Greetings and welcome to the Antero Midstream First Quarter 2021 Earnings Conference Call. Please note that this conference is being recorded. I will now hand it over to our host, Brendan Krueger, Vice President of Finance. Thank you. You may begin.

Thank you for joining us for Antero Midstream’s First Quarter 2021 Investor Conference Call. We’ll spend a few minutes going through the financial and operational 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.anteromidstream.com, where we have provided a separate earnings call presentation that will be reviewed during today’s call. Before we start our comments, I would first like to remind you that during this call, Antero management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Antero Resources and Antero Midstream and are subject to a number of risks and uncertainties, many of which are beyond Antero’s control. Actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements. 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 and CEO of Antero Resources and Antero Midstream; Glen Warren, President and CFO of Antero Resources; and President of Antero Midstream; and Michael Kennedy, CFO of Antero Midstream. With that, I’ll turn the call over to Paul.

Thanks, Brendan. I’d like to start on Slide number 3, highlighting the step change improvement to AR, that’s Antero Resources’ balance sheet. During the first quarter of 2021, AR generated over $400 million of free cash flow. As depicted on the top left portion of the slide, AR used this free cash flow to reduce total debt from $3.0 billion to $2.6 billion during the first quarter. The top right quadrant of the slide illustrates the LTM EBITDA improvement from $1.0 billion to $1.3 billion. This improvement was a direct result of AR’s liquids focus and scale, which allowed it to take advantage of the improvement in C3+ NGL and oil prices. This total debt reduction, combined with an improvement in AR’s LTM EBITDAX, decreased AR’s leverage by over a turn to 2.0x. Lastly, during the spring redetermination period, AR’s borrowing base was reaffirmed at $2.85 billion, supported by the deep drilling inventory of liquids-rich locations in AR’s portfolio. This reaffirmation, along with the $700 million senior note issuance and debt reduction during the quarter, resulted in AR’s liquidity doubling to $1.8 billion. Looking ahead, we expect AR to continue generating free cash flow and reducing total debt, which is expected to result in a completely undrawn credit facility balance over the next few quarters. This significant improvement in the financial strength of AM’s primary customer, AR, continues to strengthen the outlook at AM. To put AR’s first quarter financial results into perspective, let’s turn to Slide number 4. Since we are early in the reporting cycle, most of these figures are based on consensus estimates. The top of the slide highlights AR’s balance sheet positioning compared to its E&P peers in Appalachia. On the top left, you can see AR’s $2.6 billion of total debt ranks third amongst its peers. However, the chart on the top right-hand side of the page shows that AR’s net debt-to-EBITDAX of 2.0x ranks second. The bottom of the page focuses on financial performance and scale. AR’s $519 million of EBITDAX in the first quarter ranks second in Appalachia and is substantially above the remaining peers. Looking at free cash flow, AR’s $419 million of free cash flow during the first quarter is dramatically above the Appalachian peers and highlights the significant scale and liquids-rich exposure that AR has in a rising commodity price environment. In summary, AR is one of the strongest customers in Appalachia today and a strong AR results in a strong AM. Now let’s turn to Slide number 5 to discuss the recent NGL hedging done at AR that protects their free cash flow profile and results in further debt and leverage reduction throughout 2021. While the fundamentals remain strong for C3+ NGLs, we view this hedging program as an insurance policy to protect AR against any seasonal weakness or risk associated with the change in the COVID-19 pandemic recovery. Before getting into NGL hedging on the slide, I want to remind everyone that AR is also over 90% hedged in natural gas in Cal ‘21 at $2.76 per MMBtu. During the first quarter, AR hedged 36,000 barrels a day and 35,000 barrels a day of C3+ NGLs for the second quarter and third quarters of ‘21, respectively. This represents approximately one-third of AR’s C3+ NGL production during the summer months, which can be the weakest pricing months for NGLs. Importantly, we are hedging at incredibly attractive prices during the summer, around $36 a barrel, which is approximately double the price that AR realized at this same time last year. Hedging has always been a core principle at AR, and we plan to continue prudently layering on additional hedges across all commodity products to support AR’s consistent development program. Before turning the call over to Mike, I want to congratulate Glen on his upcoming retirement and thank him for all of his contributions to the Antero entities over the years. Glen and I have been partners for over 20 years, dating back to coal bed methane exploration and production in the Powder River Basin. Since then, we became early shale pioneers adopting horizontal drilling and multistage completions in the Barnett Shale and have built Antero into one of the largest and most integrated NGL and natural gas producers in the U.S. Over this last year, Glen was instrumental in successfully executing a series of strategic transactions and capital market activities, which allowed us to navigate the challenging environment and put us in the position that we are today. As we look ahead, AR and AM are in the strongest financial positions that we’ve been in since inception, both generating significant free cash flow with strong balance sheets and leverage profiles. While Glen will be missed, I’m very excited about internally backfilling his positions with Mike Kennedy and Brendan Krueger, which highlights the deep bench we have here at Antero. With that, I’ll turn it over to Mike.

Thanks, Paul. I’ll begin my AM comments with first quarter operational results, beginning on Slide number 6 titled Year-Over-Year Midstream Throughput. Starting in the top left portion of the page, low-pressure gathering volumes were 2.9 Bcf per day in the first quarter, which represents a 5% increase from the prior year quarter. Compression volumes during the quarter averaged 2.7 Bcf per day, an 8% increase compared to the prior year quarter. Our 50-50 joint venture gross processing volumes averaged 1.4 Bcf per day, an 8% increase compared to the prior year quarter. Processing capacity was 100% utilized during the first quarter. JV gross fractionation volumes averaged 38,000 barrels per day, a 15% increase from the prior year quarter. Fresh water delivery volumes averaged 104,000 barrels per day, a 43% decrease from the prior year quarter, driven by lower completion activity by Antero Resources as it transitioned to a maintenance capital development program. Adjusted EBITDA for the quarter was $219 million, a 1% increase year-over-year. Capital expenditures were $30 million, a 64% decrease year-over-year. Looking ahead, we expect an increase in our quarterly capital expenditures as we begin construction on infrastructure supporting the drilling partnership that we expect to drive throughput growth over the next several years. Specifically, we expect to invest roughly two-thirds of our 2021 budget of $240 million to $260 million in the second and third quarter combined as we take advantage of better weather during the summer months. Importantly, a third drilling rig has already arrived in the Utica to commence development by the drilling partnership, utilizing midstream infrastructure that is largely in place. We expect completion activities using AM’s freshwater delivery system to begin on those two pads in the back half of the year and expect to turn in those wells by year-end to drive throughput growth heading into 2022. During the first quarter of 2021, we generated $146 million of free cash flow before dividends, a $50 million increase compared to last year. Importantly, for the second time in the last three quarters, we generated free cash flow after dividends, which totaled $39 million during the quarter. I’ll finish my comments with Slide number 7, titled Uniquely Positioned Midstream Entity. We’re very excited for the future of Antero Midstream following the announcement of the drilling partnership. We believe AM is uniquely positioned in the midstream space with its C-Corp structure and one of the very few companies with expected throughput and EBITDA growth over the next several years. Importantly, AM has significant visibility into this throughput growth which supports our confidence in generating attractive rates of return on the incremental investments supporting the drilling partnership. As a reminder, we expect the incremental $175 million of capital investments supporting the drilling partnership over the next five years to generate $200 million of incremental free cash flow net of that capital. So these are highly economic and attractive opportunities for AM. While it does result in a near-term increase in capital for AM, as a midstream company, we’re in this business to evaluate and invest in projects that generate attractive rates of return and deliver value to our shareholders. We have a strong track record generating a 14% ROIC on average over the last six years, well in excess of our cost of capital. Importantly, our new financial policy allows us to internally finance both our capital investments and a return of capital to shareholders, which we believe is the prudent decision that results in leverage trending toward the low 3x range. With that, operator, we are ready to take questions.

Our first question is from Brian Reynolds with UBS.

Michael and Brendan, first, congrats to you both. To start out, I was wondering how we should think about gathering rate relief expiration with AR in 2023? Just wondering if we could see a share buyback from AR in exchange for a continued rate relief as it appears AR may look to potentially increase production beyond 2025?

Yes. No, we talked in the other call, the first order of business for AR is to pay down debt below $2 billion, and then we’ll assess at that time whether further debt paydown or return of capital or what form of return of capital, combination of both. We do have a slide out there on AR’s website that walks through all the reductions in the firm transport volumes over that period. So that’s a step down between now and ‘24 and ‘25 and it’s more rightsized to what our actual production at this maintenance capital level add in ‘24 and ‘25. But for the next three to four years, I would say AR is in the maintenance capital mode.

Great. And lastly, just given the long-term drilling expectations for AR seemed pretty fixed at this point, are there any unique opportunities for AM to pursue, i.e., further downstream or around Marcus Hook that could provide incremental value to the Antero family as a whole? Any color would be helpful.

We view the drilling joint venture as significant, as it involves third-party volumes and business. This has been beneficial for Antero Midstream. As I noted earlier, Antero Midstream is expecting throughput growth of 2% to 4% over the next three years, which is somewhat exceptional for a midstream company. Therefore, Antero Midstream is well positioned for growth. With efficient capital usage and timely visibility into operations, we anticipate generating $200 million in free cash flow, after accounting for $175 million in capital expenditures. Antero Midstream is in good shape, and since the system is nearly fully constructed, capital requirements will remain low in the coming years. We expect free cash flow to surpass $500 million before dividends, and after dividends, it will be roughly flat at $25 million positive for this year and next, with about $100 million annually thereafter. This presents a very attractive profile for Antero Midstream.

Our next question is from Jeremy Tonet with JP Morgan.

This is James on for Jeremy. Just two quick ones for me. I guess just starting on the gathering, OpEx seemed to tick up this quarter. Just looking past the run rate from last year. Maybe just looking forward, is that a run rate to use? Or how are you guys thinking about that?

No, it should come down always in the winter. And the first quarter is always a little bit higher. Just drop operating in winter weather once the weather improves, which it has, it comes back down to its normal run rate.

Got it. And then just on the free cash flow front, starting the year off with the strong kind of 1Q with the $40 million after dividends. You guys messaged that 2Q and 3Q will be more capital intensive. But just on the cadence of the year, do you see kind of 4Q as returning to positive free cash flow post dividends or just any color you can share there in terms of what you guys are budgeting there?

Yes, right now, Q4 is about neutral. There is a step down in the water activity in Q4. So you’re correct. Q2, Q3, there is a bit of a negative just because the capital steps up in that $80 million to $90 million range for those two quarters. Capital does step down a bit in Q4, but with a little bit less water, you have a little bit less EBITDA in that quarter. So it’s about flat. So very positive this quarter, $39 million, a little bit negative in second and third quarter and then neutral in the fourth. That’s the cadence.

Got it. And sorry, just one more if I could. I noticed the asset sale recorded in the quarter. I think you shared there and if there’s a potential down the road for similar sales.

Yes. That was just some sale of some excess pipe that we did not need anymore. We had some gains on some sale of pipes that showed up in 4Q ‘20 and so a little loss here. So net breakeven when we just sell some excess pipe, so nothing further.

Our next question is from John Mackay with Goldman Sachs.

Just wanted to circle back. I know this came up earlier on this call and came up a little bit on the AR call. But again, just with AR getting closer to that 2x level, I know you’re talking more about shareholder returns up there, but it sounds like growth is in theory still on the table. Just wondering if you could unpack a little bit maybe what would drive that decision? Is it NGL prices? Is it basin takeaway? Just anything we can kind of frame the argument.

Yes. In our discussion, I didn't sense that growth was a priority at the moment, but perhaps after three to four years, depending on the market conditions, growth could be considered. The level of free cash flow generation we have at AR during that period is quite impressive. So after a few years, it might be worth thinking about growth. Until then, the focus is primarily on reducing debt and returning capital to shareholders. Additionally, the growth is largely coming from the drilling partnership. It's important to note that AM is experiencing growth, as its volume throughput is increasing, and the gross volumes from Antero's field are rising. However, from a net perspective, Antero has been focused on maintenance capital.

Okay. Absolutely. Maybe just one more in the weeds. Looks like Stonewall picked up a little bit this quarter. Just wondering, is that a timing thing or is something new going on in that asset? I know it’s small, but...

Yes, that was essentially a catch-up payment from some deferred capital in 2020 because of COVID. That capital has kind of been pushed into ‘21 and they held a reserve for that and so they kind of released that reserve to us in the first quarter. We still do expect those annual distributions being the $10 million to $12 million this year. So nothing changed there. We just had a catch-up payment in the first quarter.

Our next question is from Kyle May with Capital One Securities.

Just wondering if you could talk more about the construction and development of infrastructure for the drilling partnership. And just curious about more details on the assets that you’re developing. Maybe longer term, if we should expect kind of the lumpiness of spend similar to this year.

I wouldn’t characterize this year's spending as lumpy. In the second and third quarters, it's between $80 million and $90 million, and around $60 million in the fourth quarter, following the drilling joint venture. That seems fairly consistent. Spending tends to be lower in the winter due to challenges in construction during that season. Regarding the projects, there’s not much additional processing; we are focusing on one processing plant, as mentioned earlier, which involves building out low pressure, high pressure, and compression to support the increased drilling pace from the joint venture. Over the next four years, we expect to add around 60 more wells, mainly focusing on gathering, which is our core business, and supplying freshwater distribution for completions. We are essentially expanding our existing system at an accelerated pace to accommodate the increased volumes.

Got it. And in the water segment, it looks like you serviced 24 wells in the first quarter, which is kind of similar to what you did in the second and third quarter of last year. Should we think about this as the high watermark for the year? Or is this a more normalized run rate?

Yes, this will be the high watermark. There were 24 completions, but it's important to note that some of those were simultaneous fracs. We count it as starting when it’s spud, but it was completing work that was in progress around March 31. Therefore, some volumes will carry over into Q2. For the wells actually spud in these quarters, we anticipate about 15 to 20 in Q2 and Q3, with a decrease to around 10 wells in Q4. This trend is quite similar to last year's.

Our next question is from Timm Schneider with Citi.

Just a really quick one for me. Just confirming that you’re not a cash taxpayer through ‘25 still? Or if anything has changed there?

Yes. That’s correct.

Our next question is from Sunil Sibal with Seaport Global Securities.

So just a couple of follow-ups, actually. So first, it seems like as the activity picks up, could you give us a sense of the cadence of volumes on your gas systems for the remainder of the year?

Yes. They’re stable. They increase slightly, but overall, they remain consistent throughout the year.

Okay.

The drilling joint venture will start contributing volumes at the end of the year, so you won't see an increase in volumes from it until 2022.

So basically, then we should think about 2022 as a little bit of a step change in volumes. Is that...

Yes, it’s up 2% to 3%, and that’s the same case for every year, ‘22, ‘23 and ‘24.

Our next question is a follow-up from Brian Reynolds with UBS.

I have a quick question about the water treatment litigation. Was any of the potential impact from the litigation included in your long-term guidance for free cash flow? Any comments you have regarding this would be appreciated, especially with the case coming up.

Yes. No, it was not.

There are no further questions registered at this time. I would like to turn the conference back over to management for any closing remarks.

Yes. Thank you for joining us on today’s call, and please follow up with any questions. Thank you.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.