Quarterly / Earnings Reports | Second Quarter (2Q) Update | Financial Results | Capital Markets | Private Equity Activity

Antero Grows Production 19% YOY Despite 7.3 Bcfe Shut-In

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Antero Resources Corporation released its second quarter 2016 financial results.

• Antero's net daily production for the second quarter of 2016 averaged 1,762 MMcfe/d, including 75,041 Bbl/d of liquids (26% liquids). Second quarter 2016 production represents an organic production growth rate of 19% from the second quarter of 2015 and flat compared to the first quarter of 2016.

• During the second quarter, Antero shut in 7.3 Bcfe

Highlights Include:

• GAAP net loss of $596 million, or $(2.12) per share, compared to a GAAP net loss of $145 million, or $(0.52) per share in the prior year quarter due to non-cash losses on unsettled hedges of $977 million and $198 million, respectively, driven by increasing commodity prices during each quarter
• Adjusted net income of $41 million, or $0.14 per share, representing a 136% increase compared to the prior year quarter
• Adjusted EBITDAX of $332 million, a 24% increase compared to the prior year quarter
• Net daily production averaged a record 1,762 MMcfe/d, a 19% increase over the prior year quarter and flat sequentially
• Included record net daily liquids production of 75,041 Bbl/d, a 63% increase over the prior year quarter and a 10% increase sequentially
• Realized natural gas price before hedging averaged $1.93 per Mcf, a $0.02 negative differential to Nymex, with 99% of production priced at favorable markets
• Realized natural gas equivalent price including NGLs, oil and hedges averaged $3.95 per Mcfe, a 3% increase over the prior year quarter

Second Quarter 2016 Capital Spending

Antero's drilling and completion costs for the three months ended June 30, 2016 were $315 million. In addition, the Company invested $30 million for land and $1 million in other capital projects. Antero Midstream invested $48 million for gathering and compression systems and $42 million for water infrastructure projects including $33 million on the Antero Clearwater treatment facility during the quarter.

Hedge Position

Antero currently has hedged 3.4 Tcfe of future natural gas equivalent production using fixed price swaps covering the period from July 1, 2016 through December 31, 2022 at an average index price of $3.71 per MMBtu.

Second Quarter 2016 Financial Results

As of June 30, 2016, Antero owned a 62% limited partner interest in Antero Midstream Partners LP's. Antero Midstream's results are consolidated with Antero's results.

For the three months ended June 30, 2016, the Company reported a GAAP net loss of $596 million, or $(2.12) per basic and diluted share, compared to a GAAP net loss of $145 million, or $(0.52) per basic and diluted share, in the second quarter of 2015. The GAAP net loss for the second quarter of 2016 included the following items:

• Non-cash loss on unsettled hedges of $977 million due to increasing commodity prices during the quarter
• Non-cash equity-based stock compensation expense of $26 million
• Impairment of unproved properties of $20 million

Without the effect of these items, the Company's results for the second quarter of 2016 were as follows:

• Adjusted net income of $41 million, or $0.14 per basic and diluted share, a 136% increase compared to the second quarter of 2015
• Adjusted EBITDAX of $332 million, a 24% increase compared to the second quarter of 2015
• Cash flow from operations before changes in working capital of $269 million, a 29% increase compared to the second quarter of 2015

Antero's net daily production for the second quarter of 2016 averaged 1,762 MMcfe/d, including 75,041 Bbl/d of liquids (26% liquids). Second quarter 2016 production represents an organic production growth rate of 19% from the second quarter of 2015 and flat compared to the first quarter of 2016. During the second quarter, Antero shut in 7.3 Bcfe, representing 80 MMcfe/d of production for the quarter due to operational downtime in late June at the Sherwood Processing Plant in West Virginia. Antero currently has no production shut in. Second quarter 2016 C3+ natural gas liquids ("NGLs") and oil production averaged 52,424 Bbl/d and 5,244 Bbl/d, respectively, while ethane (C2) production averaged 17,373 Bbl/d. Total liquids production for the second quarter of 2016 represents an organic production growth rate of 63% and 10% from the second quarter of 2015 and first quarter of 2016, respectively.

Antero's average natural gas price before hedging decreased 12% from the prior year quarter to $1.93 per Mcf, a $0.02 per Mcf negative differential to Nymex, as Nymex natural gas prices decreased 26% from the prior year quarter. Approximately 99% of Antero's second quarter 2016 natural gas revenue was realized at currently favorable price indices, including Columbia Gas Transmission (TCO), Chicago, MichCon, Tennessee Gulf and Nymex. Antero's average realized natural gas price after hedging for the second quarter of 2016 was $4.31 per Mcf, a $2.36 premium to the Nymex average price for the period. This represents a 12% increase compared to the prior year quarter. During the quarter, Antero realized a cash settled natural gas hedge gain of $283 million, or $2.38 per Mcf.

The Company's average realized C3+ NGL price before hedging for the second quarter of 2016 was $17.08 per barrel, or 38% of the Nymex WTI oil price, which represents a 5% increase as compared to the prior year quarter. Average realized oil price was $35.08 per barrel, a 20% decrease as compared to the second quarter of 2015 due to a 21% decrease in the Nymex WTI oil price. Antero's average realized ethane price for the second quarter of 2016 was $8.36 per barrel, or $0.20 per gallon. Antero's average realized C3+ NGL price including hedges was $18.98 per barrel, or $0.45 per gallon, a 3% decrease as compared to the second quarter of 2015.

Antero's average natural gas-equivalent price including C2+ NGLs and oil, but excluding hedge settlements, decreased from the prior year quarter by 11% to $2.13 per Mcfe due to a 21% decline in Nymex WTI and a 26% decline in Nymex natural gas prices. The Company's average natural gas-equivalent price, including C2+ NGLs, oil and hedge settlements, increased by 3% to $3.95 per Mcfe for the second quarter of 2016 as compared to the second quarter of 2015. For the second quarter of 2016, Antero realized a hedge settlement gain of $293 million, or $1.82 per Mcfe.

Total operating revenue for the second quarter of 2016 was $(249) million as compared to $377 million for the second quarter of 2015. Operating revenue for the second quarter of 2016 included a $977 million non-cash loss on unsettled hedges, while the second quarter of 2015 included a $198 million non-cash loss on unsettled hedges. In both periods, the non-cash loss on unsettled hedges was driven by increasing natural gas prices during the period. Revenue excluding the unrealized hedge loss was $728 million, a 27% increase compared to the second quarter of 2015. Liquids production contributed 33% of total revenue before hedges in the second quarter of 2016, as compared to a 25% contribution for the prior year quarter. For a reconciliation of revenue excluding unrealized hedge (gains) losses to operating revenue, the most comparable GAAP measure, please read "Non-GAAP Financial Measures."

Marketing revenue for the second quarter of 2016 was $91 million. Antero's marketing revenue was primarily associated with the sale of third party gas purchased to utilize the Company's excess firm transportation capacity on the Tennessee Gas Pipeline. Marketing expense for the second quarter of 2016 was $126 million. The largest components of marketing expense were the costs related to excess capacity and the cost of purchasing third party gas. Combining the two, net marketing expense was $35 million or $0.22 per Mcfe for the second quarter of 2016. For the second half of 2016, due to a third party contractual commitment effective July, 1, 2016, Antero has released to a third party certain unutilized firm transportation capacity and the costs associated with the unutilized capacity. As a result of the reduction in marketing expense, Antero expects net marketing expense to decrease to a range of $0.10 to $0.15 per Mcfe for the second half of 2016.

Per unit cash production expense (lease operating, gathering, compression, processing, transportation, and production tax) for the second quarter of 2016 was $1.48 per Mcfe, a 2% increase compared to $1.45 per Mcfe in the prior year quarter. The per unit cash production expense for the quarter included $0.08 per Mcfe for lease operating costs, $1.29 per Mcfe for gathering, compression, processing and transportation costs and $0.11 per Mcfe for production and ad valorem taxes. Per unit general and administrative expense for the second quarter of 2016, excluding non-cash equity-based compensation expense, was$0.21 per Mcfe, a 9% decrease from the second quarter of 2015. The significant per unit decrease in general and administrative expenses was primarily driven by the increase in production. Per unit depreciation, depletion and amortization expense decreased 6% from the prior year quarter to $1.23 per Mcfe, primarily driven by lower development costs.

Adjusted EBITDAX of $332 million for the second quarter of 2016 represents a 24% increase compared to the prior year quarter. Adjusted EBITDAX margin for the quarter was $2.06 per Mcfe, representing a 4% increase from the prior year quarter. For the second quarter of 2016, cash flow from operations before changes in working capital was $269 million, a 29% increase from the prior year quarter.

Antero Midstream Financial Results

Low pressure gathering volumes for the second quarter of 2016 averaged 1,353 MMcf/d, a 40% increase from the second quarter of 2015 and a 4% increase sequentially. High pressure gathering volumes for the second quarter of 2016 averaged 1,253 MMcf/d, a 5% increase from the second quarter of 2015 and a 3% increase sequentially. Compression volumes for the second quarter of 2016 averaged 658 MMcf/d, a 45% increase from the second quarter of 2015 and a 9% increase sequentially. The increase in gathering and compression volumes was due to production growth from Antero in Antero Midstream's area of dedication. Condensate gathering volumes averaged 1,983 Bbl/d during the quarter, a 34% decrease compared to the prior year quarter and a 33% decrease sequentially. The sequential decrease in condensate gathering volumes was driven by Antero shifting Ohio Utica Shale development from its Highly-Rich Gas/Condensate area to higher rate of return drilling in the Highly-Rich Gas area, as well as the shifting of Antero Resources' development program to the Marcellus Shale from the Utica Shale, due to firm transportation constraints to premium markets in the Utica Shale. Fresh water delivery volumes averaged 105,379 Bbl/d during the quarter, an 11% increase compared to the prior year quarter and an 8% increase sequentially. The increase in fresh water delivery volumes was driven by operational efficiencies leading to accelerated Marcellus completions and an increase in the average water used per foot in completions to 41 barrels, a 25% increase as compared to 2015 and an 11% increase compared to the first quarter of 2016.

For the three months ended June 30, 2016, the Partnership reported revenues of $137 million. Revenues increased 55% compared to the prior year quarter, primarily driven by the startup of produced water handling and high rate transfer services in the first quarter of 2016. Direct operating expenses for the three months ended June 30, 2016 were $43 million. Direct operating expenses increased 138% year over year, driven primarily by the inclusion of produced water handling and high rate water transfer services, as well as the expansion of Antero Midstream's gathering and compression and fresh water delivery assets to support the production growth of Antero Resources. General and administrative expenses were $7 millionduring the second quarter of 2016, an increase of 17% compared to the second quarter of 2015. Total cash and non-cash operating expenses were $84 million, including $24 million of depreciation, $7 million of equity-based compensation, and$3 million of accretion of contingent acquisition consideration.

The Board of Directors of Antero Resources Midstream Management LLC, the general partner of Antero Midstream, declared a cash distribution of $0.25 per unit ($1.00 per unit annualized) for the second quarter of 2016. The distribution represents a 32% increase compared to the prior year quarter and a 6% increase sequentially. The distribution is Antero Midstream's sixth consecutive quarterly distribution increase since its initial public offering in November 2014 and will be payable on August 24, 2016 to unitholders of record as of August 10, 2016.

Balance Sheet and Liquidity

As of June 30, 2016, Antero's consolidated total debt and consolidated net debt were $4.2 billion, of which $900 million were borrowings outstanding under the Company's and Antero Midstream's revolving credit facilities. Total lender commitments under these two facilities are currently $5.5 billion. Including $708 million in letters of credit outstanding, the company had$3.9 billion in available consolidated liquidity as of June 30, 2016.