Antero Resources Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unless otherwise noted, financial amounts are in millions of dollars. Antero explores and produces natural gas, NGLs and oil in the Appalachian Basin, and also operates gathering, compression and water-distribution businesses.
Financial performance and position
| Metric | Q2 2015 | Six months 2015 | Comparable 2014 period |
|---|---|---|---|
| Total revenue | $376.7 | $1,606.4 | $311.3 Q2; $479.5 six months |
| Operating income (loss) | $(163.7) | $535.9 | $(5.3) Q2; $(109.4) six months |
| Net income (loss) attributable to Antero | $(145.4) | $249.1 | $(42.3) Q2; $(137.0) six months |
| Adjusted EBITDAX | $268.2 | $622.8 | $266.5 Q2; $540.1 six months |
| Operating cash flow | $239.2 | $590.6 | $223.7 Q2; $498.0 six months |
- Q2 production was 135 Bcfe, up 67% year over year; six-month production was 269 Bcfe, up 77%. Average daily production was 1,484 MMcfe in Q2 and 1,485 MMcfe for the first half.
- Average realized price after settled derivatives fell 27% to $3.85/Mcfe in Q2 and 25% to $4.14/Mcfe for the first half. Before settled derivatives, the respective averages were $2.40 and $2.72/Mcfe.
- Q2 net loss included a $2.2 million derivative fair-value loss, despite $195.9 million of settled derivative gains. First-half net income included $757.3 million of derivative fair-value gains, including $380.7 million of settled gains. Fair-value changes on unsettled contracts affect reported earnings but not cash until settlement.
- For the first half, operating cash flow of $590.6 million was substantially below investing cash outflow of $1.34 billion. Cash declined by $102.7 million to $143.3 million.
- At June 30, total assets were $12.53 billion, total liabilities $6.22 billion and equity $6.31 billion. Long-term debt was $4.50 billion, versus $4.36 billion at year-end 2014. The reported current-asset and current-liability balances were $1.02 billion and $966.2 million.
- The revolving credit and water facilities had $1.12 billion drawn and $475 million of letters of credit outstanding, against a $4.0 billion borrowing base and commitments. The company reported compliance with covenants, a 3.85:1 covenant current ratio and 6.05:1 interest coverage ratio. Antero Midstream had no borrowings under its $1.0 billion facility.
Material changes versus 2014
- Q2 production growth was outweighed by lower commodity prices: oil and gas sales fell to $324.6 million from $429.6 million despite 67% higher production. The six-month oil and gas sales total declined 13% to $731 million despite 77% higher production.
- Q2 total revenue rose 21%, largely reflecting higher marketing revenue and a much smaller derivative fair-value loss; operating expenses rose 71% to $540.5 million and the operating loss widened to $163.7 million.
- First-half results moved from a $137.0 million net loss to $249.1 million net income, driven principally by the $757.3 million derivative fair-value gain. Adjusted EBITDAX increased 15% to $622.8 million.
- Q2 gathering, compression, processing and transportation expense rose to $166.7 million, while marketing expenses rose to $79.1 million. Marketing activities recorded a $29 million net loss in Q2 and a $44 million net loss for the first half.
- First-half capital expenditures were approximately $1.4 billion, versus $1.7 billion a year earlier. Antero issued $750 million of 5.625% notes due 2023 and raised approximately $538 million net through a common-stock offering; it also repaid $612 million net on its revolving facility.
Outlook, risks and unusual items
- The 2015 Antero capital budget was $1.8 billion, excluding Antero Midstream’s $425–$450 million budget. Management planned an average of 14 rigs, completion of 130 horizontal wells, and deferred 50 Marcellus completions to the first half of 2016. The company said it expected to fund its budget through operating cash flow and available borrowing capacity, while retaining discretion to adjust spending.
- Management expected production and product-revenue growth to slow from 2014 rates amid low commodity prices. It estimated $100–$150 million of 2015 annual net marketing costs related to unutilized transportation capacity, depending on its ability to market or use that capacity.
- At June 30, hedges covered projected production through 2021: 2.648 Tcf of natural gas at a weighted average index price of $4.06/MMBtu, 552,000 barrels of oil at $65.26/barrel and 700 million gallons of propane at $0.60/gallon. Hedges reduce downside exposure but also limit gains if market prices rise.
- First-half unusual costs included $10.9 million for contract termination and rig stacking and $34.9 million of unproved-property impairment. Management attributed the latter primarily to leases it elected not to retain and develop.
- South Jersey Gas and South Jersey Resources Group dispute contract pricing. Antero estimated it was underpaid by approximately $22.5 million through June 30 and is pursuing a breach-of-contract claim; the outcome and recovery are uncertain.
- Environmental proceedings include federal compliance orders concerning alleged discharges and a West Virginia drilling incident. The company could not estimate total sanctions or remediation costs for the federal matters; it estimated the West Virginia sanction would not exceed $300,000. Separate personal-injury and property-damage lawsuits seek unspecified relief.
- Key risks include commodity-price volatility, reserve and production uncertainty, access to capital, counterparty credit risk, firm-transportation commitments, and possible increases in Ohio severance taxes. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Separate settled hedge cash receipts from noncash derivative fair-value gains when assessing recurring earnings and operating cash flow.
- Review hedge volumes, prices, maturities, counterparty concentrations and the sensitivity of production economics to commodity prices.
- Check actual capital spending, production, completion deferrals and cash generation against the 2015 plan, including Antero Midstream’s separate spending.
- Assess liquidity after committed capital expenditures and the October 2015 borrowing-base redetermination, including letters of credit and covenant headroom.
- Track firm-transportation utilization and the estimated $100–$150 million of annual net marketing costs, as well as the SJGC dispute and environmental matters.