Yahoo Finance Antero Resources Corporation (NYSE:AR) Q1 2024 Earnings Call Transcript
Antero Resources Corporation (NYSE:AR) Q1 2024 Earnings Call Transcript April 25, 2024
Antero Resources Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Antero Resources First Quarter 2024 Earnings Call. [Operator Instructions]. It is now my pleasure to introduce Brendan Krueger, Vice President of Finance and Treasurer of Antero Resources and Chief Financial Officer of Antero Midstream. Thank you. You may begin.
Brendan Krueger: Good morning. Thank you for joining us for Antero's First Quarter 2024 Investor Conference Call. We'll spend a few minutes going through the financial and operating highlights, and then we'll open it up for Q&A. I would also like to direct you to the homepage of our website at www.anteroresources.com, where we have provided a separate earnings call presentation that will be reviewed during today's call. Today's call may contain certain non-GAAP financial measures. Please refer to our earnings press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. Joining me on the call today are Paul Rady, Chairman, CEO and President; Michael Kennedy, CFO; Dave Cannelongo, Senior Vice President of Liquids Marketing and Transportation; and Justin Fowler, Senior Vice President of Natural Gas Marketing. I will now turn the call over to Paul.
Paul Rady: Thank you, Brendan. Good morning, everyone. I'll start my comments on Slide 3 titled, "Drilling and Completion Efficiencies." As I started my comments off last quarter, the year 2023 was a transformational year for Antero for operational efficiency gains. This year, 2024, continues that trend. Starting with the chart on the top left-hand side of the slide, days per 10,000 lateral feet drilled averaged 5.4 days during the first quarter, down from 5.5 days in 2023. On the completion side, we averaged a quarterly record of 11.3 stages per day during the first quarter, an increase from the pace in 2023 of just under 11 stages per day. These operational improvements result in shorter cycle times, as shown on the bottom of the page.
Our year-to-date cycle time per pad is currently trending ahead of last year's 2023 average. There are many inputs that lead to these operational improvements as every single line item gets examined by our team. However, the most impactful change in 2024 has been improved efficiency in zipper swaps that allows us to move from well to well on a pad without having any true downtime. We estimate that this new completion technology will save more than an hour of pumping time each day and will result in further increases in completion times. Our operations also benefit from Antero Midstream's water infrastructure, providing industry-leading water deliverability rates for our completions. Avoiding the use of water trucks significantly reduces pad site congestion that we would otherwise get from water and sand trucks accessing the pad, something that many of our peers have to contend with.
Now let's look at how these improvements led to our peer-leading capital efficiency. The chart on Slide 4 compares capital efficiency of the natural gas peer group. Put simply, this is the amount of capital required to achieve a maintenance level of production. Antero has the lowest capital per Mcf equivalent of its peer group at just $0.55 per Mcfe. This is 40% below the peer average of $0.90 per Mcfe. Our best-in-class operating efficiency, combined with significant liquids exposure, led to positive free cash flow during the first quarter and is expected to generate free cash flow for the full year. Now to touch on the current liquids and natural gas liquids or NGL fundamentals, I will turn it over to our Senior Vice President of Liquids Marketing and Transportation, Dave Cannelongo for his comments.
David Cannelongo: Thanks, Paul. The start of 2024 demonstrated improved fundamentals for liquids. Ongoing geopolitical tension, particularly in the Middle East, has increased the risk premium on crude pricing in 2024 year-to-date. Internationally, the canal related challenges seen last year have diminished, but global geopolitical tensions remain high. On the domestic front, record propane demand occurred simultaneously with significant January freeze-offs drawing down storage and resulting in upward pressure on propane prices. Propane as a percentage of WTI has averaged 44% since the start of this year compared with 36% in the fourth quarter of 2023. The Exports have remained a driving force in the propane market and are showing strong year-over-year growth driven by growing global demand.
This year, China PDH build-out continues to progress with 3 new facilities placed in service in the first quarter and another 3 expected to start up there in the second quarter totaling nearly 170,000 barrels per day of capacity additions in the first half of 2024. At the same time, propane exports have averaged 1.8 million barrels per day in 2024 year-to-date, an increase of 14% over the average in 2023. Notably, propane exports reported an all-time record high this week at over 2.3 million barrels per day. This export growth is depicted on Slide 5. The chart illustrates that the U.S. remains the most important source of waterborne export LPG to meet fast-growing global demand. As a reminder, Antero exports over 50% of our C3+ production skewed heavily towards propane directly out of the Marcus Hook terminal in Pennsylvania.
This year, we have elected to sell a greater portion of our waterborne barrels against international indices as well as in the spot market instead of entering into longer Mont Belvieu link term deals. In the event that Mont Belvieu propane prices disconnect from Europe and Asian pricing due to dock constraints or rising domestic storage levels, Antero is well positioned to avoid additional Mont Belvieu exposure. The strength in international pricing has allowed us to increase our guidance for full year 2024 C3+ differentials to a premium to Mont Belvieu pricing. As Paul just touched on, our first quarter results benefited from our significant exposure to liquids prices. Slide 6 illustrates the approximately 125,000 barrels per day of C3+ NGLs plus condensate that we produce.
You can see the breakout of those products in the barrel on the left. The barrel on the right-hand side of the slide separates the approximately 40,000 barrels per day of liquids that are closely linked to WTI oil prices. This includes IsoButane, natural gasoline and condensate. Butane markets have also been a strong tailwind to Antero's C3+ realizations mainly due to implications of the Tier 3 gasoline specifications enacted in the U.S. Many U.S. refiners are unable to desulfurize gasoline down to 10 parts per million without also downgrading the octane of their motor gasoline. As a result, there is a strong demand for octane enhancement products made with butanes as feedstock. IsoButane has been particularly strong as it is used in the production of alkylate, which is a key octane enhancement product.
Just this morning, you've seen IsoButane trade at over $0.40 per gallon premium to normal butane. In conclusion, Antero's NGL strategy, product diversification and pricing is distinct when compared to other producers. Supportive fundamentals witnessed this past quarter illustrate the promising signs that are ahead. With that, I'll turn it over to our Senior Vice President of Natural Gas Marketing, Justin Fowler, to discuss the natural gas market.
Justin Fowler: Thanks, Dave. I'd like to open it up by turning to Slide 7 titled, "Not all Transport to the U.S. Gulf Coast is Equal." As a reminder, we sell substantially all of our natural gas out of basin, including approximately 75% to the LNG corridor. Our firm transportation portfolio provides us with direct exposure to growing LNG demand along the Gulf Coast and importantly, in the Tier 1 pricing points in the vicinity of the major LNG facilities. With several new LNG facilities starting up over the next year, we expect to see a widening spread between sales points near Henry Hub and sales points outside of this premium market. The blue call out box highlights a recent quote from a research commodity team that emphasizes this view.
They believe sales points within 100 miles of Henry Hub can see prices comfortably above $5 per MMBtu, while sales points outside of that range could price at $3 to $4 per MMBtu. Looking closely at this map, the yellow stars highlight Antero sales points and are located well within this 100-mile range to Henry Hub. These sales points were strategically selected beginning over 10 years ago in order to access the feeder lines at the doorstep of the LNG fairway. The chart on the top left-hand side of this slide highlights that Antero sell 75% of our gas at Henry Hub link prices while our peers, on average, sell less than 15% of their natural gas into this premium market. Looking ahead over the next 2 years as LNG export capacity increases by nearly 6 Bcf per day, in addition to an expected rise in NYMEX pricing, we expect Antero sales points to be priced at even higher premiums than NYMEX as these LNG facilities compete for supply.
An example of this is the pricing along the TGP 500L pool in the summer of 2025 and 2026. We launched those summer premiums increased to $0.40 about Henry Hub on a financial basis alone in anticipation of Venture Global's Plaquemine facility start up in the next few months. Just last year, those same implied summer premiums were only $0.03 above NYMEX. Venture Global received FERC approval this week to begin immediately introducing gas into the feeder Gator Express pipeline that brings supply from the TGP 500L pool to the Plaquemine LNG facility. This initial feed gas requirement will potentially lead to higher demand and pricing in the TGP 500 region as well as NYMEX Henry Hub prices this summer. According to Market Intelligence, the Tennessee Gas Pipeline Phase 1, Evangeline Pass project that feeds the Plaquemine LNG facility, is expected to be online by July 1, 2024, with capacity of $900 million per day.
As a reminder, Antero funds $570 million per day of the firm delivery to the 500L pool or 63% of the supply that will feed the Phase 1 project capacity. Next, I would like to touch on the outlook for power burn demand. The chart on Slide 8 depicts a third-party estimate for the increasing natural gas power demand as a result of AI data centers, crypto mining and electric vehicles. It projects nearly 8 Bcf of incremental natural gas demand through 2030 in its base case scenario or 14% growth per year. Next, turning to the chart on Slide 9. We illustrate the significant expected natural gas demand growth coming from LNG exports, Mexico exports, along with this increasing electric power generation need. Combined, these are expected to result in an increase in demand of 30 Bcf by 2030, an increase of over 100% from the same demand sources today.
It is in the early innings of increasing electrification demand. We believe there has been a structural shift toward reliable, clean and affordable natural gas that will continue to increase power burn demand annually going forward. This demand grade, combined with rising LNG and Mexico exports, creates a significantly higher base demand level than we have ever experienced in the past. We expect these fundamentals will provide support to natural gas prices and lead to periods of higher prices in the coming years. With that, I will turn it over to Mike Kennedy, Antero's CFO.
Michael Kennedy: Thanks, Justin. I'd like to start with Slide 10 and our continued focus on reducing absolute debt. We plan to allocate future free cash flow to paying down the remainder of the credit facility balance and the higher coupon near-term notes we have outstanding. We will then be in a position to return to our 50-50 strategy of 50% of free cash flow going to debt reduction and 50% going towards our share repurchase program. Turning to Slide 11. This slide compares 2024 free cash flow breakeven levels. We highlighted our peer-leading breakeven price shown on this slide during our last conference call. Our $2.27 breakeven level compares to the average NYMEX natural gas price of $2.24 in the first quarter. Despite the low price, Antero generated an unhedged $10 million of free cash flow during the first quarter.
Our quarterly results benefited from low maintenance capital requirements and high exposure to liquids. And as shown on this slide, results in the lowest unhedged free cash flow breakeven price among our natural gas peers. I will conclude my comments today with Slide 12 titled ,"Antero Resources: The "Unconstrained" E&P Company." We believe the differentiated strategy that we built here at Antero is set up for success in today's macro backdrop. We have significant scale with production volumes of 3.4 Bcfe a day and over 20 years of premium inventory. We have integrated upstream and midstream, which provides development reliability and long-term visibility into our program. This is critical in the development of the asset as evidenced by recent transactions in the basin.
We have the firm transportation portfolio that allows us to sell 75% of our production to the LNG fairway in the Gulf Coast. Many of our peers lack firm transportation capacity, forcing them to sell gas at discounted prices well back of Henry Hub. The start-up of the Plaquemines LNG terminal this summer is expected to lead to higher prices at our TGP 500 sales point, potentially leading to higher premiums to NYMEX Henry Hub. Lastly, we have the lowest reinvestment rate of our natural gas peer group. This peer-leading capital efficiency drives higher free cash flow conversion. Our low investment rate and high leverage liquids was highlighted during the first quarter when we generated positive free cash flow despite being unhedged at $2.24 NYMEX Henry Hub natural gas price.
With that, I will now turn the call over to the operator for questions.
Operator: [Operator Instructions]. Our first question comes from the line of Arun Jayaram with JPMorgan.
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