Antero Resources Corporation — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017. Antero explores for, develops and produces natural gas, NGLs and oil, principally in the Appalachian Basin’s Marcellus and Utica Shales. The consolidated results include Antero Midstream, which provides gathering, processing and water services. Figures below are generally consolidated unless identified otherwise.
Key financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Production | 822 Bcfe; 2,253 MMcfe/day | 676 Bcfe; 1,847 MMcfe/day |
| Natural gas, NGL and oil sales | $2.748 billion | $1.755 billion |
| Total revenue and other, including derivative fair-value gains/losses | $3.656 billion | $1.745 billion |
| Operating income (loss) | $740 million | $(976) million |
| Net income (loss) attributable to Antero | $615 million | $(849) million |
| Net cash provided by operating activities | $2.006 billion | $1.241 billion |
| Net cash used in investing activities | $(2.462) billion | $(2.395) billion |
| Capital expenditures | $2.217 billion | $2.495 billion |
| Adjusted EBITDAX, non-GAAP | $1.460 billion | $1.536 billion |
| Cash and cash equivalents at year-end | $28 million | $32 million |
Consolidated net income, including noncontrolling interests, was $785 million in 2017. Revenue and earnings include derivative accounting effects: reported commodity derivative fair-value gains were $637 million, including $214 million of settled gains, while changes in fair value included a $327 million noncash loss. The company also received $750 million from monetizing gas hedges. The $295 million income tax benefit included a $428 million benefit from remeasuring deferred taxes after the federal corporate tax rate was reduced to 21%.
Realized sales price before settled derivative effects rose to $3.34/Mcfe from $2.60/Mcfe; after settled derivative effects it fell to $3.60/Mcfe from $4.08/Mcfe. Production costs included gathering, compression, processing and transportation expense of $1.75/Mcfe, lease operating expense of $0.11/Mcfe, and DD&A of $0.86/Mcfe. The reported operating result is affected by derivative fair-value movements and should not be read as a production margin alone.
At December 31, 2017, current assets were $833 million and current liabilities were $762 million. Long-term debt carrying value was $4.800 billion. Antero had $185 million drawn and $705 million of letters of credit under its $2.5 billion revolving lender commitments; its borrowing base was $4.5 billion. Antero Midstream had $555 million drawn under its $1.5 billion revolving facility. The facilities mature in October 2022, subject to stated conditions. The company reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Production increased 22%, while product sales rose 57%, reflecting both higher volumes and improved commodity prices, particularly for NGLs and oil.
- Antero moved from a 2016 net loss to 2017 net income. The comparison is also affected by the swing in derivative fair-value results, from a $514 million loss in 2016 to a $637 million gain in 2017.
- Operating cash flow increased by $765 million, in part because of the $750 million hedge monetization. Capital spending remained substantial and exceeded operating cash flow.
- Adjusted EBITDAX declined about 5% to $1.460 billion; stand-alone E&P Adjusted EBITDAX fell 10% to $1.244 billion, primarily due to lower realized gas prices after settled derivatives.
- Proved reserves increased 12% to 17.261 Tcfe; proved developed reserves were 8.488 Tcfe, or 49% of the total. PV-10 increased to $10.175 billion from $3.676 billion, reflecting changed reserve volumes and SEC pricing assumptions; PV-10 is non-GAAP and not fair market value.
- Antero Midstream and MarkWest formed a 50/50 joint venture to develop Appalachian processing and fractionation assets. Antero Midstream also issued units and Antero sold some of its Antero Midstream units as part of deleveraging and funding activities.
Outlook, risks, contingencies and unusual items
- 2018 plan: The consolidated capital budget is $2.1 billion, including $1.3 billion for drilling and completion, $150 million for leasehold expenditures and $650 million for Antero Midstream. The company planned to complete 140–150 horizontal wells, compared with 135 in 2017, and expected to operate five Marcellus rigs and one Utica rig. The budget excludes acquisitions and may be adjusted for liquidity, drilling results and commodity prices.
- Funding and development: Management said, based on December 31, 2017 strip prices, operating cash flows and available borrowing or capital-market resources should fund expected needs for at least 12 months. Developing proved undeveloped reserves is expected to require about $3.3 billion over five years. Approximately 51% of proved reserves were undeveloped, and development plans, prices, costs and access to capital could affect whether they are developed.
- Hedges and price exposure: Contracts covered projected production through 2023, including natural gas, propane and oil; the reported year-end derivative position was a net asset of approximately $1.273 billion. The 2017 gas hedge monetization generated cash but reduced fixed prices on certain 2018–2022 gas hedges while retaining volumes. Hedges cushion price declines but limit gains from higher prices and expose the company to counterparty risk.
- Transportation and other commitments: Long-term commitments under firm transportation, processing, gathering and compression agreements total about $18.2 billion, excluding certain intercompany commitments and other items. The company estimated 2018 net marketing costs of $100–$125 million from potentially unused transportation capacity; actual costs depend on utilization and capacity marketing.
- Customer disputes: Antero reported estimated gross damages, including interest, of approximately $76 million against SJGC and $101 million against WGL through year-end; substantially all were unaccrued. Antero had won an SJGC jury verdict, with post-judgment motions pending, and was pursuing WGL cover damages in litigation scheduled for trial in September 2018. Outcomes and recoveries were uncertain.
- Other risks and unusual items: Principal risks include commodity-price volatility, concentrated Appalachian operations, pipeline or processing constraints, lease expirations, reserve-estimate uncertainty, environmental and hydraulic-fracturing regulation, and counterparty/customer credit risk. Environmental compliance orders in West Virginia could involve monetary sanctions exceeding $100,000, but the total resolution and remediation costs were not estimable; management did not expect a material adverse effect. The filing also describes related-party and governance considerations involving Antero Midstream and AMGP.
- The company paid no common-stock dividends. KPMG issued an unqualified audit opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2017.
Important facts for investors to verify
- How much of 2017 operating cash flow and earnings reflects recurring production economics versus hedge settlements, the $750 million monetization and noncash derivative valuation changes.
- Progress and cost of the 2018 drilling plan, reserve additions and conversion of proved undeveloped reserves, including lease renewals and the five-year development schedule.
- Available liquidity after letters of credit, the April 2018 borrowing-base redetermination, covenant headroom and debt obligations at both Antero and Antero Midstream.
- Actual utilization and third-party marketing of firm transportation capacity, and the resulting marketing costs compared with the $100–$125 million 2018 estimate.
- Developments, appeals, trial results and eventual cash collections related to the SJGC and WGL disputes; the claimed amounts are company estimates and were largely not recorded as receivables.
- Actual returns and capital requirements for the MarkWest joint venture and other midstream investments, alongside the company’s substantial long-term service commitments.