Antero Resources Reports Second Quarter 2018 Financial and Operational Results

DENVER, Aug. 1, 2018 /PRNewswire/ — Antero Resources Corporation (NYSE: AR) (“Antero” or the “Company”) today released its second quarter 2018 financial and operational results.  The relevant consolidated and consolidating financial statements are included in Antero’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, which has been filed with the Securities and Exchange Commission (“SEC”).  The relevant Stand-Alone financial statements are also included in Antero’s Form 10-Q within the Parent column of the guarantor footnote (Note 16).

Second Quarter 2018 Highlights:

• Net daily gas equivalent production averaged a record 2,520 MMcfe/d (27% liquids), a 15% increase over the prior year period and a 6% increase sequentially
• Liquids production averaged 113,581 Bbl/d, an 11% increase over the prior year period and a 10% increase sequentially, and contributed 38% of total product revenue before hedging
• Realized natural gas price averaged $2.83 per Mcf, a $0.03 premium to the NYMEX Henry Hub natural gas price before hedging
• Realized natural gas equivalent price averaged $3.35 per Mcfe before hedges, driven by a $0.52 per Mcfe uplift from liquids production
• Realized natural gas equivalent price averaged $3.77 per Mcfe after hedges
• GAAP net loss was reported at $136 million, or $(0.43) per diluted share, non-GAAP adjusted net income at $6 million, or $0.02 per diluted share, and non-GAAP Stand-Alone adjusted net loss at $2 million

• Reported Adjusted EBITDAX of $405 million and Stand-Alone Adjusted EBITDAX of $335 million, a 26% and 25% increase over the prior year period, respectively
• Stand-Alone Net Debt to trailing twelve months Stand-Alone Adjusted EBITDAX was 2.6x at quarter-end
• Drilled longest lateral in West Virginia history at 15,100 lateral feet
• Antero targeted 2018 and 2019 natural gas production is 100% hedged at $3.50 per MMBtu

Commenting on the quarter, Paul Rady, Chairman and CEO said, “We have made significant progress towards achieving our financial and operating objectives during the first half of 2018.  Our focus on operations execution resulted in meaningful efficiency gains during the first half of the year. This has positioned us to reduce the number of completion crews that we plan to operate in the field during the remainder of the year, while production growth of 20% and capital spending guidance remain on target.  We continue to execute on our long-term 5-year plan in which we expect attractive production growth while generating significant free cash flow.”

Recent Developments

2018 Guidance Update

Based on the first half realizations and current strip prices for the second half of the year, Antero is raising its full year realized natural gas price guidance before hedges from a range of $0.00 to $0.05 per Mcf premium to NYMEX Henry Hub to a range of $0.05 to $0.10 per Mcf premium to NYMEX. Importantly, the Rover Phase 2 Sherwood Lateral is expected to allow Antero’s Marcellus gas to be transported on Rover to attractively priced Chicago and Gulf Coast markets, highlighting the optionality that the Sherwood Lateral brings to Antero’s long-term development plan. The ability to consistently realize natural gas prices above NYMEX reflects the competitive advantage of Antero’s diversified firm transportation portfolio and ability to sell gas into favorably priced markets.

Driven primarily by a delay of the in-service date of the Mariner East 2 pipeline, now expected in the fourth quarter of 2018, Antero is lowering its guidance on C3+ NGL realized prices as a percentage of WTI from a range of 62.5% to 67.5% to a range of 57.5% to 62.5%.  Additionally, although NGL prices on an absolute dollar per barrel basis have remained in line with prior guidance assumptions, NGL prices have not increased at the same rate as WTI during 2018.  The Mariner East 2 pipeline and terminal project is expected to result in a significant reduction in propane and butane differentials to Mont Belvieu, driven by lower transportation costs to the market and sales to international markets at a premium to Mont Belvieu pricing.

In conjunction with the Mariner East 2 pipeline delay, Antero is also lowering its cash cost guidance for 2018 from $2.10 to $2.20 per Mcfe on a Stand-Alone basis to $2.05 to $2.15 per Mcfe, and from $1.65 to $1.75 per Mcfe on a consolidated basis to $1.60 to $1.70 per Mcfe.  Cash costs include lease operating, gathering, compression, processing, transportation, and production and ad valorem taxes.

The following table is a comparison of the initial 2018 guidance issued in January 2018 and the revised 2018 guidance.  Except as mentioned below, our previously issued 2018 guidance remains unchanged.

Financial and operational results are reported and discussed on a consolidated basis, unless otherwise noted.  Please read “Non-GAAP Financial Measures” for:

• A description of consolidated and Stand-Alone non-GAAP measures, including Adjusted EBITDAX and adjusted net income and reconciliations to their nearest comparable GAAP measures
• A reconciliation of revenue excluding unrealized derivative gains (losses) to operating revenue, the most comparable GAAP measure
• A reconciliation of Net Debt to total debt, the most comparable GAAP measure
• A reconciliation of Antero Midstream’s Adjusted EBITDA and Distributable Cash Flow to their nearest comparable GAAP measure

Please read “Second Quarter 2018 Financial Results” for a reconciliation of consolidated and Stand-Alone Adjusted EBITDAX margin to realized price before cash receipts for settled commodity derivatives, the most comparable GAAP measure.

Second Quarter 2018 Financial Results

As of June 30, 2018, Antero Resources owned a 53% limited partner interest in Antero Midstream Partners LP (“Antero Midstream”).  Antero Midstream’s results are consolidated within Antero Resources’ results. 

For the three months ended June 30, 2018, Antero reported a GAAP net loss of $136 million, or $(0.43) per diluted share, compared to a net loss of $5 million, or $(0.02) per diluted share, in the prior year period.  Excluding items detailed in “Non-GAAP Financial Measures,” adjusted net income was $6 million, or $0.02 per diluted share, compared to a $13 million loss, or $(0.04) per diluted share, in the prior year period.  Stand-Alone adjusted net loss was $2 million compared to a loss of $17 million in the prior year period.  Adjusted EBITDAX was $405 million, a 26% increase compared to $321 million in the prior year period, and Stand-Alone Adjusted EBITDAX was $335 million, a 25% increase compared to $267 million in the prior year period.  Second quarter 2018 results include settled marketing derivative losses of $16 million.

The following table details the components of average net production and average realized prices for the three months ended June 30, 2018:

Net daily natural gas equivalent production in the second quarter averaged 2,520 MMcfe/d, including 113,581 Bbl/d of liquids (27% of production), an increase of 15% compared to the prior year period and a 6% increase sequentially. Natural gas production averaged 1,838 MMcf/d, oil production averaged 6,940 Bbl/d, C3+ NGLs production averaged 70,485 Bbl/d, and recovered ethane production averaged 36,156 Bbl/d. Total liquids production grew 11% compared to the prior year period and 10% sequentially.  Liquids revenue represented approximately 38% of total product revenue before hedges, an increase from 30% of total product revenue in the prior year period.  This increase reflects the substantial increase in liquids pricing year over year. 

Antero’s average realized natural gas price before hedging was $2.83 per Mcf, a $0.03 per Mcf premium to the average NYMEX Henry Hub price during the period.   Including hedges, Antero’s average realized natural gas price was $3.50 per Mcf, a $0.70 premium to the average NYMEX price, reflecting the realization of a cash settled natural gas hedge gain of $113 million, or $0.67 per Mcf. 

Antero’s average realized C3+ NGL price before hedging was $34.81 per barrel, or 51% of the average NYMEX WTI oil price, representing a 44% increase versus the prior year period.  Including hedges, Antero’s average realized C3+ NGL price was $33.10 per barrel, reflecting the realization of a cash settled C3+ hedge loss of $11 million, or $1.71 per barrel. 

Antero’s average realized oil price before hedging was $61.55 per barrel, a $6.48 negative differential to average NYMEX WTI and a 42% increase versus the prior year period. Including hedges, the average realized oil price was $52.11 per barrel, reflecting the realization of a cash settled WTI crude oil loss of $6 million, or $9.44 per barrel.  The average realized ethane price was $0.24 per gallon, or $9.93 per barrel, compared to $0.20 per gallon, or $8.40 per barrel, in the prior year period. 

Antero’s average natural gas equivalent price including recovered C2+ NGLs and oil, but excluding hedge settlements, was $3.35 per Mcfe, representing a 3% increase compared to the prior year period.  Including hedges, the Company’s average natural gas equivalent price was $3.77 per Mcfe, an 11% increase from the prior year period, primarily driven by higher realized liquids prices and hedge gains.  Net cash settled hedge gains on all products were $96 million, or $0.42 per Mcfe.

Operating revenues in the second quarter were $989 million, compared to $790 million in the prior year period.  Revenue included a $41 million non-cash loss on unsettled commodity derivatives and a $16 million non-cash gain on unsettled marketing derivatives, while the prior year included a $55 million non-cash gain on unsettled commodity derivatives.  Revenue excluding gains and losses on unsettled derivatives was $1.0 billion, a 38% increase versus the prior year period.  Liquids production contributed 38% of total product revenues before hedges, compared to a 30% contribution in the prior year period.  Please see “Non-GAAP Financial Measures” for a description of revenue excluding unrealized derivative (gains) losses.

The following table presents a reconciliation of Stand-Alone and consolidated realized price before cash receipts for settled derivatives to Adjusted EBITDAX margin for the three months ended June 30, 2017 and 2018:

Stand-Alone per unit cash production expense (lease operating, gathering, compression, processing, transportation, and production and ad valorem taxes) was $2.04 per Mcfe, a 4% increase compared to $1.96 per Mcfe in the prior year period.  The per unit cash production expense for the quarter included $1.79 per Mcfe for gathering, compression, processing and transportation costs, $0.14 per Mcfe for lease operating costs, and $0.11 per Mcfe for production and ad valorem taxes.  Lease operating expenses increased in the second quarter due to an increase in produced water from newer wells that were completed with higher water intensity advanced completions.  

Stand-Alone per unit net marketing expense was $0.30 per Mcfe compared to $0.14 per Mcfe reported in the prior year period.  Net marketing expense increased due to higher unutilized excess capacity related to Rover pipeline capacity that was placed in service in late 2017.  Net marketing expense included a $0.07 per Mcfe loss for settled marketing derivatives related to contracts that had resulted in realized gains in the first quarter of 2018.  See note 11 to the condensed consolidated financial statements in Antero’s Form 10-Q for more information on these contracts. 

Stand-Alone per unit general and administrative expense, excluding non-cash equity-based compensation expense, was $0.15 per Mcfe, consistent with the prior year period. 

Stand-Alone Adjusted EBITDAX was $335 million for the second quarter of 2018, a 25% increase compared to $267 million in the prior year period.  The increase was primarily driven by increased production and pricing.  Stand-Alone Adjusted EBITDAX margin was $1.46 per Mcfe, a 10% increase from the prior year period.  Consolidated Adjusted EBITDAX was $405 million, compared to $321 million in the prior year period, a 26% increase over the prior year period.  Consolidated Adjusted EBITDAX margin was $1.77 per Mcfe, compared to $1.60 per Mcfe in the prior year period. 

Stand-Alone net cash provided by operating activities was $229 million for the period.  Stand-Alone Adjusted Operating Cash Flow was $279 million, a 36% increase over the prior year period.  Consolidated net cash provided by operating activities was $297 million for the period.  Consolidated Adjusted Operating Cash Flow was $335 million during the second quarter, a 34% increase compared to the prior year period.  Stand-Alone Adjusted Operating Cash Flow and Adjusted Operating Cash Flow increased versus the prior year period primarily due to higher production and liquids prices during the quarter.

Operating Update

Second Quarter 2018

Marcellus Shale — Antero placed 25 horizontal Marcellus wells to sales during the second quarter of 2018 with an average lateral length of 9,500 feet and a 30-day gross average rate per well of 16.9 MMcfe/day on choke. The 30-day gross rate included 914 Bbl/d of liquids, representing oil, C3+ NGLs and 25% of the ethane that could be recovered (“25% ethane recovery”).  Current average well costs are $0.86 million per 1,000 feet of lateral in the Marcellus assuming the 2018 average lateral length of 10,000 feet and 2,000 pounds of proppant per foot. 

During the quarter, Antero drilled 22 wells in the Marcellus with an average lateral length of 9,600 feet in approximately 12 total days from spud to final rig release on average.  Antero also set a state of West Virginia record for the longest lateral drilled to date at 15,100 lateral feet during the period.  Antero completed 5.0 stages per day on average during the second quarter and achieved a record 5.5 stages per day during the month of April.  Completion efficiencies improved from 4.3 stages per day in the prior quarter and exceeded the 4.5 stages per day budgeted for 2018.  The trend continues with 6.5 stages per day completed on average in late July 2018.  Antero recently completed its first remote completion which involved locating crews and equipment on a separate pad from the well pad, enabling improved logistics for completion operations. These operational efficiencies led to an acceleration of total stages completed during the first half of the year.  As a result, Antero expects to place a total of 50 to 60 Marcellus wells to sales during the third quarter of 2018, including the Company’s largest pad to date, a 14-well pad that recently commenced production in July.  Because of these efficiency gains, Antero expects to release two completion crews in the coming weeks, resulting in an average of four crews operating during the second half of 2018, compared to six crews in the first half of 2018.  Antero’s operating plan contemplates a reduction in capital spending during the second half of the year, as compared to the first half of 2018.

Two Marcellus pads completed late in the first quarter of 2018 have now been online for more than 90 days with noteworthy gross production rates.  One 9-well pad with an average lateral length of 8,300′ produced a 90-day gross average rate of 157 MMcfe per day, which is on average 17.5 MMcfe/d day per well with 25% ethane recovery, including 7,715 Bbl/d of liquids.  A second 3-well pad representing the most westerly wells completed on Antero’s Marcellus acreage to date averaged 9,000 feet in lateral length per well and produced a 90-day gross average rate of 18.5 MMcfe/d per well with 25% ethane recovery, including 1,112 Bbl/d of liquids per well. 

During the latter part of the second quarter and into the third quarter, Antero has experienced production curtailments due to tightness in the local crude trucking takeaway market. This is at present a common issue industry-wide.  The Company’s crude buyers have been challenged to secure an adequate number of licensed trucks and drivers to move Antero’s growing crude production.  The Company expects these production curtailments to be temporary in nature as Antero has recently executed direct agreements for additional trucking capacity.  This additional capacity will enable Antero to lift existing curtailments as well as move the 100,000 barrel-plus crude inventory that has built up over the past couple of months.  Currently, approximately 100 MMcfe/d is curtailed, including 4,000 Bbl/d of NGLs and 2,000 Bbl/d of crude oil. With truck capacity expected to match oil production beginning in September, Antero anticipates that the production curtailment will be alleviated by the fourth quarter of 2018.

Ohio Utica Shale — Antero placed five horizontal Ohio Utica wells to sales during the second quarter of 2018 with an average lateral length of approximately 15,900 feet and an average 30-day rate of 12.9 MMcfe/d per well on choke. Current average well costs are $0.95 million per 1,000 feet of lateral in the Ohio Utica assuming the 2018 average lateral length of 12,000 feet and 2,000 pounds of proppant per foot.  The Company does not plan to operate any drilling rigs or completion crews in the Ohio Utica Shale during the remainder of 2018 as the second half 2018 development plan shifts to liquids-rich locations in the Marcellus due to the continued strength in liquids pricing. The Company’s current five year plan does include the resumption of drilling and completion activity in the Ohio Utica Shale in 2019. 

During the period, Antero drilled six wells in the Utica dry gas regime with an average lateral length of 12,900 feet in 20 total days from spud to final rig release.  This represents a 4% decrease in drilling days and a 22% increase in lateral length in the Utica dry gas regime compared to 2017.  In addition, Antero drilled nearly 5,200 lateral feet in a 24-hour period, which is a company record for drilled lateral footage in 24 hours in the Utica. During the second quarter, the Company completed 5.4 stages per day on average, above the 5.1 stages per day achieved during the first quarter.

During the third quarter of 2018, the Company expects to place a total of 15 wells to sales in the Utica with an average lateral length of 10,200 feet per well.

President and CFO, Glen Warren, commented, “Earlier this year, we set our sights on delivering an attractive plan of living within cash flow and reducing leverage while maintaining disciplined production growth over our five year plan.  Our continued focus on strong execution has propelled us to reach drilling and completion efficiencies faster than anticipated.  As a result, our full year capital spending targets remain the same, but capital is weighted toward the first half of the year and production growth is weighted toward the back half of the year.  Notably, we expect to place 65 to 75 wells to sales in the third quarter, a sizeable increase from the 51 wells placed to sales in the first six months of the year.  Our operational momentum gives us confidence in the execution of our operating plan for 2018 and in future years.”

Second Quarter 2018 Capital Investment

Antero invested $393 million on drilling and completion capital expenditures for the three months ended June 30, 2018.  In addition, the Company invested $38 million for land, $113 million for gathering and compression systems and $18 million for water infrastructure projects, including $8 million for the Antero Clearwater Treatment Facility. Antero’s Stand-Alone drilling and completion capital expenditures for the three months ended June 30, 2018, were $467 million.

Balance Sheet and Liquidity

As of June 30, 2018, Antero’s Stand-Alone Net Debt was $3.8 billion, of which $455 million were borrowings outstanding under the Company’s revolving credit facility.  Total lender commitments under this facility were $2.5 billion and the borrowing base is $4.5 billion.  After deducting letters of credit outstanding, the Company had $1.4 billion in available Stand-Alone liquidity as of June 30, 2018.  As of June 30, 2018, Antero’s Stand-Alone Net Debt to trailing twelve months Stand-Alone Adjusted EBITDAX ratio was 2.6x.

Commodity Derivative Positions

Antero’s estimated natural gas production for the second half of 2018 at the midpoint of guidance is fully hedged at an average index price of $3.49 per MMBtu.  The Company’s target natural gas production for 2019 is fully hedged at an average index price of $3.50 per MMBtu. In total, Antero has hedged 2.3 Tcfe of future natural gas equivalent production using fixed price swaps covering the period from July 1, 2018, through December 31, 2023, at an average index price of $3.35 per MMBtu.  As of June 30, 2018, the Company’s estimated fair value of commodity derivative instruments was $1.2 billion. The following table summarizes Antero’s hedge position as of June 30, 2018: