Antero Resources Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results include Antero Midstream Partners LP, in which Antero owned 52.9% of limited partner interests. Antero explores for and produces natural gas, NGLs and oil in the Appalachian Basin, and also reports gathering and processing, water handling and treatment, and marketing activities.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue and other | $1.028 billion | $1.196 billion, down 14% |
| Revenue from customer contracts | $911 million | $757 million, up 20% |
| Operating income | $146 million | $501 million |
| Net income attributable to Antero | $14.8 million; $0.05 per diluted share | $268.4 million; $0.85 per diluted share |
| Operating cash flow | $542 million | $394 million, up 37% |
| Capital expenditures | $546 million | $516 million |
| Cash and cash equivalents | $23 million at March 31 | $28 million at December 31, 2017 |
| Long-term debt | $4.877 billion at March 31 | $4.800 billion at December 31, 2017 |
- Production was 214 Bcfe, or 2,376 MMcfe/day, up 11% year over year. Average realized price after settled commodity derivative gains was $4.04/Mcfe, versus $3.80/Mcfe; before derivative settlements it was essentially flat at $3.56/Mcfe versus $3.57/Mcfe.
- Reported operating margin was approximately 14% of total revenue and other, versus approximately 42% a year earlier. These reported margins are heavily affected by derivative marks and marketing activity and should not be read as a simple measure of underlying production economics.
- Q1 net income included $22 million of commodity derivative gains, comprising $101 million of settled gains and a $79 million noncash loss on unsettled positions; $94 million of marketing derivative gains; $51 million of unproved-property impairment; and $21 million of equity compensation expense. Consolidated earnings also include $66 million of net income attributable to noncontrolling interests.
- Current assets were $800 million and current liabilities $790 million at quarter end. The resulting balance-sheet current ratio was about 1.01; the filing reports a covenant current ratio of 5.11, which includes unused borrowing capacity and excludes specified derivative balances.
- Reported debt includes Antero Resources’ debt and Antero Midstream’s debt. Antero Resources had $155 million drawn on its $2.5 billion-commitment facility and $692 million of letters of credit outstanding. Antero Midstream had $660 million drawn on its $1.5 billion facility. Both entities reported covenant compliance.
Material changes versus prior year
- Production growth and higher NGL and oil prices lifted product sales, while natural gas sales prices declined slightly. Production revenue increased 11% to $762 million.
- Total reported revenue and operating income fell sharply mainly because Q1 2017 included $439 million of commodity derivative gains, compared with $22 million in Q1 2018. Conversely, Q1 2018 included $94 million of marketing derivative gains, which were absent in the prior-year quarter.
- Adjusted EBITDAX, a non-GAAP measure, increased 51% to $551 million; stand-alone Adjusted EBITDAX increased 52% to $488 million. Management attributed the increases primarily to realized prices after settled commodity and marketing derivatives. Operating cash flow also benefited from $110 million in settled marketing derivative gains.
- Lease operating expense rose to $31 million from $16 million, and to $0.15/Mcfe from $0.08/Mcfe, attributed in part to increased water use in advanced completions. Unproved-property impairments rose to $51 million from $27 million, primarily due to Utica lease expirations.
- Income tax expense declined to $9 million from $131 million, reflecting lower pretax income and the federal statutory-rate reduction from 35% to 21% following the Tax Cuts and Jobs Act.
Outlook, risks and unusual items
- Management’s 2018 consolidated capital budget was $2.1 billion: $1.3 billion for drilling and completion, $150 million for leasehold expenditures, and $650 million for Antero Midstream. The filing separately describes the E&P budget as $1.45 billion, excluding Midstream. The company planned an average of five Marcellus and one Utica drilling rig, with four and one completion crews, respectively. Spending may be adjusted for prices, liquidity, costs and drilling results.
- Based on March 31 strip pricing, management believed operating cash flow, facility availability or capital-market transactions would cover requirements for at least 12 months. This outlook is subject to commodity prices, capital access, operating and transportation risks, and other uncertainties.
- At March 31, Antero reported approximately $1.2 billion of net derivative assets. Fixed-price swaps covered projected production through 2023; these reduce downside exposure but also limit benefit from prices above contracted levels. Derivatives are not designated as accounting hedges, so fair-value changes create earnings volatility.
- A severe January cold-weather event generated a $110 million cash gain on marketing derivative settlements and a $94 million net marketing derivative gain recognized in the quarter. The related contracts are expected to produce cash-settled losses in future periods through October 2018.
- Minimum contractual payments for firm transportation, processing/gathering/compression, drilling and completion services, and office/equipment agreements totaled $18.5 billion. The broader contractual-obligations schedule, including debt principal and stated interest, totaled $24.6 billion. Firm transportation commitments are a material exposure if capacity is underused.
- Antero is pursuing disputed amounts from SJGC and WGL. Estimated gross damages, including interest, were approximately $77 million and $105 million, respectively, through March 31; substantially all were not accrued. SJGC appealed a judgment in Antero’s favor. WGL’s appeal remained pending and its cover-damages case was scheduled for trial in September 2018. Recovery and timing are uncertain.
- A board special committee formed in February to review potential measures addressing a perceived discount in the stock’s trading value; no particular decision had been reached by the filing date. Antero also disclosed environmental compliance orders and said sanctions would exceed $100,000, but it could not estimate total sanctions or remediation costs; management did not expect a material adverse effect.
- The company adopted ASC 606 in Q1 2018 with no financial-statement impact. It was evaluating the lease accounting standard effective in 2019 and expected balance-sheet and expense-presentation changes, with the extent not yet determined.
Investor facts to verify
- Whether Q1 earnings and cash generation are sustainable excluding derivative fair-value swings and the unusual marketing gain, and how the related later-period settlements affect cash flow.
- Progress and outcomes in the SJGC and WGL disputes, including whether claimed amounts are recoverable and when; neither major claim was substantially accrued.
- Utilization and economics of firm transportation commitments, including costs from unused capacity and the company’s ability to market or monetize excess capacity.
- Funding and execution of the $2.1 billion capital plan, liquidity under both credit facilities, and the effect of facility redeterminations and debt maturities.
- Commodity hedge volumes, prices, counterparties and concentration: derivative assets are substantial, and the company identified counterparty and customer credit risk.