Operator: Greetings and welcome to the Antero Midstream’s Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Justin Agnew, Director of Finance and Investor Relations for Antero Midstream. Thank you. You may begin.

Justin Agnew: Good morning and thank you for joining us for Antero Midstream’s fourth quarter 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 home page of our website at www.anteromidstream.com where we’ve provided a separate earnings call presentation that will be reviewed during today’s call. Today’s call may also 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 of Antero Resources and Antero Midstream; Brendan Kruger CFO of Antero Midstream; and Michael Kennedy CFO of Antero Resources and Director of Interim Midstream. With that, I’ll turn the call over to Paul.

Paul Rady: Thanks, Justin, and good morning, everyone. In my comments, I will discuss the financial and operational success at Antero Midstream since our IPO in 2014. I’ll also discuss the 2024 capital budget and the capital efficiency of our primary customer, Antero Resources, or AR. Brendan will then highlight our 2023 results, 2024 guidance and long-term outlook, and Antero Midstream’s capital allocation strategy. I will start my comments on slide number three titled, A Decade of Success Since Our 2014 IPO. In 2023, we generated a company record $981 million of EBITDA at an 18% return on invested capital. Additionally, since the IPO in 2014, EBITDA has grown by an impressive 18% compound annual growth rate. This is a testament to AM’s world class assets, operational success and the visibility it has into the development plans of Antero resources, who is one of the premier E&P operators in North America.

Looking ahead to 2024, we are guiding to a midpoint of $1.04 billion of EBITDA based on a maintenance capital program at AR. This program is expected to generate high teens ROIC in the 2024, as well as later, our capital budget declines and EBITDA increases. Now let’s dive into AM’s 2024 capital budget by turning to slide number four titled, Unparalleled Capital Flexibility. 2023, our capital expenditures were $185 million, which was at the lower half of our guidance range, at a 30% reduction compared to 2022. Looking ahead to 2024, we had budgeted $150 million to $170 million of capital, substantially all of which is invested in the Marcellus liquids-rich midstream corridor. This is below our previous target of flat year-over-year capital in 2024 and illustrates the flexibility of our capital budget to changes in the development plans.

At the midpoint, this represents a 14% decrease compared to 2023. The right side of the page depicts the breakout of the capital budget by segment. As you can see, our compression capital declines year-over-year. This is driven by our compression, what we call relocation and reuse savings, and the completion of our Grays Peak compressor station, which will add 160 million cubic feet of compression capacity in the second quarter. In addition, Ontario’s midstream fresh water delivery and water blending capital declines in 2024 as a result of modestly lower activity levels than the completion of a main water pipeline artery in the liquids rich Marcellus Shale. On a quarterly basis, it is worth noting that AM expects to invest approximately 60% to 65% of its full year capital budget in the second and third quarters during the summer months, which are more favorable for infrastructure build-up.

One of the foundations of AM’s flexible and capital efficient investment approach is the visibility it shares with AR. The chart on slide five titled, Most Capital Efficient Customer compares the Capital Efficiency of the Natural Gas Peer Group. Based on expected 2024 drilling and completion capital budgets relative to its production, AR will have the lowest capital per unit of production of the peer group at just $0.55 per Mcf equivalent. This is 40% below the natural gas peer average of 62% per Mcf. This measure is important when comparing the asset quality and operational efficiency of each company. In the case of AR, the quality and depth of the inventory along with its operational efficiencies achieved in 2023 provides tremendous ability for AM’s long-term operations.

I’ll finish my comments on slide number six titled, AR Benefiting from Liquids Pricing Improvement. The left-hand side of the page depicts year-to-year propane inventories relative to 2023 and the five-year average. As a result of strong exports and winter weather, inventories have declined by more than 45 million barrels since October. In just a few months, propane stocks have moved from the high end of the five-year range to five-year average levels. This return of propane inventories to the historical average has tightened the market and driven bullish sentiment from Mont Belvieu propane prices as a percent of WTI increasing from 43% last fall to 57% today as prices have risen above $0.90 a gallon. This pricing uplift uniquely benefits AR due to its productivity diversity compared to traditional dry gas producers.

A pumping station with its industrial infrastructure in the background.

Approximately 50% of AR’s 2023 revenues were derived from liquids including NGLs. To put a dollar value on the pricing uplift, each dollar per barrel change in C3+ NGL pricing results in approximately $40 million of incremental free cash flow for AR since AR will produce about 40 million barrels of C3+ NGLs. Pricing improvement combined with the reduced maintenance capital at AR more than offsets the impact from the decline in natural gas prices and supports the stable development plan at AR that underpins AM’s 2024 guidance. With that, I’ll turn the call over to Brendan.

Brendan Krueger: Thanks, Paul. I will begin my comments on slide number seven titled 2023 highlights. During the fourth quarter, we generated a company record $254 million of EBITDA which was a 10% increase year-over-year. We also generated $156 million of free cash flow before dividends and $48 million of free cash flow after dividends during the quarter. These financial achievements were a direct result of Antero Midstream’s organic growth strategy and operational success. During the fourth quarter, low pressure gathering and compression volumes increased by 10% and 14% respectively compared to last year. Both throughput measures set company records for Antero Midstream. As Paul mentioned, full year 2023 EBITDA was $989 million, a 12% increase compared to 2022.

Full year free cash flow before and after dividends were company records at $587 million and $155 million respectively. Free cash flow after dividends was at the top of our updated guidance range of $145 million to $155 million and nearly 50% above our initial guidance range. This free cash flow was utilized to reduce absolute debt by approximately $150 million in 2023 and resulted in leverage declining to 3.3 times at year end 2023. Now let’s discuss our 2024 outlook by turning to slide number eight titled 2024 EBITDA increasing and capital declining. For 2024, we are forecasting over $1 billion of EBITDA or 5% growth in 2023 at the midpoint of guidance. The EBITDA growth is driven primarily by flat to low single digit throughput growth, the expiration of the LP gathering fee rebates with AR and annual inflation adjustments to our fixed fees.

As Paul discussed earlier, we are also forecasting $160 million of capital investment at the midpoint of our guidance, which represents a 14% decrease from 2023. This is the second year in a row with EBITDA growth and capital declining by double digits and illustrates the significant operational leverage of our assets. This 2024 plan allows us to generate over $250 million of free cash flow after dividends or a 65% increase compared to 2023. Slide number nine illustrates our capital allocation strategy for 2024 with sources on the left and uses on the right. Starting at the top, we are forecasting $190 million of interest payments at the midpoint of guidance, which is a 13% reduction year-over-year and is driven by lower absolute debt levels and interest savings from the successful senior note issuance in January of this year.

Next are the highly economic blocking and tackling capital investments that are the foundation of our capital allocation strategy. A peer leading return on capital supports our return of capital to shareholders. In 2024, we plan on maintaining our stable $0.90 per share dividend, which represents an attractive 7% yield at today’s share price. The remaining discretionary cash flow will first be allocated towards debt reduction to achieve our three times leverage target in 2024. Thereafter, we plan to utilize any excess cash flow for further debt reduction and opportunistic share repurchases under our new $500 million open market share repurchase program. We believe this balanced approach to reducing both the debt and equity components of the capital structure is the most efficient way to accrue value to our shareholders.

I’ll finish my comments in slide number 10 titled Delivering on Five-Year Outlook. Our transition to sustainable free cash flow after dividends over the last several years has allowed us to reduce absolute debt and leverage, execute accretive bolt-on acquisitions, and now announce a sizable $500 million share repurchase program. Looking ahead, despite the volatile commodity price environment, Antero Midstream remains on track to achieve its previously disclosed five-year targets from 2023 through 2027. Our highly economic organic project backlog of $900 million to $1 billion is expected to continue to drive high teams’ return on invested capital and generate $1.0 billion to $1.3 billion of free cash flow after dividends. Excluding our 2023 actual results, our $500 million share repurchase program represents approximately 50% of our remaining $1 billion of free cash flow after dividends from 2024 through 2027.

This program will allow AM to supplement its stable dividend with flexible and opportunistic share repurchases in order to maximize value for our shareholders. Importantly, debt reduction will continue to be an integral part of our overall capital allocation strategy to maintain a strong balance sheet, provide flexibility, and de-risk our business. The goal of this balanced capital allocation strategy is to ultimately provide the highest risk-adjusted return profile for our shareholders. In summary, 2023 was a fantastic year for AM, both operationally and financially. We have been discussing our inflection point of expanding free cash flow, and we are now delivering on that plan in 2024 and beyond. Our balance sheet strength, combined with multiple avenues to return capital to shareholders, positions AM as one of the most unique investment opportunities, not only in the midstream industry, but in the domestic mid-cap investment universe.

With that, operator, we are ready to take questions.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Jeremy Tonet with JPMorgan Chase. Please proceed with your question.

Jeremy Tonet: Hi, good morning. Morning.

Brendan Krueger: Morning.

Jeremy Tonet: Thanks for all the color today. Looking forward to 2024. Just wanted to dive in, I guess, a little bit more on volume trajectory expectations as it relates to, I guess, AR’s activity into 2024 and what that could maybe look like going into 2025. And also wanted to dive in, I guess, for the drilling partnerships, the changes in working interest there for AR and, I guess, just overall impact and what it means for AM volumes.

Brendan Krueger: Yes, I mean, on the AR side, AR came out with its guidance, which was overall production flat, maintenance capital plan overall. At AM, again, we do have the drilling partnership with QL. AR talked about gas volumes being down slightly, but again, with the drilling partnership, we’d expect more flat volumes at AM. And then as noted, I think in the prepared remarks, we have the fee rebates rolling away, which is about $53 million, and then CPI adjustments as well, which is another, call it $10 million to $15 million increase year-over-year. So that’s what drives the 5% outlook on EBITDA in 2024. And then I think AR talked on its call as well on 2025 outlook, which was, again, maintenance capital levels. And so, AM is well positioned, again, to service AR in 2025 at that maintenance capital level.

Jeremy Tonet: Got it. Thank you for that. And then moving over to the buybacks, just wanted to be clear, I guess, on how timing of that could unfold. It looks like when leverage hits three or lower, that would be an option on the table. Just wondering how you see, I guess, a timeline for that playing out. And with this, would you look at more open market purchases or from AR? Just any thoughts in general would be helpful.

Brendan Krueger: Yes, no, I mean, just to hit your latter point, I think they’d be, open market repurchases. I think AR’s stated in the past it certainly enjoys its ownership in AM, so open market repurchases. And from a timing, we did have the previous target out there on free cash flow after dividends. It was $1.15 billion at the midpoint, and that was for 2023 through 2027. So that’s now a billion after taking out the 2023 results. So a billion over the next four years, $500 million share repurchase program. So it’s about 50% of that billion on free cash flow after dividends that we you know We’d look to look to put to work Once you hit that leverage of three times over the next several years.

Jeremy Tonet: Got it. And sorry just to be clear on the point, the buybacks wouldn’t start ahead of hitting three, right, you’d wait for that to materialize and then the buybacks.

Brendan Krueger: We’re very committed to hitting that 3 times leverage. So to the extent you sell some sort of big dislocation and you had a high visibility 3 times, you certainly could potentially take advantage of that like we have in the past, but we’re pretty committed to that 3 times before we really go in a big way on the share repurchases.

Jeremy Tonet: Got it. That’s helpful. Thanks.

Operator: Thank you. Our next question comes from the line of Brian Reynolds with UBS. Please proceed with your question.

Brian Reynolds: Hi, good morning everyone. Maybe to follow up on some of the buyback commentary, but more through the lens of just flexibility and use of cash. Over the past few years, it’s been pretty consistent. But with the flexibility going forward, just kind of curious how maybe perhaps some accretive M&A could compete with buybacks. Are there any metrics that you’re looking at, just given that there does seem to be a few more assets out there that could compete with buybacks? Thanks.

Brendan Krueger: Good question, Brian. I mean we try to look at everything through the lens of just return on invested capital. And so the benefit that AM has and I think we’ve talked about this on past calls, is the high visibility that it has into its capital plan for not only the next few years, but really the next couple of decades with AR’s development plan. And so that allows us to have a pretty strong view of what our equity should trade at. And so when we look at bolt-on acquisitions, we can look at return on invested capital for those acquisitions relative to what we could be buying our stock back at and what the return we’d expect on that. So we’ll certainly be thoughtful between bolt-on acquisitions that could be attractive versus share buybacks versus further debt paydown. This just allows us to have another tool in the toolbox, I think, as we continue to generate more and more free cash flow to dividends moving forward.

Brian Reynolds: Right. Makes sense. And then maybe as a follow-up on the EBITDA guide. I think you’re ending the year at call it, $990 and you kind of talked about the bridge of where your base guide is with the rate relief in the CPI. So maybe if you can just help sensitize maybe the lower end of the guide. I mean does that really just kind of imply limited to no activity? Because it seems like kind of your base outlook given where AR came out today, it seems like you’ll be trending towards the high end of that guide at this point. Thanks.

Brendan Krueger: Yes. I think the guidance is really around — I mean, we’re in certainly a volatile gas price environment and ARs got strong with prices as we’ve talked about. But I think the low end is just to provide for to the extent you had any further reduction because commodity prices have come off even further, and AR pulled back completion. That would likely be the low end of the guide. But I think your point is fair. We feel pretty good about the activity given AR strong balance sheet, liquids focus and the capital efficiency gain that ARs had, they pulled back capital over 25% and generating free cash flow despite gas prices being at kind of a 25-year low outside of COVID. So feel pretty good about the outlook today, but the low end reflects potential slightly lower activity.

Brian Reynolds: Fair enough. I’ll leave it there. Enjoy the rest of your morning.

Brendan Krueger: Hey Brian, thank you.

Operator: Thank you. Our next question comes from the line of John Mackay with Goldman Sachs. Please proceed with your question.

John Mackay: Hey good morning. Thanks for the time. Maybe just to pick up one on the gas macro there. I’m pretty sure I know what the answer is going to be, but just so we can kind of talk through it. We do need to see production kind of roll over somewhere in the U.S. on the gas side given where we sit right now. Just curious to hear your high-level thoughts on kind of where you think that would hit? What any impact at all you could see on AM? And I know it was kind of answered on the AR call a little bit, but maybe just go through that again for us. Thank you.

Brendan Krueger: Yes. No, good question. I mean, I think, again, if you think about where it should come from on the AR front, given the liquids focus, liquids is driving the economics as we see other basins out there — so let me step back. Liquids is driving the economics and even at AR gas volumes declining 3%. And so to the extent you have similar producers take an approach, I think that AR is you have a significant decline in production on the gas side. And so I think we view producers that have dry gas focused basis challenges, high declines, high capital intensity areas. Those should all come down, which essentially is all the other gas basins, if you don’t have a liquids focus, I think, today. So we’d expect kind of an allocation across gas basins to see activity. You’ve seen some of that come out already with some producers, and we’d expect more of that as we move forward through the earnings season here.

Q – John Mackay: I appreciate that. And like, you guys — I guess, second question, you guys gave a lot of guidance on the forward look. So I’m not trying to pick apart too much, but I guess last year, you guys kind of gave the forward look to 2027. This year, your kind of forward look didn’t roll over a year. Is there anything special about 2027 or 2028? Or is this kind of — you’ve gotten into a pretty steady EBITDA outlook, pretty steady CapEx outlook, you’d generally expect that to hold through past 2027, I guess, is the crux answer. Is that fair?

Brendan Krueger: Yes. That’s well said. I mean there’s no material change to our outlook. And I think you can look at the remaining years and come to an average in terms of free cash flow after dividends, and there’s nothing in particular that would change that as you move into 2028 and beyond. So we’re executing on the plan we put out there. And to the extent something changed over time, we’d certainly update, but I think we’d continue to expect those expectations. And ARs got plenty of inventory. There’s over 20 years of inventory. I think 22 years was the number that they talked about on their call. And so plenty of inventory, like I said, multi-decade inventory at AR. So no impact on inventory. It’s just a matter of there’s no real material change beyond 2027 and so did not really feel the need to go out another year just to extend the years that we’ve already put out there.

John Mackay: Makes sense. 2027 is far enough – already. I appreciate the time. Thank you.

Brendan Krueger: Thanks, John.

Operator: Thank you.[Operator Instructions] Our next question comes from the line of Zack Van Everen with TPH. Please proceed with your question.

Zack Van Everen: Hey guys, thanks for taking my question. Just want to circle back on the production side to help me think through that. I believe AR mentioned 1% declines on total volumes, 3% like you guys had mentioned on gas. So maybe just a refresher on that drilling partnership. Are they just more incentivized to keep volumes flat around your system based on contracts? Or just any kind of clarity there would be helpful.

Brendan Krueger: Yes. So just a reminder, the drilling partnership is in all of the wells that AR drilled during the year. And so with AR declining, AM gathers gross gas, of course, gross well and gas. So AR’s net gas volumes are not really reflective of the gross operated wellhead volumes. So with the gross operated wellhead volumes, which include QL and other non-op interest owners, which is a small component that’s where you get to flat gross wellhead volumes year-over-year, which is what we talked about.

Zack Van Everen: Okay. That makes sense. And then just one on the — I’ll probably mispronounce this, but [indiscernible] lawsuit. I know in 2023, it was kind of going back and forth. Any update there on when that might come through and what you might do with that cash if it does?

Brendan Krueger: Yes. No update outside of what we disclosed in the 10-K. So always hard to pinpoint timing on those things and no update there. In terms of — none of the guidance we put out there includes [indiscernible] to the extent the cash comes in, we’ll certainly just evaluate like we do with our regular free cash flow and what’s the best return on that cash flow to the extent it comes in.

Zack Van Everen: Alright. Perfect. That’s all I had. Thanks guys.

Operator: Thank you. Our next question comes from the line of Ned Baramov with Wells Fargo. Please proceed with your question.

Ned Baramov: Hi, thanks for taking the question. It seems you continue to pay down debt even after hitting your 3 times target later this year. So what is the ultimate leverage metric you would like to get to at AM?

Brendan Krueger: Yes. I mean, again, I think we put out the 3 times. I don’t think we’re necessarily saying we’re going to pay down more than the 3 times leverage. I think we’re just saying we’ll evaluate once we get to that level, what makes the most sense between share repurchases, asset bolt-on acquisitions, further dividend increases. I mean, I think we’ll evaluate once we get to that point. As we sit here today, share repurchases certainly make a lot of sense, which is why we came out with our $500 million share repurchase program, but we’ll just continue to evaluate. And if you need to re-up [ph] the share repurchase program or if you get through it over the next few years, then you’ll do that, but no magic to that and no identified further leverage target beyond the 3 times right now.

Ned Baramov: Got it. And then a quick clarification on Slide 10, does the 2025 through 2027 outlook for free cash flows after dividends, does that reflect the impact of share repurchases?

Brendan Krueger: That is before share repurchases. So you’d have slightly different — after share repurchases.

Ned Baramov: Okay. Understood. And then a housekeeping item, if I may, just on some of the drivers for the water business. It seems that you’re looking for fewer wells to be serviced in 2024. However, lateral length is now longer and I presume the barrels per foot is essentially unchanged, but net-net, my math seems to indicate that total water volumes should be pretty much unchanged in 2024 relative to 2023. Am I thinking about this correctly?

Brendan Krueger: No, they should be down. So the guidance we gave was about 20 fewer completions and lateral feet are up 2,000 feet. So you’re down about 180,000 feet. And so volumes are down about 15% to 20% overall, which is a part of the guidance that we gave.

Ned Baramov: Understood. Thanks for that. That’s all I had.

Operator: Thanks you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Agnew for any final comments.

Justin Agnew: Thank you, everybody, for joining today’s conference call. Please feel free to reach out with any further questions.

Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.

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Q4 2023

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