Antero Resources Corporation — Q3 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2014. Antero explores, develops and produces natural gas, NGLs and oil in the Appalachian Basin, and operates gathering, compression and fresh-water distribution businesses. At September 30, it held approximately 516,000 net acres in West Virginia, Ohio and Pennsylvania. The unaudited interim financial statements are prepared under U.S. GAAP.
Key financial metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | 2014: $762.5; 2013: $384.5 | 2014: $1,242.0; 2013: $833.1 |
| Operating income | 2014: $381.4; 2013: $222.6 | 2014: $272.0; 2013: $422.5 |
| Income from continuing operations | 2014: $203.9; 2013: $117.8 | 2014: $64.7; 2013: $201.0 |
| Net income | 2014: $203.9; 2013: $120.9 | 2014: $66.9; 2013: $204.1 |
| Adjusted EBITDAX, non-GAAP | 2014: $291.6; 2013: $182.8 | 2014: $831.7; 2013: $434.2 |
| Net cash provided by operating activities | 2014: approximately $300.7 | 2014: $798.7; 2013: $331.9 |
- Production and pricing: Q3 production was 99 Bcfe, or 1.08 Bcfe/day, up 91% year over year; nine-month production was 251 Bcfe, up 96%. Realized prices after cash-settled hedges were $4.91/Mcfe in Q3 and $5.29/Mcfe for the nine months.
- Cash flow and investment: Nine-month investing cash outflow was $2,824.5, including drilling and completion costs of $1,723.7. Financing cash inflow was $2,014.5. Cash declined by $11.2 to $6.3 at September 30.
- Liquidity and debt: Total assets were $9,315.9, total liabilities $5,564.5, and stockholders’ equity $3,751.4. Long-term debt carrying value was $4,137.9, including $1,505.0 outstanding on revolving facilities and $2,625.0 principal of senior notes. The facilities had $332 million of letters of credit outstanding. The company reported compliance with its financial covenants; its current ratio was 1.45 and interest coverage ratio 6.95, against minimums of 1.0 and 2.5, respectively.
- Margins and costs: Reported operating margin was approximately 50% for Q3 and 22% for the nine months, but revenue includes volatile derivative fair-value amounts. Nine-month gathering, compression, processing and transportation cost was $1.26/Mcfe; lease operating cost was $0.07/Mcfe.
Material changes versus prior comparable periods
- Q3 revenue rose 98% and continuing-operations income rose 73% year over year, supported by 91% production growth and $309.0 million of derivative fair-value gains.
- For the nine months, revenue increased 49%, but operating income declined 36%, continuing-operations income declined 68%, and net income declined 67%. Derivative results shifted from a $285.5 million gain in 2013 to a $63.7 million loss in 2014.
- Nine-month production sales revenue grew substantially with higher volumes and a richer NGL/oil mix. Higher production also increased operating costs, DD&A, gathering and transportation expense, and production taxes.
- Debt increased significantly from year-end 2013. Antero issued $1.1 billion of 5.125% notes due 2022, redeemed $260 million of 7.25% notes due 2019 and paid a $17.4 million make-whole premium. The early extinguishment charge, including deferred financing cost write-off, was $20.4 million.
- Noncash stock compensation was $85.8 million for the nine months, including $68.5 million related to profits interests associated with the 2013 IPO reorganization. The filing says approximately $53 million of additional expense remained to be recognized over the remaining service period.
Outlook, management commentary and risks
- Capital program: The revised 2014 capital budget was $3.7 billion: $2.4 billion for drilling and completion, $850 million for gathering/compression and fresh-water infrastructure (including $200 million for fresh water), and $450 million for core leasehold acquisitions. The program assumed an average of 21 rigs. Management said spending may be adjusted for liquidity, prices, drilling results and other conditions.
- Liquidity outlook: Management believed operating cash flow and available revolving borrowings would cover cash needs, debt service, capital expenditures and commitments for at least 12 months. The credit facility was amended October 16, 2014, after quarter-end, increasing the borrowing base to $4.0 billion and lender commitments to $3.0 billion. The next borrowing-base redetermination was scheduled for April 2015.
- Midstream offering: Antero Midstream Partners LP priced an offering of 40 million common units at $25 each on November 4, 2014, with an underwriters’ option for 6 million additional units. At the filing date, closing was expected November 10, subject to customary conditions.
- Hedges and commodity exposure: Commodity derivative fair value was a net asset of $739.1 million at September 30, down from $860.1 million at year-end. Derivatives are not designated as accounting hedges, so mark-to-market changes affect earnings before settlement. Management estimated that a $0.10/MMBtu gas-price decline and a $1/Bbl oil and NGL-price decline would reduce nine-month production revenue, after cash-settled derivatives, by approximately $7 million. Hedges reduce downside exposure but also limit upside; counterparty credit exposure is concentrated among financial institutions.
- Commitments: Disclosed contractual obligations totaled $21.976 billion, including $13.833 billion of firm transportation commitments and $2.335 billion for gas processing, gathering and compression services. These are long-term commitments and may include gross amounts; Antero records its proportionate share based on working interests.
- Legal and regulatory matters: EPA orders concern alleged unpermitted discharges at West Virginia well sites. No penalty had been proposed, but the company believed monetary sanctions would exceed $100,000 and could not estimate total sanctions or remediation costs. Separate lawsuits in Colorado, West Virginia and Pennsylvania seek unspecified damages; Antero denies the allegations and intends to defend itself. Ohio severance-tax proposals could raise future costs if enacted.
- Other risks and controls: Commodity-price volatility, production and reserve-estimation uncertainty, access to capital, transportation capacity, operating costs and environmental regulation remain material risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2013 Form 10-K.
Important facts for investors to verify
- Separate operating cash flow and cash-settled hedge receipts from noncash derivative gains or losses when assessing earnings and liquidity.
- Review the assumptions and settlement profile behind the $739.1 million net derivative asset, hedge volumes and prices, and counterparty concentration.
- Track actual capital spending against the $3.7 billion budget, funding needs, revolving-facility availability and the April 2015 borrowing-base redetermination.
- Assess the duration and utilization risk of firm transportation and midstream service commitments, including the disclosed unused ethane transportation contract.
- Confirm completion and economics of the Midstream Partners offering and any related asset contributions or transactions.
- Monitor environmental proceedings, the unquantified lawsuits, tax examinations and potential changes to severance taxes or tax deductions.