Antero Resources Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; financial statements are unaudited. Unless noted, amounts are in U.S. dollars. Antero explores and produces natural gas, NGLs and oil in the Appalachian Basin and operates gathering, compression and water-distribution businesses.
Financial and operating performance
| Metric | Q2 2014 | Six months 2014 | Comparison with 2013 |
|---|---|---|---|
| Total revenue, including derivative fair-value changes | $311 million | $480 million | Q2 decreased 20%; six-month revenue increased 7% |
| Production sales before derivative fair-value changes | $430 million | $840 million | Up 124% and 158%, respectively |
| Operating income (loss) | $(5) million | $(109) million | 2013 comparatives were income of $248 million and $200 million |
| Net income (loss) from continuing operations | $(44) million | $(139) million | 2013 comparatives were income of $131 million and $83 million |
| Adjusted EBITDAX, a non-GAAP measure | $266 million | $540 million | Up 101% and 115%, respectively |
| Cash provided by operating activities | $224 million | $498 million | Six-month 2013: $192 million |
| Capital expenditures | Not stated separately for Q2 | Approximately $1.7 billion | Six-month 2013 investing cash use was $1.2 billion |
Q2 production was 81 Bcfe (891 MMcfe/day), up 94%; six-month production was 152 Bcfe (838 MMcfe/day), up 99%. Average realized price before cash-settled hedges was $5.30/Mcfe for Q2 and $5.54/Mcfe for the first half, versus $4.60 and $4.27, respectively, in 2013. After cash-settled hedges, realized prices were $5.31/Mcfe and $5.53/Mcfe.
Revenue and earnings were materially affected by noncash derivative fair-value losses of $124 million in Q2 and $373 million for the first half; the comparable 2013 periods recorded gains. These mark-to-market changes are recorded in revenue and generally do not affect cash until settlement. Q2 operating expenses included $32 million of stock compensation; first-half stock compensation was $62 million. The filing reports no proved-property impairment in either comparative period.
Liquidity, debt and balance sheet
- At June 30, cash was $19 million, total current assets $387 million, and current liabilities $861 million. Management said operating cash flow and available revolver borrowings should cover requirements for at least the next 12 months.
- Total debt was $3.371 billion, up from $2.079 billion at December 31, 2013. This included $1.240 billion drawn under revolving facilities and $2.125 billion of senior notes. The company reported $237 million of letters of credit and $523 million of available borrowing capacity at June 30, based on then-current commitments.
- The July 28, 2014 credit-facility amendment increased lender commitments from $2.0 billion to $2.5 billion, including $400 million under the midstream facility; the borrowing base was $3.0 billion. The next borrowing-base redetermination was scheduled for October 2014. The company reported compliance with financial covenants at June 30.
- In May, Antero issued $600 million of 5.125% notes due 2022 and redeemed $260 million of 7.25% notes due 2019. The redemption generated a $20 million early-extinguishment loss, including the make-whole premium and financing-cost write-off.
- Six-month investing cash use was $1.754 billion, exceeding operating cash flow; financing provided $1.258 billion. The 2014 capital budget was $2.85 billion. Contractual obligations totaled $17.170 billion, including $10.384 billion of firm transportation commitments and $2.163 billion for processing, gathering and compression.
Changes, outlook and risks
- Production growth and higher realized prices drove a sharp increase in physical sales, but derivative mark-to-market reversals, higher operating costs and stock compensation contributed to GAAP losses. Gathering and water operations were reported as separate segments beginning in late 2013; third-party marketing activity also began in 2014.
- Management’s 2014 capital budget allocated $1.8 billion to drilling and completion, $750 million to midstream expansion (including $200 million for water infrastructure), and $300 million to core leasehold acquisitions. The plan assumed an average of 18 rigs. Management was reviewing the budget and expected to update production and capital guidance in Q3, in part while monitoring third-party midstream capacity.
- As of June 30, proved reserves were estimated at 9.1 Tcfe, up 19% from year-end 2013; 30% were proved developed. The June estimate was prepared internally and had not been reviewed by independent reserve engineers. Antero reported approximately 486,000 net acres and about 5,400 potential horizontal well locations.
- The proposed midstream MLP IPO had not commenced; the company said it was awaiting an IRS ruling and gave no assurance the offering would be completed. The IPO and any related financing or asset contribution remained uncertain.
- Commodity-price volatility, regional transportation and processing capacity, operating costs, access to capital, and reserve-estimation uncertainty remain key risks. Hedges reduce some price exposure but also limit gains when prices rise; derivative assets carried counterparty exposure. The company estimated a $3.5 million first-half interest-expense increase for a 1 percentage-point rise in specified benchmark rates.
- EPA compliance orders concerning alleged unpermitted discharges at West Virginia sites remained unresolved; no penalty had been proposed, but Antero believed sanctions would exceed $100,000 and could not estimate total sanctions or remediation costs. Separate property and personal-injury lawsuits sought unspecified damages; outcomes could not be estimated.
- The company stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess cash generation against the $2.85 billion capital program, higher debt and substantial long-term transportation and processing commitments.
- Review the October 2014 borrowing-base redetermination, revolver availability, covenant headroom and the effect of letters of credit.
- Distinguish operating performance and cash-settled hedge results from noncash derivative fair-value gains or losses and related GAAP earnings volatility.
- Verify reserve assumptions and the internal-only status of the June 30 reserve estimate; track production growth alongside per-unit operating costs and takeaway capacity.
- Monitor the midstream IPO and planned guidance update, as well as the EPA matters, lawsuits and any resulting financial exposure.