Antero Midstream Announces Third Quarter 2022 Financial and Operational Results
Antero Midstream Corporation (NYSE: AM) (“Antero Midstream” or the “Company”) announced its third quarter 2022 financial and operational results. The relevant unaudited condensed consolidated financial statements are included in Antero Midstream’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022.
Third Quarter 2022 Earnings Highlights:
- Net Income was $84 million, or $0.17 per diluted share
- Adjusted Net Income was $96 million, or $0.20 per share (non-GAAP measure)
- Adjusted EBITDA was $223 million (non-GAAP measure)
- Net cash provided by operating activities was $177 million
- Free Cash Flow after dividends was $30 million (non-GAAP measure)
- Low pressure gathering volumes per day increased by 3% compared to the prior year quarter
- Announced a $205 million bolt-on acquisition of Marcellus gathering and compression assets
Paul Rady, Chairman and CEO said, “This quarter marked an important inflection point as we generated $30 million of Free Cash Flow after dividends. This was driven by a reduction in capital expenditures as we completed milestone projects supporting the expected growth from the drilling partnership. This transition to generating consistent Free Cash Flow after dividends significantly de-risks our business model over the next several years and positions us well to achieve our leverage target of 3.0x or less by year end 2024.”
Mr. Rady added, “In addition, we closed the $205 million bolt-on acquisition of gathering and compression assets in the Marcellus Shale. This complementary acquisition with highly visible throughput in the core of the Marcellus Shale is a strategic fit with Antero Midstream’s assets.”
Marcellus Bolt-on Acquisition Closing
On October 25, 2022, Antero Midstream closed the previously announced bolt-on acquisition of Marcellus gathering and compression assets from Crestwood Equity Partners, LP (NYSE: CEQP) for $205 million in cash. The transaction was financed with borrowings under the Company’s revolving credit facility. The assets include 72 miles of dry gas gathering pipelines and nine compressor stations with approximately 700 MMcf/d of capacity. The transaction increases Antero Midstream’s compression capacity by 20% and gathering pipeline mileage by 15%, and importantly, has significant available capacity for growth without significant capital investment. Antero Midstream has identified over $50 million of discounted future capital avoidance, integration and operational synergies, resulting in an adjusted transaction multiple of 4.5x next twelve months estimated Adjusted EBITDA.
The acquisition includes approximately 120,000 gross dedicated acres for gathering and compression and over 425 undeveloped drilling locations from Antero Resources. In addition, through the first nine months of 2022, Antero Resources has also added approximately 60 drilling locations from its organic leasing program. This results in approximately 485 total locations added year-do-date dedicated to Antero Midstream, which represents an additional seven to eight years of drilling inventory at the current development pace.
Brendan Krueger, CFO of Antero Midstream, said “Antero Midstream’s highly visible and sustainable Free Cash Flow after dividends profile allowed us to finance the $205 million bolt-on acquisition with revolver borrowings. This strategic acquisition, with over $50 million of discounted future capital avoidance and synergies, is expected to further enhance our Free Cash Flow profile after dividends by over 10% through 2026.”
For a discussion of the non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income, Leverage and Free Cash Flow after dividends please see “Non-GAAP Financial Measures.”
Third Quarter 2022 Financial Results
Low pressure gathering volumes for the third quarter of 2022 averaged 2,952 MMcf/d, a 3% increase as compared to the prior year quarter. Low pressure gathering volumes were in excess of the growth incentive fee threshold of 2,900 MMcf/d, resulting in a $12 million rebate to Antero Resources. Compression volumes for the third quarter of 2022 averaged 2,794 MMcf/d, a 2% increase compared to the prior year quarter. High pressure gathering volumes averaged 2,802 MMcf/d, in line with the third quarter of 2021. Fresh water delivery volumes averaged 103 MBbl/d during the quarter, a 13% increase compared to the third quarter of 2021.
Gross processing volumes from our processing and fractionation joint venture with MPLX, LP (the “Joint Venture”) averaged 1,474 MMcf/d for the third quarter of 2022, a 4% decrease compared to the prior year quarter. Joint Venture processing capacity was 92% utilized during the quarter based on nameplate processing capacity of 1.6 Bcf/d. Gross Joint Venture fractionation volumes averaged 36 MBbl/d, a 3% decrease compared to the prior year quarter. Joint Venture fractionation capacity was 90% utilized during the quarter based on nameplate fractionation capacity of 40 MBbl/d.
| Three Months Ended
September 30, |
|||||||||||||
| Average Daily Volumes: | 2021 | 2022 | % Change | ||||||||||
| Low Pressure Gathering (MMcf/d) | 2,880 | 2,952 | 3 % | ||||||||||
| Compression (MMcf/d) | 2,734 | 2,794 | 2 % | ||||||||||
| High Pressure Gathering (MMcf/d) | 2,811 | 2,802 | * | ||||||||||
| Fresh Water Delivery (MBbl/d) | 91 | 103 | 13 % | ||||||||||
| Gross Joint Venture Processing (MMcf/d) | 1,539 | 1,474 | (4) % | ||||||||||
| Gross Joint Venture Fractionation (MBbl/d) | 37 | 36 | (3) % | ||||||||||
| * Not meaningful | |||||||||||||
For the three months ended September 30, 2022, revenues were $231 million, comprised of $176 million from the Gathering and Processing segment and $55 million from the Water Handling segment, net of $18 million of amortization of customer relationships. Water Handling revenues included $2 million from third party water business and $24 million from wastewater handling and high rate water transfer services.
Direct operating expenses for the Gathering and Processing and Water Handling segments were $20 million and $27 million, respectively, for a total of $47 million. Water Handling operating expenses include $23 million from wastewater handling and high rate water transfer services. General and administrative expenses excluding equity-based compensation were $8 million during the third quarter of 2022. Total operating expenses during the third quarter of 2022 included $6 million of equity-based compensation expense, $34 million of depreciation and a $2 million gain on asset sale.
Net Income was $84 million, or $0.17 per diluted share. Net Income adjusted for amortization of customer relationships, impairment expense, and gain on asset sale, net of tax effects of reconciling items, or Adjusted Net Income, was $96 million. Adjusted Net Income was $0.20 per share.
The following table reconciles Net Income to Adjusted Net Income (in thousands):
| Three Months Ended
September 30, |
||||||||||
| 2021 | 2022 | |||||||||
| Net Income | $ | 89,327 | 84,014 | |||||||
| Amortization of customer relationships | 17,668 | 17,668 | ||||||||
| Impairment expense | 203 | — | ||||||||
| Gain on asset sale | — | (2,092) | ||||||||
| Tax effect of reconciling items(1) | (4,455) | (4,012) | ||||||||
| Adjusted Net Income | $ | 102,743 | 95,578 | |||||||
| (1) | Statutory tax rate was approximately 24.9% for 2021 and 25.8% for 2022. | |||||||||
Adjusted EBITDA was $223 million, a 2% increase compared to the prior year quarter. Interest expense was $48 million, a 7% increase compared to the prior year quarter. Capital expenditures were $37 million, a 54% decrease compared to the prior year quarter. Free Cash Flow before dividends was $138 million, a 47% increase compared to the prior year quarter. Free Cash Flow after dividends was $30 million compared to a $13 million deficit in the prior year quarter.
The following table reconciles Net Income to Adjusted EBITDA and Free Cash Flow before and after dividends (in thousands):
| Three Months Ended
September 30, |
|||||||||
| 2021 | 2022 | ||||||||
| Net Income | $ | 89,327 | 84,014 | ||||||
| Interest expense, net | 44,544 | 47,835 | |||||||
| Income tax expense | 32,038 | 30,332 | |||||||
| Amortization of customer relationships | 17,668 | 17,668 | |||||||
| Depreciation expense | 27,487 | 34,206 | |||||||
| Impairment expense | 203 | — | |||||||
| Gain on asset sale | — | (2,092) | |||||||
| Accretion of asset retirement obligations | 114 | 50 | |||||||
| Equity-based compensation | 3,255 | 5,553 | |||||||
| Equity in earnings of unconsolidated affiliates | (24,088) | (24,411) | |||||||
| Distributions from unconsolidated affiliates | 28,930 | 29,965 | |||||||
| Adjusted EBITDA | $ | 219,478 | 223,120 | ||||||
| Interest expense | (44,544) | (47,835) | |||||||
| Capital expenditures (accrual-based) | (80,873) | (37,168) | |||||||
| Free Cash Flow before dividends | $ | 94,061 | 138,117 | ||||||
| Dividends declared (accrual-based) | (107,436) | (107,659) | |||||||
| Free Cash Flow after dividends | $ | (13,375) | 30,458 | ||||||
The following table reconciles net cash provided by operating activities to Free Cash Flow before and after dividends (in thousands):
| Three Months Ended
September 30, |
|||||||||
| 2021 | 2022 | ||||||||
| Net cash provided by operating activities | $ | 185,115 | 176,795 | ||||||
| Amortization of deferred financing costs | (1,419) | (1,440) | |||||||
| Settlement of asset retirement obligations | 212 | 479 | |||||||
| Changes in working capital | (8,974) | (549) | |||||||
| Capital expenditures (accrual-based) | (80,873) | (37,168) | |||||||
| Free Cash Flow before dividends | $ | 94,061 | 138,117 | ||||||
| Dividends declared (accrual-based) | (107,436) | (107,659) | |||||||
| Free Cash Flow after dividends | $ | (13,375) | 30,458 | ||||||
Third Quarter 2022 Operating Update
Gathering and Processing — During the third quarter of 2022, Antero Midstream connected 22 wells to its gathering system. Antero Midstream finished construction on the Wetzel County high pressure pipeline that was placed online in the third quarter of 2022. This high pressure trunkline, in addition to the compression capacity placed in service in the second quarter of 2022 will support the expected throughput growth in 2023 and beyond.
Water Handling— Antero Midstream’s water delivery systems serviced 18 well completions during the third quarter of 2022. These completions, which drove a 13% increase in fresh water delivery volumes compared to the prior year quarter, will generate momentum in throughput volume growth in 2023.
Capital Investments
Accrued capital expenditures were $37 million during the third quarter of 2022. The company invested $54 million in gathering, compression, and water infrastructure primarily in the liquids-rich midstream corridor of the Marcellus shale. In addition, the Company received a $17 million reimbursement of the prior capital expenditures related to the sale of the Smithburg 2 processing plant. As a result, Antero Midstream expects full year 2022 capital expenditures to be at the low end of the capital budget guidance range of $275 million to $300 million.