Greetings, and welcome to Antero Midstream Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Michael Kennedy, Chief Financial Officer. Thank you. Please go ahead.

Thank you for joining us for Antero Midstream's second quarter 2019 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 Web site 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 Glen Warren, President and CFO of Antero Resources and President of Antero Midstream. With that, I'll turn the call over to Paul.

Thanks, Mike. I’ll begin my comments on AR on Slide 3 titled AR Strength and Resiliency Drives AM Strength, which illustrates the increase in capital efficiency, financial strength and scale that AR has achieved since the AM IPO in 2014. Starting with the proven capital efficiency, AR’s drilling and completion CapEx has decreased 50% from $2.6 billion to $1.3 billion from 2014 to 2019. Over that same time period, AR has generated attractive net production growth and replaced natural decline on a production base that is now over 3x as large as it was in 2014, while reducing its development costs by over 50%. In addition, AR’s operational efficiencies have driven its rig count down from a peak of 21 rigs to four rigs from cal '14 to cal '19. From a financial strength standpoint, AR has taken considerable steps to maintain and improve its balance sheet driving total debt down by over $700 million and reducing leverage from 3.9x to 2.3x. Over the past five years we have maintained our conservative approach to hedging and risk management with 100% of AR’s oil and natural gas production hedged for the remainder of cal '19 and over 90% of expected natural gas production hedged in cal '20. Our capital efficiency and financial strength have allowed AR to achieve significant scale over the last five years, roughly tripling proved developed reserves that underpin the future growth at AM. Antero continues to be a dynamic and integrated organization with a track record of driving efficiencies, navigating challenging commodity price environments, maintaining financial strength and doing what we say we’re going to do. We expect this track record to continue even at current commodity strip pricing which is driven by AR’s 10% to 14% well cost reduction initiatives that I will discuss on Slide…

Thank you, Paul. For those who did not have a chance to listen in to the AR conference call, I would encourage you to listen to the replay or access the AR earnings call slides on the AR Web site, which go into greater detail on the cost savings initiatives that underpin the resiliency of the AR business model that Paul discussed. I’ll begin my AM comments by highlighting the recently announced AM cash dividend of $0.3075 per share, 146% increase year-over-year for former AMGP shareholders and a 40% increase year-over-year for Antero Midstream Partners unitholders. The dividend at AM was the 18th consecutive distribution increase since the IPO of Antero Midstream Partners in 2014. As depicted on Slide 7, we are on track to achieve our 2019 full year dividend of $1.24 per share which represents over a 13% yield on today’s share price. Now let’s move on to the second quarter operational results, beginning with Slide 8 titled High Growth Year-Over-Year Midstream Throughput. Starting on the top left portion of the page, low pressure gathering volumes were 2.7 Bcf per day in the second quarter, which represents a 34% increase from the prior year quarter. Compression volumes during the quarter averaged 2.4 Bcf per day, a 54% increase compared to the prior year quarter. Compression capacity was 88% utilized during the second quarter. Joint venture gross processing volumes averaged 1 Bcf per day, a 73% increase compared to the prior year quarter. Joint venture gross fractionation volumes averaged 27,000 barrels per day, a 170% increase from the prior year quarter. And freshwater delivery volumes averaged 122,000 barrels per day, a 46% decrease over the prior year quarter. The decline in freshwater delivery volumes was driven by a reduction in completion activities at AR, as expected. During the third…

Thank you. [Operator Instructions]. Our first question comes from the line of Spiro Dounis with Credit Suisse.

Hi. Good morning, guys. First one, just a two-part question on some of the finer details around the new water opportunity. Just first on the top line. I believe AR mentioned spending upwards something like 160 million on these water services and was looking to save around 50 million or so. So if I just do the simple math around that, is it fair to say the top line opportunity for AM will be something around 110 million? And the second part of that is just how to think about some of the spending, the CapEx spending to build out this infrastructure?

Yes, the first you talked about is the LOE or how much we spend. So the 160 million, if the 50 million savings would be the 110 million for AM.

Okay. And then the potential CapEx needed to build this out, how should we think about that?

It’s over the next couple of years. It’s around the $100 million range as well over two or three years.

Okay. And that’s spread out over those three years.

Right.

Got it. Okay, that’s helpful. Second one kind of high level here, but stock’s trading down materially today and follows a pretty challenging July. You’ve come out, you’ve reiterated guidance, you’ve talked to some new opportunities, you’ve talked to capital efficiencies and it doesn’t seem to be having an impact. And so I guess at what point does it make sense to undergo a strategic review here and consider what, if anything, could really be changed? And just trying to be clear, I’m not saying you should do anything dramatic for the sake of the share price. But if I’m echoing some feedback we receive, it seems to be ongoing concerns around counterparty risk and basin risk and it just doesn’t seem like reiterating guidance is going to be enough to appease that?

Yes, I’m not sure how to answer that. We are under strategic review all the time. That’s what we do. And I think it’s hard to impeach the business and we’ve got great rock and a great business and taken our product to great sales points and we’re well hedged and strong balance sheet. So, yes, I don’t really – not sure what you’re getting at. Glad to talk offline about that. But I think we’re doing the right thing here.

That’s fair. We can catch up on that. Just last one for me with --

Obviously we don’t control the stock price, right, so you’re kind of --

No, I totally understand that. We’ve seen others do it. When your yield starts to get to this level and to your point you’re always under strategic review, so I appreciate that. But we can follow up offline. Next one I believe is on the last call you mentioned maybe an increasing appetite to potentially get more into long haul business. Could you just maybe update us on where that stands?

For AM getting more into long haul type. Yes, those are not the kind of things that we can talk about publicly on the call. We’re always looking at opportunities that you’ll hear about if we do something.

Understood. Thanks for the color. Thanks, guys.

Thank you.

Our next question is from the line of David Amoss with Heikkinen Energy.

Hi. Good morning. I’m trying to think about your CapEx in 2020. I think the newest deck shows that growth CapEx is a little under 600 million. And just thoughts about how sticky that number is and are there things that you can do at the AM level to get CapEx down next year?

That’s right now looking at the AR plan, so obviously it will follow the AR. But we have been trending lower on capital as we get more efficient. So still a target of 600 million with the 10% AR plan; that’s still a good ballpark but we’ll continue to try to refine that and bring that down.

Okay. Thanks. And then on the pilots with your lower water usage, can you just tell us how many of these pilots you’ve done and how long those well have been producing? And then just anything high level on your confidence levels that the production from the new completions will hold up to the production from the older [ph] completions?

Yes, I think we started out probably between two and three years ago where we’d on a certain – whenever we do pilots on pads and these might be pads with 10 or 12 wells, we vary the treatment on different wellbores. So we might do three wellbores that incorporate 30-50 sand and then three wellbores that are interspersed that are just pure 100 mesh, and we watch those. And so we have a production history going back at least two, maybe three years where we do these within the pad basis on the pilots. And then more recently we’ve done full pads where the entire pad is 100 mesh or the entire north directed, so say six wells going north are all 100 mesh and then the other six wells going south are the standard design that uses coarse mesh. So we have a good sampling throughout our area. I would say that at least 10 pads have been involved in 100 mesh piloting over the last two to three years, so 10 pads and if you say an average of at least eight wells per pad, there’s probably at least 80 wells where we’ve piloted throughout the fairway and have seen positive results. But 100 mesh provides as good if not better sometimes production than the traditional design, so feeling good about that. Does that answer your question, David?

Yes. Thanks, Paul. And then just one last one, if you wouldn’t mind just kind of going through why you had to pull Clearwater off again in the second quarter, thoughts going forward on achieving efficiencies through that facility that you expected when you built it? And then finally, is there any legal remedy to clawback some of the underperformance from Clearwater over the last year or so?

I would say Clearwater is a good facility. It’s complicated. It’s got three or four different processes within it and so it’s just working the bugs out. We have seen greater and greater volumes. We’ve got a good operating team there that’s growing it. But sometimes when we have – we will schedule a number of projects when we have downtime, let’s say 10 days or two weeks of downtime, there’s a number of things that go on not just one flaw in the operating side, but there might be two, three, four or five. And so that’s usually what the downtime is, is just either – really improving the efficiency and adding things on. So mostly what we’ve been doing is just improving the process and there’s just – it’s a big facility, going to 50,000 to 60,000 barrels a day is there’s a lot of moving parts there. So that’s what we’ve been doing and it’s been good so far. Was there another part of that question, David, that I didn’t address?

So just to clarify of what you’re saying, it’s an operational issue not a design flaw?

Right. Just the operational issues, yes.

Okay. Our next question is coming from the line of Tim Howard with Stifel.

Hi. Thanks for my question. Just given the kind of strategy change and DCF trending towards the low end of guidance in 2019, was there any thought of removing the 7% to 9% expected capital return growth in 2020 just to build coverage? It seems like that’s what investors are preferring more these days and the stock doesn’t appear to be valuing the growth.

That is building coverage – excuse me, the 7% to 9% is below our actual DCF growth of kind of low to mid-teens here, so that does build the coverage back into the 1.2x range. So the DCF growth in 2020 does support that type of return to capital target.

Got it. And then was there any thought on providing just more detailed expectations into 2020, adjusted EBITDA, DCF guidance officially given the new strategy you set and just maybe supporting investor concerns?

These are targets generally in the ballpark or at. We did a formal budget process in the following winter of each year and the '19 that gets Board approval and that’s when we come out with formal guidance.

Got it. And then just pivoting to the water, how much produced water is flowing today and maybe what’s expected into 2020? And then is there any thought on kind of how of that will be captured via pipeline as you kind of work through 2020?

I would say produced water now is in the 45,000 to 65,000 barrel a day range. So depending on the timing of turning in line pads, you get a surge and then it will go down, but roughly in the high 50s. So as to how much will come into the new business, we’ll do as much as we can as we focus on the northern fairway, and so as much as we can. So could it be 10,000, 20,000 barrels a day at least that we are polishing and blending and keeping local, in other words decentralized and not bringing to Clearwater could be in that range. We’re just setting out in the earliest pads now. So we aim to make as big a dent as possible just because the cost structure is so superior not to have to do the long haul trucking. But that’s a good target is at least 10,000 to 20,000 barrels a day out of 55,000 or 60,000 total, and we’ll see where it goes from there. One can think, well, that will be less for Clearwater, but as we have more than 1,000 wells producing now and our growth rate is such that the overall water grows. So even as we do a cut with polishing and blending, still there’s an overall quantity of water that continues to grow. So there will still be good water available for Clearwater.

Got it. Yes, that was kind of my next question. What is the expectation for Clearwater in 2020 with this new strategy? It’s still in that like 40 to 50 since I think that’s where it was previously.

Yes, I think that’s reasonable. We got our operating teams now that are very busy focused on bringing on a number of pads in the northern fairway where we’re working hard on coordinating flowback and produced water to take advantage of it and use that water in future completions. So we’ll see just how effective we can get that. But we’ll want to be of course as effective as possible. And so in the success case, maybe the polishing and blending can take 20,000 or 30,000 barrels a day from the northern fairway and not move it to the south. But again, the overall number is increasing so I think I’m giving you ballparks as to what Clearwater will maintain at, but it could be in the 40,000 or 50,000 range while we polish and blend 10,000, 20,000, 30,000 barrels a day just as we step into this over the next 18 months.

Okay, that’s helpful. And then last one from me, what drives growth in the second half for Antero Midstream cash flows? I assume that the water completions I think were mentioned, but production is supposed to be relatively flat at AR I think is what I heard. So can you just help us out with that? Thanks.

Yes, so a lot of it’s the water obviously but also the production. You got to remember the east side of the field that’s not Antero Midstream dedicated is not being developed. So as it declines even with flat AR production that means growth for AM’s volumes, because the areas that AM services grow while the areas that it does not service are declining. And then we also obviously have the freshwater that increases with that increased completion with one completion crew addition in the third quarter.

Thank you.

Thank you.

[Operator Instructions]. Our next question is coming from the line of Barrett Blaschke with MUFG.

Hi, guys. Just sort of looking at the commodity world as it sits today and the JV you have with MPLX and some of their commentary around more spending on their L&S segment and less on their G&P. Can you give us kind of an outlook on where you see things going after sort of the 12 and 13?

Well, the outlook, of course, is for growth and more processing plants and so that will be at Sherwood or the new call it a twin facility that’s just a couple of miles away to the west called Smithburg. And so new plants are being prepared there as well as now, so the growth will continue well beyond plants 12 and 13 and it’s all timed out relative to our production growth.

So there are plants --

Generally, it’s roughly two plants a year. Sorry about that, Barrett. What did you say?

I’m sorry. So there’s plants on the drawing board today to go on beyond 14 and 15 and what sort of triggers timing and investment decision on that?

Well, we’re always looking at our production curves and anticipating when we’re going to need it. We give our joint venture partner MPLX usually an 18-month lead time, 18 or 20 months and we all work towards that. And of course our teams are meeting every month. So we give updates. But that’s how it’s coordinated.

And just one last one from me. Could you tell me how much of the volume on those plants is typically Antero volume?

Typically 100%.

Okay.

I think you can see it on our Web site.

That’s what I thought.

Smithburg, the civil work’s already been done. Smithburg 1 comes on, I forget, sometime next year. First half of next year. And so you can see all that outlined on the Web site. I think we are pretty clear about them. It takes a lot of planning. That’s what we do. And you don’t see us having a lot of hiccups on takeaway and processing and such.

It’s been a long time since we’ve had to wait for a plant, but we bring these pads on as you can imagine, if a plant is 200 million, 215 million a day, the pads come on and choke back at 175 million, 200 million. So a big pad will fill a plant right away, very efficient.

Thank you.

Thank you.

Our next question is from the line of Sunil Sibal with Seaport Global. Please go ahead.

Hi. Good morning, guys, and thanks for all the clarity. I just wanted to go back a little bit when you did the Analyst Day last year getting to investment grade balance sheet was the goal and realized that you made a fair bit of progress towards that and things will change around. I was kind of curious how do you think about that in the current context of things? And any considerations with regard to – I know you talked about the dividend growth but in light of your goal to get to IG, is there any consideration for slowing down and getting the balance sheet beefed up?

Antero Midstream is really capped out at where Antero Resources is rated by the rating agencies. And of course with the current commodity price environment, Antero Resources is a strong DD credit. But I don’t think there’s – in the next 12 months I don’t think there is any movement from the rating agencies and upgrading E&P companies just because the commodity price environment. Antero Midstream on its own right now probably would be investing grade, but with it’s very strong balance sheet low 3s in scale but it is capped where AR’s at.

Okay. Also, I think you kind of talked about getting into the downstream side of things. Is there something in terms of opportunities set in the near term that you guys are looking at to make progress in that direction?

Well, we’re always looking and of course we can’t comment on. If there was something imminent, we couldn’t announce that until it really happened. But we’re always looking, we’re always thinking and I think that’s all we can say about that. It’s possible in the future.

Okay, got it. Thanks, guys.

Thank you.

We have now reached the end of our question-and-answer session. I would like to turn the floor back to Michael Kennedy for closing comments.

I’d like to thank everyone for joining us today. If you have any further questions, please feel free to reach out to us. Thanks again.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.