Antero Resources Corporation — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Amounts are in U.S. dollars. The unaudited consolidated results include Antero Midstream Partners LP.
Business context and financial performance
Antero explores for, develops and produces natural gas, NGLs and oil in the Appalachian Basin, with gathering, compression and water services through Antero Midstream. At quarter-end, it held approximately 573,000 net acres in West Virginia, Ohio and Pennsylvania.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue, including derivative fair-value gains | $721 million | $1,230 million |
| Operating income | $79 million | $700 million |
| Net income (loss) attributable to Antero | ($5 million) | $394 million |
| Consolidated net income, including noncontrolling interest | $11 million | $399 million |
| Adjusted EBITDAX (non-GAAP) | $355 million | $355 million |
| Net cash from operating activities | $340 million | $351 million |
| Cash used in investing activities | $519 million | $739 million |
| Cash at period end | $40 million | $185 million |
Production increased 18% to 160 Bcfe (1,758 MMcfe/day). Average realized price before settled-derivative effects fell 31% to $2.11/Mcfe; after those effects it was $4.14/Mcfe, down 6%. Settled derivative gains were $324 million in Q1 2016 versus $185 million in Q1 2015. Separately, the income statement reported $280 million of commodity derivative fair-value gains in Q1 2016; these gains include noncash mark-to-market effects and should not be treated as equivalent to cash receipts.
Liquidity, debt and investment
- At March 31, total assets were $14.29 billion, current assets $1.24 billion and current liabilities $645 million. Current assets include substantial derivative assets, not cash.
- Reported long-term debt was $4.70 billion, including $680 million drawn on Antero’s credit facility, $680 million at Antero Midstream and senior notes with $3.375 billion principal outstanding. Antero Midstream’s debt is not guaranteed by Antero.
- Antero’s facility had a $4.5 billion borrowing base and $4.0 billion lender commitments; $680 million was drawn and $702 million of letters of credit were outstanding. The borrowing base was reaffirmed in April 2016. The next redetermination was scheduled for October 2016.
- Antero reported compliance with its credit covenants; its quarter-end current ratio was 5.27x and interest coverage ratio 4.81x. Management said operating cash flow, borrowing capacity or capital-markets transactions should cover requirements for at least the next 12 months.
- Q1 consolidated capital expenditures were approximately $510 million, compared with $340 million of operating cash flow. Antero received $178 million from selling 8 million Antero Midstream units and used proceeds to reduce revolver borrowings and fund development.
Material changes and outlook
- Compared with Q1 2015, production growth was outweighed in reported revenue and operating income by lower commodity prices and smaller derivative fair-value gains. Operating expenses rose 21%, including higher gathering, transportation and marketing costs; interest expense increased to $63 million from $53 million.
- For 2016, Antero budgeted $1.4 billion for drilling, completions and land, plus a separate $435 million Antero Midstream capital budget. It planned an average of seven rigs and 110 completed horizontal wells, and expected to defer 70 well completions until 2017. Management may revise spending as market and liquidity conditions change.
- Management forecast $95 million to $125 million of 2016 net marketing expense associated with unutilized transportation capacity. The company reported $39 million of net marketing losses in Q1 2016. Firm transportation commitments total $15.1 billion through the periods disclosed, before considering the ability to market or use capacity.
- Antero reported hedges covering approximately 3.5 Tcf of projected natural gas production and 937 million gallons of propane through 2022. Hedges reduce exposure to falling prices but also limit upside; fair-value changes can make reported earnings volatile.
Risks, contingencies and unusual items
- Commodity-price volatility, production and drilling uncertainty, access to capital, and transportation capacity and costs are significant risks. New pipelines increased transportation costs per Mcfe, while management noted that production growth could slow.
- The company had approximately $3.1 billion of net derivative assets, with exposure to counterparty credit risk and concentration among financial counterparties.
- Antero is pursuing approximately $43 million in alleged underpayments under two South Jersey gas contracts. A separate Washington Gas pricing dispute was expected to proceed to arbitration; outcomes are uncertain.
- Environmental matters include older federal compliance orders for which potential sanctions and remediation costs could not be estimated. In April 2016, Antero Midstream agreed to remediation plans and a $412,000 penalty concerning a compressor-station catalyst matter.
- Q1 included a $16 million impairment of unproved properties and $23 million of equity-based compensation expense. No impairment of proved properties was recorded after management’s recoverability assessment. Q1 2015 included $9 million of rig termination and stacking costs, versus none in Q1 2016.
- Management identified no material changes to the risk factors in its 2015 Form 10-K. The filing also warns that results for the quarter may not indicate full-year performance.
Important facts for investors to verify
- How much of the $3.1 billion derivative asset value is expected to become cash, and how sensitive are settlements and counterparties to price changes?
- Whether operating cash flow and available financing can support the 2016 capital program, debt service and contractual commitments without additional financing or spending reductions.
- Actual utilization and monetization of firm transportation capacity, and whether net marketing costs remain within management’s $95–$125 million 2016 estimate.
- Progress and outcomes in the South Jersey and Washington Gas disputes, including any effect on collections or realized prices.
- Production, realized prices, costs and covenant headroom at subsequent reporting dates; the filing provides plans and estimates, not guaranteed outcomes.