Antero Resources Corporation — Q1 2017 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2017, Antero explored for and produced natural gas, NGLs and oil in the Appalachian Basin, with gathering, processing and water services conducted through consolidated subsidiary Antero Midstream. The unaudited results are compared with Q1 2016; balance-sheet figures are as of March 31, 2017, compared with December 31, 2016. Dollar amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q1 2017 | Prior period / comparison |
|---|---|---|
| Total revenue, including commodity derivative fair-value gains | $1,195.6 | $721.0 in Q1 2016 |
| Natural gas, NGL and oil sales | $688.3 | $338.0 in Q1 2016 |
| Operating income | $501.3 | $78.7 in Q1 2016 |
| Net income attributable to Antero | $268.4; $0.85 per diluted share | Net loss of $5.1; $(0.02) per diluted share in Q1 2016 |
| Adjusted EBITDAX (non-GAAP) | $365.3 | $355.4 in Q1 2016 |
| Cash flow from operations | $393.9 | $340.2 in Q1 2016 |
| Net cash used in investing activities | $688.5 | $519.3 in Q1 2016 |
| Production | 193 Bcfe; 2,144 MMcfe/day | 160 Bcfe; 1,758 MMcfe/day in Q1 2016 |
| Average realized production price, after settled derivatives | $3.80/Mcfe | $4.14/Mcfe in Q1 2016 |
Revenue rose 66% year over year; production increased 22%. Product sales grew 104%, reflecting higher volumes and higher pre-derivative realized prices ($3.57/Mcfe versus $2.11/Mcfe). However, the after-settlement realized price fell 8%, primarily because settled hedge gains were lower.
Q1 net income included $438.8 million of derivative fair-value gains, including $393.9 million of noncash gains on unsettled contracts and $44.8 million of gains on settled derivatives. These accounting gains materially boosted reported revenue and operating income; the filing cautions that unsettled derivative fair-value changes do not affect cash flow until settlement. Adjusted EBITDAX increased only 3% year over year.
Balance sheet, debt and liquidity
- Cash and cash equivalents were zero at March 31, down from $31.6 million at year-end. Total current assets were $503.7 million and current liabilities were $723.4 million.
- Long-term debt was $4.775 billion, up from $4.704 billion at December 31. This consolidated amount includes Antero Midstream debt. Antero’s senior notes totaled $3.45 billion principal; Antero Midstream’s senior notes totaled $650 million.
- Antero’s revolving facility had $520 million drawn and $710 million of letters of credit against $4.0 billion of lender commitments; its borrowing base was $4.75 billion. The borrowing base was reaffirmed in April, with the next redetermination scheduled for October 2017. The company reported covenant compliance and a 6.31x interest-coverage ratio.
- Antero Midstream had $200 million drawn on its $1.5 billion revolving facility. Management said operating cash flow, available borrowing capacity or capital-market transactions should fund obligations and planned spending for at least 12 months.
- Net derivative assets were $1.994 billion at March 31, up from $1.600 billion at year-end. This asset position is subject to commodity-price movements and counterparty credit risk.
Material changes, outlook and notable items
- The 2017 consolidated capital budget is $2.3 billion, comprising $1.3 billion for drilling and completion, $200 million for leasehold additions and extensions, and $800 million for Antero Midstream, including investments in unconsolidated affiliates. Antero separately describes a $1.5 billion drilling, completion and land budget, excluding Midstream.
- Plans call for an average of seven drilling rigs, 170 horizontal well completions in 2017 versus 140 in 2016, and deferral of 30 completions to 2018. Q1 consolidated capital expenditures were approximately $516 million; Antero Midstream also invested $160 million in its MarkWest joint venture.
- Antero Midstream and MarkWest formed a 50/50 processing and fractionation joint venture in February; MarkWest operates it. Antero Midstream raised approximately $223 million through a common-unit issuance to fund its initial contribution, repay facility borrowings and for general purposes.
- As of March 31, the company reported substantial hedging through 2023, including projected natural gas volumes at a weighted average index price of $3.63/MMBtu. Hedges mitigate downside exposure but also limit benefit from prices above contracted levels.
- Firm transportation commitments total $15.123 billion, including $510 million for the remainder of 2017; total listed contractual obligations are $24.851 billion. The company may owe reservation fees for unused capacity. It estimated 2017 net marketing expense of $60–$105 million, with future amounts dependent on capacity use and resale.
- Unproved-property impairment was $26.9 million, mainly from Marcellus leases allowed to expire. No impairment was recorded on proved properties after the company found estimated undiscounted future cash flows exceeded carrying values.
- Legal matters include Antero’s claim that South Jersey Gas entities short-paid approximately $56 million under long-term gas contracts, and a separate WGL suit seeking more than $30 million. Antero prevailed in an earlier WGL pricing arbitration but is seeking dismissal of the new suit. Environmental compliance proceedings could result in monetary sanctions exceeding $100,000; total sanctions and remediation costs were not estimable.
Most important facts for investors to verify
- How much of reported earnings and revenue growth is attributable to derivative fair-value gains rather than realized operating performance; review settled hedge cash flows and hedge coverage.
- Whether the $2.3 billion capital program and production plans can be funded while cash is depleted and investing outflows exceed operating cash flow.
- Utilization, resale and economics of the $15.1 billion firm-transportation commitments, and the effect on marketing expense and cash flows.
- Debt maturities, facility availability after letters of credit and covenant limits, and the October 2017 borrowing-base redetermination.
- Outcomes and potential financial exposure from the SJGC, WGL and environmental matters, together with performance and distributions from the MarkWest joint venture.