Antero Resources Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited. Antero develops and produces natural gas, NGLs and oil in the Appalachian Basin; it reported approximately 504,000 net acres in West Virginia and Ohio.
Financial performance and position
- Q3 revenue: $2.065 billion, versus $534 million in Q3 2021. Natural gas sales were $1.736 billion; NGL sales $621 million; oil sales $67 million. Revenue includes a $531 million commodity-derivative fair-value loss.
- Q3 earnings: Operating income was $774 million, compared with an operating loss of $684 million a year earlier. Net income attributable to Antero was $560 million, or $1.83 basic and $1.72 diluted per share, versus a $549 million loss, or $1.75 per share, in Q3 2021.
- Nine-month results: Revenue was $5.053 billion versus $2.225 billion; operating income was $1.631 billion versus an operating loss of $1.232 billion. Net income attributable to Antero was $1.168 billion, or $3.77 basic and $3.51 diluted per share, versus a $1.088 billion loss.
- Cash flow, nine months: Operating cash flow was $2.576 billion, up from $1.185 billion. Investing used $718 million and financing used $1.858 billion. Reported cash and cash equivalents were zero at period-end; the filing describes book overdrafts included in payables.
- Liquidity: Current assets were $978 million and current liabilities $2.544 billion. The revolving credit facility had $986 million of available capacity, with $9 million drawn and $505 million of letters of credit outstanding. The company reported compliance with facility financial covenants.
- Debt: Long-term debt carrying value was $1.173 billion at September 30, down from $2.125 billion at year-end 2021; principal outstanding was $1.186 billion. Nine-month debt actions included redeeming $585 million of 2025 notes and repurchasing $221 million of 2026 notes and $168 million of 2029 notes.
- Production and realized pricing: Q3 combined production was 294 Bcfe, down 2% year over year; nine-month production was 873 Bcfe, down 3%. Average realized combined price after derivative settlements increased 60% to $6.06/Mcfe in Q3 and 51% to $5.74/Mcfe for nine months.
- Capital returns and equity: The company repurchased approximately 19 million shares for $675 million through September 30. Shares issued and outstanding were 303.1 million at quarter-end; 300.1 million were outstanding October 21.
Material changes and notable items
- Higher commodity prices drove the improvement in sales and operating results, while production volumes declined modestly. Q3 benchmark Henry Hub averaged $8.20/Mcf versus $4.01; WTI averaged $91.55/barrel versus $70.56.
- Derivative fair-value losses were $531 million in Q3 2022 versus $1.250 billion in Q3 2021; for nine months, losses were $1.808 billion versus $2.260 billion. These instruments are not designated as accounting hedges, so mark-to-market changes affect reported earnings. Cash settlements were also significant: $640 million in Q3 and $1.485 billion for the first nine months of 2022, as described in MD&A.
- The net derivative liability increased to $1.049 billion from $727 million at year-end 2021. Management says hedges reduce exposure to falling prices but also limit upside above contracted prices.
- Net cash used in financing rose to $1.858 billion, reflecting debt repayment, $675 million of share repurchases, Martica distributions and employee tax withholding related to equity awards.
- General and administrative expense included $10 million of Q3 equity compensation, versus $5 million a year earlier. Q3 contract-termination expense rose to $18 million, including a $12 million payment to cancel the Smithburg 2 processing plant.
- The company adopted new convertible-debt accounting guidance in January 2022, increasing long-term debt by $27 million at adoption and reducing the convertible notes’ effective interest rate from 15.1% to 4.9%.
Outlook, risks and contingencies
- Management said operating cash flow, Antero Midstream distributions and available revolver borrowings, based on September 30 strip prices, should cover normal operating needs, debt service, capital spending and commitments for at least the next 12 months. This is a forward-looking assessment, not a guarantee.
- On October 26, 2022, Antero announced a revised 2022 net capital budget of $900 million–$950 million: $775 million–$800 million for drilling and completion and $125 million–$150 million for leasehold spending. It planned to complete 72 wells, versus the initial plan of 60–65. Management cited development optimization and inflation in services, diesel and steel; the budget had increased 15% during the first nine months.
- On October 25, 2022, the board increased the share-repurchase authorization by $1.0 billion, to $2.0 billion. Future purchases are discretionary.
- Commodity-price volatility, hedge settlements, production changes, inflation, service availability and costs, transportation commitments, interest rates, regulation, environmental matters and access to capital remain key risks. Management reported no significant supply-chain interruption to date.
- EPA and state environmental notices allege air-permitting violations at certain facilities; negotiations continue. Management does not expect a material adverse effect, and operations have not been suspended. The WGL contract dispute was resolved after the company and royalty owners received approximately $107 million in 2021. Other litigation and royalty post-production-cost disputes remain possible.
- Pennsylvania tax-law changes effective in 2023 reduced the company’s net deferred tax liability by $21 million and resulted in a corresponding income-tax expense charge in 2022.
Investor verification priorities
- Reconcile cash flow and liquidity disclosures, including the zero reported cash balance, book overdrafts, revolver availability and letters of credit.
- Review hedge volumes, settlement prices and cash-payment requirements against production and forward commodity assumptions; distinguish cash settlements from noncash fair-value changes.
- Assess whether the revised capital budget, planned well count and production trajectory remain achievable amid inflation and lower year-over-year volumes.
- Confirm the effects of debt repurchases and convertible-note conversions on future interest, share count, leverage and liquidity; consider the subsequent $2.0 billion repurchase authorization.
- Monitor the environmental notices, royalty-related litigation risks, firm transportation commitments and contractual obligations, including lease liabilities.