Energy Prospectus

Any thoughts on their announcement regarding the water mgmt decision to abandon?

Probably a non-cash impairment charge in Q3, but no press release from the company. On the surface, I think it has more to do with AR than AM. It should not impact AM's DCF coverage.
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By Paul J. Gough – Reporter, Pittsburgh Business Times
Sep 18, 2019, 3:50pm EDT
Natural gas producer Antero Resources and Antero Midstream are temporarily idling its pioneering wastewater treatment facility after less than two years of operation, a casualty of the steep drop in natural gas prices.

The Antero Clearwater Treatment Facility in Pennsboro, West Virginia had been hailed as a major innovation in the industry when it opened in late 2017 and early 2018. It treated produced water from Antero (NYSE: AR) natural gas wells in the Marcellus and Utica shales. Antero Clearwater treated produced water, water that is trapped underground and brought up the surface during natural gas production — also known as brine — that has salt, oil, organic and inorganic chemicals and naturally occurring low-radioactive material.

Antero VP Al Shoop confirmed the idling to the Business Times on Wednesday afternoon and blamed low commodity prices and the fact the plant, which took about two years to build, had been conceived when gas prices were a lot higher than they are today and the foreseeable future.

"We're idling Clearwater for evaluation," Shoop said. The facility cost $300 million to build.

The plant was operated by Veolia Water Technologies, which also built the plant for Antero Midstream (NYSE: AM). It has about 20 workers, all either Veolia employees or subcontractors. No Antero employees are assigned to the plant. He declined to discuss the status of the longterm contract with Veolia to operate the plant; Veolia Water Technologies did not respond to a request for comment.

Shoop said the plant wasn't completely idled yet but it wasn't taking any produced water. Whether it will reopen at a later date or be sold is a decision that is under consideration now.

"We're exploring those options and we're exploring the cost effectiveness of Clearwater as a facility," Shoop said.

Antero, a major producer in the Marcellus and Utica shale, has two options for its produced water with Clearwater off the table. That's either injecting the wastewater into the ground in special wells or blending, which means taking the produced water and recycling it for use in hydraulic fracturing. Antero will be doing both moving forward.

The idling does not impact Antero's nearby freshwater pipeline system.

AM & H20: could this why AM has been aggressively shorted? What does << On the surface>> mean? AM has lost about 1/3 of its share-price.

Without details from the company, it is impossible to know the impact on net income or cash flow. When a fixed asset is abandoned, it has very little impact on cash flow from operations or DCF going forward. It is a good bet that the project is being "temporarily abandoned" because it has negative cash flow.

In the last 3 months, 4 ranked analysts set 12-month price targets for AM ($11 to $13). The average price target among the analysts is $12.33.

AM's Q1 and Q2 results were good and they have increased their dividends each quarter and they have publicly said that they plan to keep increasing dividends by "high single digits" per year.
First Call's estimates show net income and cash flow from operations rising in Q3 and Q4.

Minimal impact on net income from the Clearwater Facility

Per AM's Q2 press release July 31, 2019:

For the three months ended June 30, 2019, revenues were $256 million, comprised of $167 million from the Gathering and Processing segment and $89 million from the Water Handling and Treatment segment, net of $(9) million of amortization of customer contracts. Revenues increased 5% compared to the prior year quarter, driven by growth in gathering, compression, and Clearwater treatment volumes. Water Handling and Treatment segment revenues include $12 million from wastewater treatment at the Antero Clearwater Facility and $40 million from wastewater handling and high rate water transfer services, which are billed at cost plus 3%.

Direct operating expenses for the Gathering and Processing and Water Handling and Treatment segments were $12 million and $52 million, respectively, for a total of $64 million, compared to $76 million in total direct operating expenses in the prior year quarter. Water Handling and Treatment direct operating expenses include $9 million from wastewater treatment at the Antero Clearwater Facility and $39 million from wastewater handling and high rate water transfer services, which are billed at cost plus 3%.

After-tax impact on Q2 cash flow was approximately $2 million. < This compares to AM's Q2 cash flow from operations of $199.8 million.

Now you can sleep at night.