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Antero Details 2021 Plan; 4Q, Full Year 2020 Results

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   |    Monday,February 22,2021

Antero Resources Corp. reported its fourth quarter and full year 2020 financial and operational results as well as its 2021 capital budget, guidance and proved reserves as of December 31, 2020.

2021 Capital Budget and Guidance

The Company expects to realize a $0.10 to $0.20 per MMBtu price premium compared to the NYMEX Henry Hub price for its natural gas sales during 2021, as Antero's firm transportation portfolio delivers access to premium priced markets in the Gulf Coast and Midwest. The winter weather event in February is expected to result in first quarter 2020 realized natural gas prices at a $0.30 to $0.40 premium to NYMEX. Antero is forecasting an average realized price for C3+ NGLs in the range of a $0.00 to a $0.05 per gallon premium relative to Mont Belvieu pricing. Antero expects to sell at least 50% of its C3+ NGL production in 2021 at Marcus Hook, PA for export at a premium to Mont Belvieu pricing.

Cash Production Expense and Net Marketing Expense
Antero forecasts cash production expenses to be in the range of $2.18 to $2.23 per Mcfe. The slight increase in production expenses as compared to 2020 reflects the expectation that Antero Resources will not receive any low pressure gathering fee rebates from Antero Midstream in 2021 and reflects the expected incremental 5,000 Bbl/d of NGL volume commitments on Mariner East 2, beginning April 1, 2021.

Antero forecasts net marketing expense to be in the range of $0.08 to $0.10 per Mcfe. This guidance reflects the impact from the winter weather in February and the current narrow strip for local basis in 2021. However, if local basis widens, as it did in 2020, net marketing expense is expected to be near the low end of the guidance range as more long-haul transportation is utilized.

Well Cost Savings
Antero's drilling and completion capital budget is based on an average well cost of $660 per lateral foot during 2021, normalized for a 12,000 foot lateral. Well costs are expected to average $675 per lateral foot during the first half of 2021, before declining to $635 per lateral foot in the second half of 2021 driven by various sand and completion initiatives.

Antero plans to complete 65 to 70 gross wells in 2021. The average lateral length on completed wells is expected to be 13,150 feet. Antero plans to drill 80 to 85 gross wells with an average lateral length of 13,250 feet. Drilled wells include 70 in the Marcellus and 10 to 15 in the Ohio Utica. The 2021 capital budget assumes an average of 3 drilling rigs and 2 completion crews on a gross basis for the drilling partnership.

Q4 Highlights:

  • Net production averaged 3,650 MMcfe/d, including 199,000 Bbl/d of liquids
  • Realized natural gas equivalent price including hedges averaged $3.12 per Mcfe, a $0.46 premium to NYMEX pricing
  • Net income was $70 million
  • Adjusted EBITDAX was $299 million (Non-GAAP); net cash provided by operating activities was $243 million
  • Drilling and completion capital expenditures were $84 million, a 69% reduction from the year ago period
  • Free Cash Flow before changes in working capital was $155 million (Non-GAAP)
  • Achieved record 60-day rate per well of 33.9 MMcfe/d for 10 wells placed on-line during the quarter
  • Proved reserves were 17.6 Tcfe at year end 2020 and proved developed reserves increased to 11.9 Tcfe (67% Proved Developed)
  • Future development cost for 5.8 Tcfe of proved undeveloped reserves is $0.27 per Mcfe

2021 Guidance and Other Highlights:

  • Announced formation of a $500 to $550 million drilling partnership to fund drilling of 60 incremental wells from 2021 through 2024, enabling Antero to fill unutilized firm transportation capacity, receive additional low pressure gathering fee rebates and realize a cash drilling carry. This partnership begins immediately and includes all wells spud since January 1, 2021.
  • Drilling and completion capital budget of $590 million net to Antero, down 21% from 2020
  • Maintenance level capital program includes 60 to 65 well completions in 2021, average lateral length of 13,150 feet
  • Well cost average of $660 per lateral foot, declining to $635 per lateral foot for the second half of 2021
  • Net production is expected to average 3.3 to 3.4 Bcfe/d, including 170,000 to 175,000 Bbl/d of liquids (NGLs and oil)
  • Natural gas realizations expected to be a $0.10 to $0.20 per MMBtu premium to NYMEX, before hedges
  • Received $85 million in net litigation proceeds in February 2021 for underpayment of a natural gas contract

Paul Rady, Chairman and Chief Executive Officer of Antero Resources commented, "Antero's unique position of having market leading exposure to attractive C3+ NGL prices, a premium firm transportation portfolio and extensive premium core drilling inventory creates a highly accretive development program in 2021. In addition, the drilling partnership announced today and the incremental gross production generated thereby is estimated to add incremental free cash flow to Antero of $400 million through 2025, assuming current strip prices. This significant incremental free cash flow results from filling of our premium firm transportation capacity, capturing additional LP gathering incentive fees from Antero Midstream and realizing carry payments from our drilling partner."

Mr. Rady continued, "Our 2021 capital budget reflects our shift to a maintenance level capital plan and the benefit from our well cost savings initiatives that we launched in 2019. We are targeting total well costs of $635 per lateral foot for the second half of 2021, a 35% reduction from $970 in the initial 2019 budget. Our ability to reduce costs and lower capital spending, combined with the benefits of the drilling partnership, puts us in position to generate over $500 million of free cash flow in 2021 and exceed $1.5 billion of cumulative free cash flow through 2025, based on today's commodity strip. We intend to use the free cash flow to reduce debt, which will rapidly decrease our leverage profile from 3.1x at year end 2020 to below 2-times in 2021, at current strip prices."

Glen Warren, President, and Chief Financial Officer of Antero Resources said, "Through a combination of asset sales and discounted debt repurchases, we reduced absolute debt by over $800 million since the start of our deleveraging program. Assuming strip pricing, we are in position to achieve our leverage target of below 2-times this year. Longer term, we will remain focused on maintaining a low leverage profile, while maximizing free cash flow. Finally, as we approach our leverage targets, we can begin to consider further return of capital to our shareholders."

Drilling Partnership Announcement

Antero announced the formation of a $500 to $550 million drilling partnership with QL Capital Partners ("QL"), an affiliate of Quantum Energy Partners. Antero is uniquely positioned to take on a drilling partner due to unutilized firm transportation, a deep liquids-rich drilling inventory and already established LP gathering incentive program with Antero Midstream. Under the terms of the agreement, QL will fund 20% of total development capital spending in 2021 and between 15% and 20% of total development capital spending on an annual basis from 2022 through 2024 in exchange for a proportionate working interest percentage in each well spud. Each calendar year represents a tranche including 2021 which begins with wells spud as of January 1, 2021. In addition, QL will pay a drilling carry to Antero on a tranche by tranche basis, at the end of the year following the tranche year, if certain return thresholds are achieved. Assuming QL's full participation through 2024, the partnership will enable the drilling and completion of approximately 60 incremental wells relative to Antero's prior base case of maintenance level capital plans. Antero's 2021 net capital spending and net production remains unchanged at the maintenance capital level. Please see Antero's Annual Report on Form 10-K for additional details on the drilling partnership. RBC Capital Markets and Vinson & Elkins LLP acted as exclusive financial and legal advisors, respectively, to the Company.

The following tables provide a guidance summary for 2021 and targets for 2022 through 2024 for the prior base case compared to the full commitment by QL under the drilling partnership. The Company's board of directors has not approved any capital budget or development plan beyond 2021. The first incremental wells will be completed in the fourth quarter of 2021, and therefore will have limited impact on the 2021 development plan. Under these assumptions, from 2022 through 2024 there would be minimal impact to production, capital expenditures or wells drilled and completed on a net basis to Antero.

The drilling partnership is forecast to increase Antero's Free Cash Flow by approximately $400 million through 2025 compared to Antero's prior base case plan by accelerating the decline in unutilized firm transportation expense, capturing midstream fee rebates, achieving carry payments from our drilling partner, as well as lower interest costs due to lower total debt. As a result, Antero expects to achieve its absolute debt target of below $2.0 billion in 2023, based on current strip pricing.

Resolution of Washington Gas Light Company Litigation
Antero received proceeds of $85 million, net of royalty payments, from Washington Gas Light Company ("WGL") in February 2021. The payment is due to a favorable judgment on previously disclosed contractual disputes involving firm gas sales contracts between Antero and WGL during the years 2016 to 2018. The judgment was affirmed on December 10, 2020, and the judgment was satisfied in full with WGL's payment. The net proceeds from the litigation judgement were realized as gas revenue in the first quarter of 2021 and are included in EBITDAX and Free Cash Flow. In addition, the proceeds were used to pay down Antero's credit facility. For further information on this litigation, please see Antero's Annual Report on Form 10-K for the year ended December 31, 2020.

February Winter Weather Event

Antero has not been faced with curtailments to date due to the winter weather in February across the U.S. This has enabled Antero through its firm transportation portfolio to deliver certain equity and third party volumes that had not been contractually committed on a first of month basis, to locations that required additional gas volumes. This sales point flexibility enabled Antero to redirect equity volumes as well as purchase third party gas and market those volumes in the Midwest and on the Gulf Coast where gas was most needed and prices were elevated due to freeze offs throughout much of the central and southwestern U.S. Antero has realized incremental revenue of $75 million to date, net of royalties and taxes that will result in improved natural gas realizations and reduced net marketing expense during the first quarter of 2021.

Fourth Quarter 2020 Free Cash Flow

Antero generated $155 million in Free Cash Flow before changes in working capital during the fourth quarter. After adjusting for working capital investments, Free Cash Flow was $125 million.

Fourth Quarter 2020 Financial Results

For the three months ended December 31, 2020, Antero reported GAAP net income of $70 million, or $0.24 per diluted share, compared to a GAAP net loss of $482 million, or $1.61 per diluted share, in the prior year period. Adjusted Net Loss (non-GAAP measure) for the three months ended December 31, 2020 was $11 million, or $0.03 per diluted share, compared to Adjusted Net Loss of $6 million during the three months ended December 31, 2019, or $0.02 per diluted share.

Adjusted EBITDAX (non-GAAP measure) for the three months ended December 31, 2020 was $299 million, an increase of 1% versus the prior year period as lower operating costs and increased production offset a decrease in realized prices due to lower realized hedge gains. The $299 million of reported Adjusted EBITDAX includes a non-cash adjustment that increased fuel expense by $19 million or $0.07 per Mcfe during the fourth quarter.

Net daily natural gas equivalent production in the fourth quarter averaged 3,650 MMcfe/d, including 198,924 Bbl/d of liquids (67% natural gas by volume). Net gas equivalent production increased 15% from the prior year period. Throughput on Antero Midstream's low pressure gathering system exceeded the growth incentive fee threshold of 2,900 MMcf/d during the fourth quarter of 2020, resulting in a $12 million rebate to Antero Resources.

Antero's average realized natural gas price before hedging was $2.63 per Mcf, representing a 5% increase versus the prior year period. Despite a sharp widening in the regional basis differential during the quarter, Antero realized a $0.03 per Mcf discount to the average NYMEX Henry Hub price through the use of its premium firm transportation to NYMEX-based markets. Including hedges, Antero's average realized natural gas price was $2.76 per Mcf, a $0.10 premium to the average NYMEX price.

Fourth Quarter 2020 Operating Update

Marcellus Shale - Antero placed 11 horizontal Marcellus wells to sales during the fourth quarter with an average lateral length of 15,788 feet. Ten of the 11 new wells have been on-line for at least 60 days and the average 60-day rate per well was a company record 33.9 MMcfe/d, including approximately 1,822 Bbl/d of liquids assuming 25% ethane recovery. For the full year 2020, Antero averaged over 6,400 feet per day when drilling the lateral section of its wells. Additionally, Antero's ongoing emphasis on completion efficiencies resulted in an improvement during 2020 to 8.0 stages completed per day, up from 5.8 stages per day in 2019.

These efficiency gains led to average all-in well costs of $690 per lateral foot during the fourth quarter, normalized to a 12,000 foot lateral. This represents a nearly 30% reduction in all-in well cost per lateral foot since the beginning of 2019. The vast majority of the improvement in well costs has been driven by operational efficiency and process changes and are therefore expected to be sustainable.

Fourth Quarter and 2020 Capital Investment

Antero's drilling and completion capital expenditures for the three months ended December 31, 2020, were $84 million. For the full year 2020 drilling and completion capital expenditures were $735 million, 2% below full year guidance of $750 million. In addition to capital invested in drilling and completion costs, the Company invested $13 million in land during the fourth quarter and $48 million for the full year. For a reconciliation of accrued capital expenditures to cash capital expenditures see the table in the Non-GAAP Financial Measures section.

Balance Sheet and Liquidity

As of December 31, 2020, Antero's total debt was $3.0 billion, of which $1.0 billion were borrowings outstanding under the Company's revolving credit facility. Antero has a borrowing base of $2.85 billion with lender commitments that total $2.64 billion. After deducting letters of credit outstanding of $730 million, the Company had approximately $900 million in available liquidity at December 31, 2020. Net debt to trailing twelve month Adjusted EBITDA ratio (non-GAAP) was 3.1x as of December 31, 2020.

Pro forma for the closing of Antero's 8.375% senior notes due in 2026 and 7.625% senior notes due in 2029, the convertible senior note equitization transaction, the redemptions of the remaining senior notes due 2022 and receipt of proceeds from the WGL litigation judgement, all of which occurred subsequent to year end 2020, Antero had $471 outstanding under its credit facility and $1.4 billion of liquidity.

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