to Antero Resources’ development plans, commodity prices, financing availability, and other conditions.
- Management expected available operating cash flow, cash, borrowing capacity and capital markets to fund requirements for at least the next 12 months. Expansion capital was expected to rely on facility borrowings or capital-market transactions.
- Antero Resources expected to reduce water use in completion operations by 5–7 barrels per foot beginning in 2020, from a current 40–45 barrels per foot in the Marcellus. Management said increased produced-water services and Antero Resources’ continued development plan could offset much of the resulting reduction in water-related cash flow. This depends on the customer’s plans and execution.
- The board declared a $0.3075-per-share common dividend for Q2, payable August 7, 2019. The company also disclosed $70,000 of Series A preferred dividends in arrears at quarter-end.
- A contingent acquisition liability of $120.3 million was recorded. The company expected to pay $125 million for a fresh-water delivery milestone due by year-end 2019, but did not expect to meet a separate milestone that could require another $125 million.
- Key risks include dependence on Antero Resources for substantially all revenue, changes in its production and drilling plans, lower commodity prices affecting customer activity, floating-rate debt exposure, and execution of expansion projects. A 1% rise in the revolving facility rate was estimated to increase six-month interest expense by about $3 million. No material litigation or material change to previously disclosed risk factors was reported.
Investor verification priorities
- Review pro forma results and their assumptions alongside reported GAAP figures; acquisition accounting and purchase-price allocation were preliminary.
- Track Antero Resources’ production, drilling and completion activity, fresh-water demand, and ability to pay under long-term contracts.
- Verify capital spending, project timing and returns, particularly the joint-venture processing expansion and planned water infrastructure.
- Monitor debt, revolver availability and covenant headroom, floating interest costs, and the funding of dividends and expansion spending.
- Follow progress toward the 2019 water-delivery milestone and any resulting contingent payment; confirm whether the second milestone remains unlikely.