Greetings, and welcome to the Antero Midstream Second Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brendan Krueger, CFO of Antero Midstream. Thank you. You may begin.

Thank you, operator. Thank you for joining us for Antero Midstream's Second Quarter 2021 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.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; and Michael Kennedy, CFO of Antero Resources; and Director at Antero Midstream. With that, I'll turn the call over to Paul.

Thanks, Brendan. I'll start on Slide #3, highlighting the continued improvement in the financial strength of Antero Midstream's primary customer Antero Resources. Antero Resources, or AR, has paid down almost $600 million of debt year-to-date and has reduced its leverage from almost 1.5 to 1.7 times, achieving its leverage target of 2.0 times, well ahead of schedule. This resulted in an undrawn revolving credit facility and $1.9 billion of liquidity, as detailed on the right-hand side of the page. As we mentioned this morning on the Antero Resources call, AR is targeting over $750 million of free cash flow in each of 2021 and 2022, assuming current strip prices. This level of free cash flow, strong balance sheet, and flexible liquidity position collectively provide protection against a downside price scenario and further derisks the long-term growth outlook for Antero Midstream. Now let's turn to Slide #4, which illustrates the benefits of AR's firm transportation portfolio on throughput certainty for AM. The green line on the chart illustrates AR's historical gas price differential to NYMEX, and the red line illustrates the Appalachian differentials. As you can see, AR's FT portfolio has generated a premium to NYMEX and significantly reduced realized pricing volatility over the last several years. This provides AM with consistent volume and cash flow assurance as AR does not need to shut in volumes when Appalachian basis blows out, like many of its peers have to. This gives Antero Midstream an additional level of protection as we begin construction on additional infrastructure supporting AR and the drilling partnership. In addition, this competitive advantage resulted in AR generating price realizations that were $0.90 per Mcf better than in-basin Appalachian pricing, which was $0.72 per Mcf behind NYMEX. These attractive price realizations further support drilling economics that underpin the volume growth and returns at AM. I'll finish my comments by looking at Slide #5 to highlight AM's asset utilization rates and discuss future growth projects. As you can see on the left-hand side of the page, despite AR's transition to a maintenance capital program in 2019 and 2020, AM was able to maintain asset utilization rates greater than 90% across its assets. AM's joint venture processing capacity over the last year has been 100% utilized, and we recently commissioned the new Smithburg 1 processing plant which added an additional 200 million cubic feet a day of processing capacity in the third quarter. This brings AM's total joint venture processing capacity to 1.6 Bcf a day. Smithburg 1 will support processing volume growth from the drilling partnership targeting Marcellus liquids-rich development over the next several years. Similarly, on the compression side, we are currently constructing 2 stations in the Marcellus liquids-rich regimes that will add 480 million cubic feet a day of additional compression capacity. These 2 stations, along with the associated high-pressure gathering projects are expected to be placed online in 2022 to facilitate the development in Tyler and Wetzel counties in West Virginia. Importantly, AM has visibility into AR and the drilling partnerships development plan that allows AM to maintain these high asset utilization rates as we transition back to a growth outlook. As depicted on the right-hand side of the page, we expect volume growth combined with high asset utilization rates to generate EBITDA growth and, more importantly, mid- to high-teens returns on invested capital on average through 2025. With that, I will turn it over to Brendan.

Thanks, Paul. I'll begin my comments with second quarter operational results at AM, beginning on Slide 6, titled Year-Over-Year Midstream Throughput Growth. Starting in the top left portion of the page, low-pressure gathering volumes were just under 2.9 Bcf a day in the second quarter, which represents a 1% increase from the prior year quarter. As we look ahead to the third quarter, we expect AR to be slightly above the LP earn-out threshold of 2.9 Bcf a day, driven by the continued outperformance of AR's wells. Compression volumes during the quarter averaged 2.7 Bcf a day, a 1% increase compared to the prior year quarter. Our 50-50 joint venture gross processing volumes averaged just over 1.4 Bcf a day, a 3% increase compared to the prior year quarter. And our gross fractionation volumes averaged 38,000 barrels a day, a 165% increase year-over-year. As you may have seen, we did experience a few days of downtime at Sherwood at the end of the second quarter and into the third quarter due to a shutdown downstream of the facility. We do not expect this to have a material impact on our volumetric or guidance outlook as we incorporate sufficient risk in our forecast. Freshwater delivery volumes averaged 104,000 barrels a day, a 2% increase from the prior year quarter. Adjusted EBITDA for the quarter was $225 million, a 12% increase year-over-year. Capital expenditures during the quarter were $71 million. Consistent with our comments on the first quarter call, we expect to invest roughly 2/3 of our 2021 capital budget of $240 million to $260 million in the second quarter and third quarter combined as we build out the infrastructure supporting the drilling partnership. This results in expected third quarter capital of approximately $90 million to $100 million. And from there, we expect a decline in the fourth quarter to remain on budget for the full year. During the second quarter of 2021, we generated $111 million of free cash flow before dividends, a $3 million increase compared to last year. Importantly, for the third time in the last 4 quarters, we generated free cash flow after dividends, which totaled $3 million during the quarter. Year-to-date, free cash flow after dividends has totaled $42 million which has allowed us to reduce our leverage to 3.6 times. As we look to the back half of the year, we expect a modest outspend driven by increased capital expenditures, as previously discussed, which will result in a full year 2021 profile that is approximately free cash flow neutral after dividends. Moving on to the balance sheet, I wanted to highlight the debt maturity profiles at both AR and AM given the drastic improvements over the last 12 months, which we have outlined on Slide #7. At this time last year, AR had over $2 billion of senior note maturities within the next 3 years. Fast forward to today, as depicted on the top half of the page, AR does not have any senior note maturities until 2025. AR's successful refinancings and debt reduction efforts through asset sales and sustainable free cash flow generation have transformed it into one of the strongest producers in Appalachia. The bottom half of the page illustrates AM's senior note maturity schedule, which tells a similar story. During the second quarter, we refinanced the 2024 senior notes, extending the maturity to 2029 at the same coupon of 5.5%. This resulted in our next senior note maturity not occurring until 2026. In addition, we had $514 million drawn on our $2.13 billion revolving credit facility, resulting in $1.6 billion of liquidity as of quarter end. As a reminder, we previously announced that we are targeting approximately $500 million of free cash flow after dividends from 2021 through 2025 and low to mid-single-digit annual EBITDA growth as a result of the drilling partnership between AR and QL Partners. This financial strength and free cash flow outlook at both entities positions us well as we expect to extend the credit facilities over the next year. In summary, we are incredibly proud of the improvements in the balance sheet at both AR and AM over the last year, both of which have never been stronger. Before I close, I'll finish my comments with Slide #8 titled Uniquely Positioned with Midstream Entity. The last 2 years have been transformational for Antero Midstream and we believe we are well positioned for the unique business model not only in Appalachia, but in the overall U.S. In 2019, we converted to a C-Corp, significantly enhancing our corporate governance and shareholder rights which facilitated AM's inclusion into equity indices like the S&P 400. As we look at the universe of investable securities in the U.S., AM checks all the boxes as a C-Corp of scale, earnings growth driven by the drilling partnership and an inflation-protected fee structure. Of the approximately 6,000 publicly traded securities in the U.S., about 900 companies are investable C-Corps with scale and enterprise value greater than $6 billion. Narrowing down those companies to those with earnings growth, which we measured as a 3-year EBITDA CAGR greater than 3%, narrows it down to just over 650 companies, with additional filters for companies with derisked business models that are self-financing with strong balance sheets, which we measured as leverage under 4 times, and the population continues to shrink to just 421 companies. Of those companies, only 1 offers an attractive dividend over 7%, which is Antero Midstream. Today, at a 9% yield, AM presents a unique opportunity with an attractive return of capital profile, earnings growth, and declining total debt and leverage, which will further derisk AM's business model going forward. With that, operator, we are ready to take questions.

Our first questions come from the line of Brian Reynolds with UBS.

Starting off with guidance. Just wondering if you can provide some color around the drivers towards the upper and lower end of the EBITDA guidance range. It seems just annualized in the first half of '21, it seems we're at the high end of the range. I'm curious if you could share some thoughts around second half expectations.

Yes, Brian, I'll address that. When we assembled the guidance range, we considered the full year, and potential fee rebates were a factor that could go either way, as demonstrated in the second quarter. This range allows for flexibility regarding fee rebates. The other elements involve risk in production. As I noted earlier, AR's wells are continuing to exceed expectations, leading to strong results in throughput on the AM side. Looking ahead to the second half, we remain confident in the range, particularly with water; we've already serviced 41 wells in the first half, with a full-year guidance of 70. This means we have addressed over half of the target, which will result in lower water volumes in the latter half of the year. This reasoning underpins our optimistic outlook, despite starting the year strongly. We do anticipate a decrease in water volumes as the year progresses.

Great. Lastly, are there any updates on the lawsuit against Veolia Water Technologies? I know there's a pending court case in January. But I was wondering if there's any signpost that we can be tracking or if this could ultimately be resolved outside of the court.

Yes. There's no material update at this time. I think, as you saw disclosed in our 10-Q, the trial is set to begin in early 2022, which is a slight pushback from the original scheduled date just due to some COVID delays in the courts. But otherwise, no update there.

Our next questions come from the line of Jeremy Tonet with JPMorgan.

This is James on for Jeremy. Just going back to the rebate you guys mentioned, I think you guys mentioned in your prepared remarks that you expect to hit the threshold in 3Q. Just going forward, looking at 2022, especially with strong NGL prices if Antero Resources returns to growth. How have you guys budgeted that into your longer-term forecast that you guys laid out during the fourth quarter of last year with your guidance through 2025?

Yes. So as we look ahead, I think we did provide some color there. With the drilling partnership, AR is still on a maintenance capital plan, that's AR. The drilling partnership does add growth from a gross volume perspective. So as we look out to 2022, we'd expect to hit 3 or 4 of those fee rebates as currently planned, and then 2023, just given the growth, we'd expect to hit all 4. And it will depend on where that growth is in terms of whether you hit different thresholds of the rebates, but would expect to hit all 4 of those fee rebates in 2023.

Got it. That's very helpful. I appreciate the color there. And then last question for me. You mentioned the additional build out, I think, of stations next year. Just wondering on the CapEx front, if you guys can ballpark kind of a range for next year, especially again, as it pertains to kind of longer-term free cash flow guidance and how much those stations might cost?

Yes. I think Mike mentioned, I think on the first quarter call, we're still in that $275 million to $300 million for next year. And then you'd see, I think, as we talked about, we expect to be free cash flow neutral for the most part in '21 and '22. And that $500 million of free cash flow after dividends is really '23, '24, '25 and that's where you see capital come down from that $275 million to $300 million more to the $200 million in lower levels after that.

Our next questions come from the line of Kyle May with Capital One Securities.

A couple of questions on the water side. In the release, you mentioned OpEx was lower due to water blending operations. Just curious if you can talk more about what Antero is doing, if you've made any changes there and if there's any further cost savings that you can realize?

Yes. I think overall, just on the AR side, it's driven by just continued efficiencies on the water side, piping to our blending facilities and overall timing and cadence of the development plan, the AR level. So continue to see lower cost on LOE at AR, which is driving down the OpEx on the AM side related to that water blending operations.

Okay. Got it. That makes sense. And then also, have you made any changes to the amount of fresh water that's used in the wells? Or do you anticipate any changes there?

No. So we're still at 36 barrels a foot. I think we were flat on volumes quarter-over-quarter, and we had fewer wells serviced. I think some of the disconnect was just we had wells that were being serviced at the end of the first quarter that were counted in those wells serviced in the first quarter but most of that water showed up in the second quarter. So it was about 20 wells serviced in each quarter if you think about the amount of water being used per well, but there's a little bit of disconnect in terms of timing there.

Our next questions come from the line of John Mackay with Goldman Sachs.

Just wanted to ask one quickly on the Sherwood outage. I know you said there was enough kind of flexibility in the guidance, which is why you didn't change numbers. But since AR called it out specifically, can we think about a similar volume impact for you guys in the third quarter as AR called out?

Yes, I think that's fair. So if you run the math on that volume impact, it would be about $6 million to $7 million on an isolated basis. Again, I think with the risk we provide and the outperformance we've seen, we still feel very good about the range we have of $840 million to $880 million for the EBITDA range.

Okay. Great. I know you mentioned it a bit earlier, but regarding the drilling partnership, I noticed AR was at a rig back in the Utica. Can you confirm if the timing is still aligned with what you discussed at the beginning of the year? Also, just to clarify, you previously mentioned the two new compressor stations planned for next year. Were those included in the long-term drilling program related capital expenditures through 2025?

Yes, that's correct. So to your first question, overall drilling partnership is going well as planned. Nothing to note on that front in line with what we've provided publicly. And then those compressor stations, we were just calling out more details around those, but those are in line with the long-term guidance that we called out earlier this year in our guidance and long-term targets.

Our next questions come from the line of Sunil Sibal with Seaport Global Securities.

Thanks for all the clarity on the call. So just starting off on the Smithburg start-up. Could you remind us if that plant is fully dedicated to Antero? Or are there any third-party volumes in that plant?

No, that's fully dedicated to Antero.

Okay. Then a little bit of a broader question on capital allocation or capital strategy. When you laid out the strategy at the end of last year, since then it seems like the high-yield markets have improved quite a bit. Obviously, you've kind of refinanced some debt. Was kind of curious considering that the credit spreads are so much tighter now. Is there any rethink on your part in terms of the capital allocation strategy? Whether is it just paying down debt versus any incremental cash being used towards other users? Obviously, you have the share buyback program open too.

No. I think overall, certainly nice to see the improvement in capital markets. From the AM perspective, we had just over $500 million drawn on the credit facility. At the end of the quarter, we expect to generate, as mentioned, $500 million in free cash flow. So it's nice to have some borrowings on the facility to be able to pay down over time. And as we get to that 3x leverage target, we'll look at other potential return of capital, but still focused on continuing to get down to lower leverage levels on the AM side of things.

Our next questions come from the line of Gregg Brody with Bank of America.

I understand this is the AM call, but I have a question related to AR. In the past, you've indicated that AR and AM are distinct. I believe that's still true. I'm interested in your thoughts from the AR call regarding how you plan to utilize free cash flow once you reach your leverage target. Could AR potentially increase its stake in AM, or do you believe the current investment in AM by AR is appropriate? Additionally, can you share your perspective on mergers and acquisitions at this time?

Yes, we do not have any plans to change our ownership position in AM. AR currently owns 30% of AM, which we consider appropriate. As mentioned in the AR call, our focus is on reducing AR's leverage using free cash flow and then assessing capital returns. AM's free cash flow will decrease its leverage to three times, after which we will also evaluate capital returns. From a mergers and acquisitions perspective, it is challenging for M&A opportunities to compete with our growth at AM, which is projected at 3% to 4%. The return on invested capital is in the mid-teens, and this reflects a risk-adjusted return. We have precise timelines for when projects are coming online, minimizing speculative investments. Thus, it is difficult for M&A to contend with our position. Additionally, AR’s drilling partnership acts as a form of M&A, as we gain third-party volumes for growth. We are interested in only a few midstream companies that exhibit growth, and that growth must be clearly defined. Therefore, we do not see a significant need for M&A.

Thank you. There are no further questions at this time. I'd like to hand the call back over to Brendan Krueger for any closing comments.

Yes. Thank you for everybody for joining today's call, and please reach out with any further questions. Thanks.

Thank you. That does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.