Business Overview and Operational Highlights
Antero Midstream Corporation (AM) is a growth-oriented midstream energy company that owns and operates a diverse portfolio of midstream energy assets primarily serving Antero Resources' (AR) production in the prolific Appalachian Basin. With a strategic focus on gathering, processing, and water handling, Antero Midstream has established itself as a leading player in the region, providing critical infrastructure support to one of the largest natural gas producers in the United States.
Antero Midstream Corporation was formed in 2019 as a spin-off from Antero Resources Corporation. The company was created to own, operate and develop midstream energy infrastructure primarily to service Antero Resources' production and completion activity in the Appalachian Basin. In its early years, Antero Midstream focused on building out its integrated midstream system to support Antero Resources' growing production volumes in the Appalachian region. This included constructing gathering pipelines, compression facilities, and water handling infrastructure. The company also made strategic investments in joint venture processing and fractionation plants to handle the liquids-rich gas being produced.
One key challenge Antero Midstream faced early on was managing the rapid growth and buildout of its midstream systems to keep pace with Antero Resources' development plans. This required significant capital investment and careful coordination between the two companies. However, Antero Midstream was able to successfully execute on its capital program and integrate its assets to provide midstream services.
In 2022 and 2023, Antero Midstream began to focus more on optimizing its asset base and driving operational efficiencies. The company made several bolt-on acquisitions to expand its gathering and compression footprint in the core of the Marcellus and Utica plays. Antero Midstream also worked to repurpose and upgrade underutilized compressor units to enhance the utilization and returns on its midstream infrastructure.
Throughout its history, Antero Midstream has maintained a close operational and financial relationship with its largest customer, Antero Resources. The majority of the company's revenues are generated from long-term, fixed-fee contracts with Antero Resources. This has provided Antero Midstream with stable cash flows to fund its capital program and return capital to shareholders through a quarterly dividend.
As of September 30, 2024, Antero Midstream's asset base included 3,890 miles of gathering pipelines, 28 compressor stations with 1.5 Bcf/d of compression capacity, and water handling systems capable of delivering up to 320,000 barrels of fresh water per day. The company also holds a 50% equity interest in a joint venture that provides gas processing and fractionation services, as well as a 15% stake in a high-pressure gas gathering system. These strategic investments allow Antero Midstream to provide a comprehensive suite of midstream services to its customer base.
Financial Strength and Liquidity
Antero Midstream's financial position has remained robust, with the company generating consistent free cash flow and maintaining a disciplined approach to capital allocation. For the twelve months ended September 30, 2024, the company reported $819 million in total revenue, $481 million in Adjusted EBITDA, and $289 million in net income. This performance has enabled Antero Midstream to fund its organic growth capital program, as well as pursue strategic acquisitions, while also returning capital to shareholders through a quarterly dividend.
As of September 30, 2024, Antero Midstream had $540 million in outstanding borrowings under its $1.25 billion revolving credit facility, resulting in a leverage ratio of 3.1x. The company's strong liquidity position and access to capital markets provide the flexibility to continue investing in growth opportunities and maintaining its position as a leading Appalachian midstream provider.
For the third quarter of 2024, Antero Midstream reported revenue of $269.87 million, net income of $99.74 million, operating cash flow of $184.94 million, and free cash flow of $130.04 million. These figures represent year-over-year increases across all metrics compared to Q3 2023, demonstrating the company's continued growth and operational efficiency.
As of September 30, 2024, Antero Midstream had a debt to equity ratio of 1.49, with $66 million in cash and $710 million available under its credit facility. The company's current ratio and quick ratio both stood at 1.09, indicating a solid short-term liquidity position.
Consistent Free Cash Flow Generation and Deleveraging
Antero Midstream's focus on operational efficiency and disciplined capital allocation has allowed the company to consistently generate free cash flow, which it has used to both fund growth projects and reduce debt levels. Over the past two years, the company has generated over $350 million in free cash flow after dividends, exceeding the $287 million spent on accretive bolt-on acquisitions during the same period.
This free cash flow generation has enabled Antero Midstream to reduce its leverage ratio from 3.6x at the end of 2022 to 3.1x as of September 30, 2024. The company is now positioned to achieve its target leverage ratio of less than 3.0x by the end of 2024, a full year ahead of its original expectations. This deleveraging, combined with EBITDA growth, positions Antero Midstream to return additional capital to shareholders in the coming years.
Expanding Footprint and Acquisition Strategy
In addition to its organic growth initiatives, Antero Midstream has strategically executed several accretive acquisitions to expand its midstream footprint and service capabilities. Most recently, the company acquired certain Marcellus gas gathering and compression assets from Summit Midstream Partners for $70 million in May 2024. This acquisition added 48 miles of high-pressure gathering pipelines and two compressor stations with 100 MMcf/d of capacity, further enhancing Antero Midstream's integrated system.
These bolt-on acquisitions have been financed entirely through the company's robust free cash flow generation, demonstrating Antero Midstream's ability to prudently allocate capital and grow its business without relying on external funding sources. The company continues to evaluate additional strategic acquisition opportunities that align with its core competencies and geographic focus in the Appalachian Basin.
Segment Performance
Antero Midstream operates in two primary business segments: Gathering and Processing, and Water Handling.
The Gathering and Processing segment includes a network of gathering pipelines and compressor stations that collect and process natural gas production from Antero Resources' wells in West Virginia and Ohio. This segment also includes Antero Midstream's equity interests in two joint ventures - a 50% stake in a joint venture with MarkWest Energy Partners to develop processing and fractionation assets, and a 15% stake in the Stonewall Gas Gathering system.
For the nine months ended September 30, 2024, the Gathering and Processing segment reported revenues of $664 million, up 11% from the same period in 2023. This increase was driven by higher low pressure gathering volumes, compression volumes, and high pressure gathering volumes, as well as higher gathering and compression rates due to annual CPI-based adjustments. Segment operating income for this period was $473 million, up 12% from the same period in 2023. Equity in earnings of unconsolidated affiliates (the joint ventures) was $83 million, up 6% compared to the prior year period.
The Water Handling segment includes two independent water handling systems that deliver water from the Ohio River and regional waterways to support Antero Resources' well completion activities. The segment also handles flowback and produced water. For the nine months ended September 30, 2024, the Water Handling segment reported revenues of $155 million, down 16% from the same period in 2023. This decrease was primarily due to lower fresh water delivery volumes and lower revenues from other fluid handling services. Segment operating income for this period was $13 million, down 64% from the prior year period.
Outlook and Risk Factors
Looking ahead, Antero Midstream expects its capital expenditures to decline significantly in the fourth quarter of 2024 as a result of the acceleration of certain projects into the third quarter. This, combined with EBITDA growth, is expected to drive further deleveraging, with the company anticipating its leverage ratio to drop below 3.0x by the end of the year.
For 2025, Antero Midstream has provided guidance for capital expenditures in the range of $150 million to $200 million, with the midpoint being a fair assumption. The company expects low to mid-single digit growth in gathering volumes in 2025, while water volumes are expected to be generally consistent year-over-year, depending on the timing of deferred completion activities.
Once the leverage target is achieved, Antero Midstream plans to evaluate opportunities to return additional capital to shareholders, potentially through share buybacks. This strategic approach demonstrates the company's commitment to balancing growth investments with shareholder returns.
While Antero Midstream's business model and customer concentration with Antero Resources provide a high degree of visibility, the company is not without risks. Key risks include potential changes in Antero Resources' drilling and development plans, regulatory and environmental challenges, commodity price volatility, and competition from other midstream providers in the Appalachian Basin. Antero Midstream's success will depend on its ability to navigate these challenges and continue to provide reliable and cost-effective midstream services to its anchor customer and other producers in the region.
Conclusion
Antero Midstream has firmly established itself as a leading midstream player in the Appalachian Basin, providing critical infrastructure and support to one of the largest natural gas producers in the United States. The company's diversified asset base, strong financial position, and disciplined capital allocation strategy have enabled it to generate consistent free cash flow and reduce leverage, positioning it for continued growth and shareholder returns. As Antero Midstream continues to expand its footprint and explore strategic acquisition opportunities, investors will closely monitor the company's ability to navigate industry headwinds and maintain its position as a midstream powerhouse in the Appalachian region.