Antero Midstream Reports Third Quarter 2019 Financial and Operating Results

Antero Midstream is revising its 2019 capital budget down to a range of $665 to $685 million from a previous range of $750 to $800 million. The reduction is driven by the deferral of just-in-time gathering, processing and fresh water delivery projects, as well as capital savings initiatives, and removal of the final Antero Clearwater Facility milestone payments assumed in the capital budget. Antero Midstream is also revising its GAAP net income guidance from a range of $305 to $365 million to a net loss range of $55 million to $45 million as a result of the non-cash impairment of the Antero Clearwater Facility. In addition, Antero Midstream is revising its 2019 Adjusted EBITDA guidance from a range of $870 to $920 million to a range of $840 to $850 million and Distributable Cash Flow guidance from a range of $680 to $730 to a range of $655 to $665 million. The reduction is driven primarily by the reduced wastewater volume throughout the year and the idling of the Antero Clearwater Facility. The revised guidance includes an additional $10 to $15 million of idling expenses in the fourth quarter of 2019. The net positive cash flow impact to Antero Midstream as a result of the revised capital budget and Adjusted EBITDA guidance is approximately $55 million in 2019 based on the midpoint of the revised guidance ranges.

Preliminary 2020 Outlook

In a separate release, Antero Resources announced that it is targeting 110 to 120 completions in 2020, with an average lateral length of 12,100 feet as compared to 115 to 125 completions in 2019 with an average lateral of 10,200 feet.  This represents a 14% increase in total lateral feet completed.  As a result of the well cost reductions achieved to date and expectations for 2020, Antero Resources announced that its preliminary drilling and completion capital budget for 2020 is expected to be $1.15 to $1.2 billion. 

Antero Midstream is initially targeting a 2020 capital program of approximately $375 to $425 million, or a 40% decrease as compared to the midpoint of the revised 2019 capital budget. The preliminary 2020 capital program does not include the $125 million earn-out payment from the water drop down that Antero Midstream expects to pay in the first quarter of 2020 to Antero Resources. Antero Midstream's 2020 capital budget will be flexible based on Antero Resources 2020 budget and completion activity.  Antero Midstream's and Antero Resources' 2020 budgets remain subject to respective board approvals and are both expected to be finalized by the first quarter of 2020.

Return of Capital Program

On August 12, 2019, the Board of Directors of Antero Midstream authorized a share repurchase program to opportunistically repurchase up to $300 million of shares of its outstanding common stock through June 30, 2021. During the third quarter of 2019, Antero Midstream repurchased approximately 3.5 million shares under this program for approximately $25 million, leaving approximately $275 million of remaining capacity as of September 30, 2019. In addition, Antero Midstream declared a third quarter dividend of $0.3075 per share, which was unchanged as compared to the second quarter of 2019. Importantly, Antero Midstream's declining capital program in 2020 combined with anticipated Adjusted EBITDA growth in 2020 positions Antero Midstream to continue targeting high single digit return of capital growth in 2020 as compared to 2019 based on the expected Antero Resources development plan.  Based on the attractive rates of return and cash flow per share accretion from repurchasing shares at the current share price, Antero Midstream currently expects this return of capital growth in 2020 to be in the form of share repurchases. The future allocation of Antero Midstream's return of capital to shareholders between dividend growth and share repurchases is subject to Board approval.

Increased Credit Facility Commitments

In October of 2019, Antero Midstream added Royal Bank of Canada ("RBC") to its lending group with $132 million of incremental commitments.  Pro forma for the addition of RBC, Antero Midstream's lender commitments increased to $2.13 billion and the Company's available liquidity increased to $1.4 billion. 

Third Quarter 2019 Financial Results

The previously announced simplification transaction between Antero Midstream GP LP ("AMGP") and Antero Midstream Partners LP ("Antero Midstream Partners") closed on March 12, 2019. GAAP financial results for periods prior to the closing of the simplification transaction reflect the financial results of AMGP. The financial and operating results and comparisons for periods prior to the closing of the simplification transaction that are discussed in this release are based on the pro forma results of Antero Midstream Corporation as if the transaction had occurred on January 1, 2018. GAAP and pro forma financial statements can be found in the back of this press release.

Low pressure gathering volumes for the third quarter of 2019 averaged 2,698 MMcf/d, a 25% increase as compared to the prior year quarter.  Compression volumes for the third quarter of 2019 averaged 2,434 MMcf/d, a 39% increase as compared to the third quarter of 2018.  High pressure gathering volumes for the third quarter of 2019 averaged 2,662 MMcf/d, a 23% increase over the third quarter of 2018. The year-over-year increase in gathering and compression volumes was driven by production growth from Antero Resources in Antero Midstream's area of dedication.  Fresh water delivery volumes averaged 141 MBbl/d during the quarter, a 28% decrease compared to the third quarter of 2018, driven by a decrease in Antero Resources' completion activity.

Gross processing volumes from the 50/50 processing and fractionation joint venture with MarkWest (a wholly-owned subsidiary of MPLX) (the "Joint Venture") averaged 1,036 MMcf/d for the third quarter of 2019, an increase of 71% compared to the prior year quarter.  The five Sherwood Joint Venture plants operated at 100% utilization for the quarter.  Gross Joint Venture fractionation volumes averaged 32 MBbl/d, an 88% increase compared to the prior year quarter. The Joint Venture's fractionation capacity was 80% utilized during the quarter. The year-over-year increase in processing and fractionation volumes is primarily driven by the increase in Antero Resources' rich gas and C3+ NGL production volumes.

For the three months ended September 30, 2019, revenues were $244 million, comprised of $176 million from the Gathering and Processing segment and $97 million from the Water Handling and Treatment segment, net of $(29) million of amortization of customer relationships. Water Handling and Treatment segment revenues include $11 million from wastewater treatment at the Antero Clearwater Facility and $36 million from wastewater handling and high rate water transfer services. Wastewater handling and high rate transfer service revenues, which are billed at cost plus 3%, decreased by 10% compared to the second quarter of 2019 driven by water savings initiatives, improved trucking logistics, and blending operations during the month of September. These support lower operating and capital costs for Antero Resources.

Direct operating expenses for the Gathering and Processing and Water Handling and Treatment segments were $13 million and $49 million, respectively, for a total of $62 million, compared to $81 million in total direct operating expenses in the prior year quarter. Water Handling and Treatment direct operating expenses include $11 million from wastewater treatment at the Antero Clearwater Facility and $35 million from wastewater handling and high rate water transfer services, which are billed at cost plus 3%.  Antero Midstream incurred $2 million in costs to idle the Antero Clearwater Facility during the third quarter.  General and administrative expenses excluding equity-based compensation were $10 million during the third quarter of 2019.  Total operating expenses were $578 million, including $20 million of equity compensation expense, $457 million of impairment, $24 million of depreciation, and $2 million of accretion and change in fair value of contingent acquisition consideration and asset retirement obligations.

During the third quarter of 2019, Antero Midstream idled the Antero Clearwater wastewater treatment facility. The decision to idle the facility was driven by its inability to operate at its intended specifications.  As a result of idling the facility, Antero Midstream incurred a $457 million non-cash impairment during the quarter related to the property, plant and equipment, as well as the impairment of goodwill and customer relationship value related to the facility as a result of the simplification transaction. Antero Midstream will continue to evaluate strategic options for the future of the Antero Clearwater Facility. 

Net loss was $289 million, or $(0.57) per share. Adjusted Net Income was $197 million, or $0.39 per share, representing a 156% increase compared to the prior year quarter.  Adjusted EBITDA was $218 million, an 18% increase compared to the prior year quarter.  Adjusted EBITDA for the quarter included $19 million in combined distributions from Stonewall Gathering LLC and the processing and fractionation Joint Venture.  Cash interest paid was $44 million. The decrease in cash reserved for bond interest during the quarter was $9 million. Maintenance capital expenditures during the quarter totaled $13 million and Distributable Cash Flow was $170 million, representing an 8% increase over the prior year quarter. Based on the previously declared dividend of $0.3075 per share, Antero Midstream's Distributable Cash Flow coverage ratio was 1.1x.

The following table reconciles net income to Adjusted Net Income, Adjusted EBITDA and Distributable Cash Flow as used in this release (in thousands):

		Three Months Ended September 30,
			2018 (1)			2019
Net income		$	57,975			(289,477)
Amortization of customer relationships			17,843			28,863
Impairment expense			1,157			457,478
Adjusted Net Income			76,975			196,864
Interest expense			22,493			36,134
Provision for income tax expense (benefit)			22,233			(62,268)
Depreciation expense			42,390			24,460
Accretion and change in fair value of contingent acquisition consideration			4,020			1,977
Accretion of asset retirement obligations			33			54
Equity-based compensation			13,102			20,129
Equity in earnings of unconsolidated affiliates			(9,235)			(18,478)
Distributions from unconsolidated affiliates			11,765			18,710
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