Antero Resources Reports Third Quarter 2016 Financial and Operational Results

Third Quarter 2016 Financial Results

As of September 30, 2016, Antero owned a 62% limited partner interest in Antero Midstream Partners LP ("Antero Midstream").  Antero Midstream's results are consolidated with Antero's results.  

For the three months ended September 30, 2016, the Company reported GAAP net income of $238 million, or $0.78 per basic share and $0.77 per diluted share, compared to GAAP net income of $534 million, or $1.93 per basic and diluted share, in the third quarter of 2015.  The GAAP net income for the third quarter of 2016 included the following items:

• Non-cash gain on unsettled hedges of $334 million due to decreasing commodity prices during the quarter
• Non-cash equity-based compensation expense of $26 million
• Impairment of unproved properties of $12 million
• Income tax effect of these reconciling items of $112 million

The Company's results for the third quarter of 2016 were as follows:

• Adjusted net income of $55 million, or $0.18 per basic and diluted share, a 293% increase compared to the third quarter of 2015
• Adjusted EBITDAX of $373 million, a 28% increase compared to the third quarter of 2015

For a description of adjusted net income and adjusted EBITDAX and reconciliations to their nearest comparable GAAP measures, please read "Non-GAAP Financial Measures."

Antero's net daily production for the third quarter of 2016 averaged 1,875 MMcfe/d, including 81,460 Bbl/d of liquids (26% liquids).  Third quarter 2016 production represents an organic production growth rate of 25% from the third quarter of 2015 and a 6% increase compared to the second quarter of 2016.  Third quarter 2016 C3+ natural gas liquids ("NGLs") and oil production averaged 57,286 Bbl/d and 4,603 Bbl/d, respectively, while ethane (C2) production averaged 19,572 Bbl/d. Total liquids production for the third quarter of 2016 represents an organic production growth rate of 56% and 9% from the third quarter of 2015 and second quarter of 2016, respectively.

Antero's average natural gas price before hedging increased 23% from the prior year quarter to $2.86 per Mcf, a $0.05 per Mcf premium to the average Nymex price for the period.  Virtually all of Antero's third quarter 2016 natural gas revenue was realized at currently favorable price indices, including Columbia Gas Transmission (TCO), Chicago, Tennessee Gulf and Nymex.  Antero's average realized natural gas price after hedging for the third quarter of 2016 was $4.30 per Mcf, a $1.49 premium to the Nymex average price for the period.  This represents an 8% increase compared to the prior year quarter.  During the quarter, Antero realized a cash settled natural gas hedge gain of $184 million, or $1.44 per Mcf.

The Company's average realized C3+ NGL price before hedging for the third quarter of 2016 was $17.56 per barrel, or 39% of the Nymex WTI oil price, which represents a 45% increase as compared to the prior year quarter.  Antero's average realized C3+ NGL price including hedges was $19.96 per barrel, a 21% increase compared to the third quarter of 2015.  Antero's average realized ethane price for the third quarter of 2016 was $0.19 per gallon, or $8.00 per barrel.  The average realized oil price was $34.93 per barrel, a $9.92 differential to Nymex WTI and a 15% increase as compared to the third quarter of 2015. 

Antero's average natural gas-equivalent price including C2+ NGLs and oil, but excluding hedge settlements, increased from the prior year quarter by 21% to $2.82 per Mcfe.  The Company's average natural gas-equivalent price, including C2+ NGLs, oil and hedge settlements, increased by 3% to $3.96 per Mcfe compared to the prior year quarter.  For the third quarter of 2016, Antero realized a total cash settled hedge gain on all products of $197 million, or $1.14 per Mcfe.

Commenting on realized pricing, Glen Warren, President and CFO, said, "For the third quarter, we realized a $0.05 premium to Nymex on natural gas sales, before hedges, which is at the top end of our full year guidance.  Additionally, while many of our peers were forced to shut in production in September due to the widening of Dominion South and TETCO M2 differentials to $1.96 per Mcf back of Nymex, we were able to realize an $0.08 premium to Nymex for the month, or a $2.04 per Mcf premium to these local indices.  This once again highlights the significant value of our firm transport portfolio where we can physically move our gas to more healthy indices.  This demonstrates our ability to mitigate Northeast basis risk, which in turn results in significant visibility for our continued growth plans."

Total operating revenue for the third quarter of 2016 was $1.1 billion as compared to $1.4 billion for the third quarter of 2015.  Operating revenue for the third quarter of 2016 included a $334 million non-cash gain on unsettled hedges, while the third quarter of 2015 included an $873 million non-cash gain on unsettled hedges.  In both periods, the non-cash gain on unsettled hedges was driven by decreasing natural gas prices during the period.  Adjusted non-GAAP revenue excluding the unrealized hedge gain was $783 million, a 37% increase compared to the third quarter of 2015.  Liquids production contributed 25% of total product revenues before hedges in the third quarter of 2016, as compared to a 22% contribution for the prior year quarter.  For a reconciliation of revenue excluding unrealized hedge gains to operating revenue, the most comparable GAAP measure, please read "Non-GAAP Financial Measures."

Marketing revenue for the third quarter of 2016 was $97 million.  Antero's marketing revenue was primarily associated with the sale of third party gas purchased to utilize the Company's excess firm transportation capacity on the Tennessee and Columbia Gas Pipelines.  Marketing expense for the third quarter of 2016 was $115 million, including costs related to excess capacity and the cost of purchasing third party gas.  Net marketing expense was $18 million, or $0.10 per Mcfe, for the third quarter of 2016, representing a 55%, or $0.12 per Mcfe decrease from the second quarter of 2016.  The significant decrease in net marketing expense from the prior quarter is primarily attributable to a third party contractual commitment that commenced on July 1, 2016, in which Antero released certain unutilized firm transportation capacity and the costs associated with the unutilized capacity. Additionally, Antero achieved a higher spread on its marketed volumes due to the widening of local northeast indices relative to the end market indices reached through Antero's firm transportation capacity.    

Per unit cash production expense (lease operating, gathering, compression, processing, transportation, and production and ad valorem tax) for the third quarter of 2016 was $1.53 per Mcfe, a 16% increase compared to $1.32 per Mcfe in the prior year quarter.  The increase is primarily due to higher transportation costs incurred on new pipelines that were placed in service in late 2015, which deliver gas to better price indices resulting in higher realized gas prices for the period.  The per unit cash production expense for the quarter included $0.08 per Mcfe for lease operating costs, $1.36 per Mcfe for gathering, compression, processing and transportation costs and $0.09 per Mcfe for production and ad valorem taxes.  Per unit general and administrative expense for the third quarter of 2016, excluding non-cash equity-based compensation expense was $0.18 per Mcfe, a 31% decrease from the third quarter of 2015.  The significant per unit decrease in general and administrative expenses was primarily driven by the increase in production while general and administrative expense remained relatively flat.  Per unit depreciation, depletion and amortization expense decreased 15% from the prior year quarter to $1.16 per Mcfe, primarily driven by lower development costs.

Adjusted EBITDAX of $373 million for the third quarter of 2016 represents a record for Antero and a 28% increase compared to the prior year quarter.  Adjusted EBITDAX margin for the quarter was $2.16 per Mcfe, representing a 3% increase from the prior year quarter.  For the third quarter of 2016, cash flow from operations before changes in working capital was $310 million, a 31% increase from the prior year quarter.

For a description of adjusted EBITDAX, adjusted EBITDAX margin, as well as cash flow from operations before changes in working capital and reconciliations to their nearest comparable GAAP measures, please read "Non-GAAP Financial Measures."

The following table details the components of average net production and average realized prices for the three months ended September 30, 2016:

Marcellus Shale — Antero completed and placed on line 14 horizontal Marcellus wells during the third quarter of 2016 with an average lateral length of 9,033 feet.  During the quarter, Antero drilled on average approximately 4,000 feet per day in its laterals while drilling and casing 28 wells during the quarter.  The Company's contracted completion crews averaged 4.5 stages per day in the Marcellus, a record for the Company.  The increase in stages per day was a result of the implementation of zipper fracs on select pads during the quarter.  Antero plans to utilize zipper fracs on virtually all newly constructed pads going forward.  Year-to-date in the Marcellus, Antero has completed 69 wells that have at least 90 days of production history.  The 69 wells have an average EUR of 20.6 Bcfe at 1,245 Btu gas and assuming ethane rejection, an average lateral length of 9,000' and an average all-in development cost of $0.53 per Mcfe.  The Company is currently operating four drilling rigs and five completion crews in the Marcellus Shale play. 

Year-to-date, Antero has completed 33 wells using advanced completions, defined as completions using more than 1,300 pounds per foot of proppant.  The preliminary EURs associated with these 33 wells are currently trending to approximately 2.0 Bcf/1,000 or 17% above Antero's 1.7 Bcf/1,000 type curve. 

Current well costs are $0.86 million per 1,000 feet of lateral in the Marcellus, which represents a 27% reduction from 2015 and a 4% reduction from the second quarter of 2016.  The reduction in well costs continues to be driven both by reduced service costs through long-term contracts rolling off, resulting in a greater proportion of rigs and completion crews operating at market prices and continuing operational efficiencies.  In the Marcellus, average drilling days from spud to final rig release declined to 14 days in the third quarter of 2016, a 42% reduction from 2015 and a 7% reduction from the second quarter of 2016.

Ohio Utica Shale — Antero completed and placed on line eight horizontal Ohio Utica wells during the third quarter of 2016 with an average lateral length of 8,540 feet.  During the quarter, Antero drilled on average approximately 2,700 feet per day in its laterals while drilling and casing five wells during the quarter.  The Company's contracted completion crews averaged 5.0 stages per day in the Utica, a record for the Company.  Additionally, the Company has averaged 6.3 stages per day in 2016 when utilizing zipper fracs in the Utica.  Four of the eight wells completed in the third quarter of 2016 have been on line for more than 30 days and had an average restricted 30-day rate of 17.0 MMcfe/d while rejecting ethane (14% liquids).  Antero is currently operating one drilling rig and one completion crew in the Utica Shale play.   

Current well costs are $1.01 million per 1,000 feet of lateral in the Utica, which represents a 26% reduction from 2015 and a 3% reduction from the second quarter of 2016.  The reduction in well costs is primarily driven by lower service costs and continued operational efficiencies.  Drilling days from spud to final rig release declined to 16 days in the Utica in the third quarter of 2016, a 49% reduction from 2015.

Antero Midstream Financial Results

Antero Midstream results were released today and are available at www.anteromidstream.com.

Low pressure gathering volumes for the third quarter of 2016 averaged 1,431 MMcf/d, a 38% increase from the third quarter of 2015 and a 6% increase sequentially.  High pressure gathering volumes for the third quarter of 2016 averaged 1,351 MMcf/d, an 11% increase from the third quarter of 2015 and an 8% increase sequentially.  Compression volumes for the third quarter of 2016 averaged 777 MMcf/d, a 78% increase from the third quarter of 2015 and an 18% increase sequentially. The increase in gathering and compression volumes was due to production growth from Antero Resources in Antero Midstream's area of dedication.  Condensate gathering volumes averaged 521 Bbl/d during the quarter, an 82% decrease compared to the prior year quarter and a 74% decrease sequentially. The sequential decrease in condensate gathering volumes was primarily driven by Antero shifting its Ohio Utica Shale development from its Highly-Rich Gas/Condensate area to currently higher rate of return drilling in the Highly-Rich Gas areas.  Fresh water delivery volumes averaged 140,162 Bbl/d during the quarter, a 109% increase compared to the prior year quarter and a 33% increase sequentially.  The increase in volumes was driven by an increase in the average water used per foot in Marcellus completions to  43 barrels per foot, a 35% increase as compared to 2015 and a 5% increase compared to the second quarter of 2016 as Antero piloted higher water and sand concentration completions.

For the three months ended September 30, 2016, the Partnership reported revenues of $150 million, comprised of $78 million from the Gathering and Compression segment and $72 million from the Water Handling and Treatment segment. Revenues increased 84% compared to the prior year quarter, primarily driven by growth in throughput volumes and fresh water delivery volumes. Water Handling and Treatment segment revenues include $25 million from produced water handling and high rate water transfer services.  Direct operating expenses for the Gathering and Compression and Water Handling and Treatment segments were $5 million and $28 million, respectively, for a total of $33 million compared to $2 million in direct operating expenses in the prior year quarter. Water Handling and Treatment direct operating expenses include $24 million from produced water handling and high rate water transfer services. The increase in direct operating expenses was driven primarily by the inclusion of produced water handling and high rate water transfer services, as well as the expansion of the Partnership's gathering and compression and fresh water delivery systems to support the production growth of Antero Resources.  General and administrative expenses including equity-based compensation was $13 million, a $0.5 million decrease compared to the third quarter of 2015.  General and administrative expenses excluding equity-based compensation were $7 million during the third quarter of 2016, a 22% decrease compared to the third quarter of 2015, which included additional expenses from the integrated water business drop-down transaction. Total operating expenses were $76 million, including $26 million of depreciation, $7 million of equity-based compensation, and $4 million of accretion of contingent acquisition consideration.

The Board of Directors of Antero Resources Midstream Management LLC, the general partner of the Partnership, declared a cash distribution of $0.265 per unit ($1.06 per unit annualized) for the third quarter of 2016. The distribution represents a 29% increase compared to the prior year quarter and a 6% increase sequentially.  The distribution is the Partnership's seventh consecutive quarterly distribution increase since its initial public offering in November 2014 and will be payable on November 24, 2016 to unitholders of record as of November 10, 2016.

Balance Sheet and Liquidity

As of September 30, 2016, Antero's consolidated net debt was $4.7 billion, of which $775 million were borrowings outstanding under the Company's and Antero Midstream's revolving credit facilities.  Total borrowing capacity under these two facilities are currently $5.2 billion⁽¹⁾.  Including $709 million in letters of credit outstanding, the company had $3.7 billion in available consolidated liquidity as of September 30, 2016.  Pro forma for the $175 million private placement of common stock and the $170 million of proceeds from the Pennsylvania divestiture expected to close in the fourth quarter of 2016, Antero's September 30, 2016 consolidated pro forma net debt to trailing twelve months EBITDAX was 3.2 times. For a reconciliation of consolidated net debt to consolidated total debt, the most comparable GAAP measure, please read "Non-GAAP Financial Measures." For a description of adjusted EBITDAX to its nearest comparable GAAP measure, please read "Non-GAAP Financial Measures."

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