Antero Resources, Denver, has reported its second quarter 2011 results, which highlight a 78% increase in production as well as robust unconventional activity.
Financial Results
Production for the second quarter 2011 increased by 78% to 20.1 Bcfe relative to the second quarter of 2010, resulting in net revenue growth of 73% to $117 million (including cash-settled derivatives but excluding unrealized derivative gains and losses). The increase in production was primarily driven by production from new wells in the Marcellus Shale. Liquids production (NGLs and oil) contributed 11% of revenues before commodity hedges. Average natural gas prices before hedges increased 15% from the prior-year quarter to $4.56 per Mcf and average natural gas-equivalent prices before hedges also increased 15% to $4.85 per Mcfe. Additionally, average realized gas prices including hedges increased by 1% to $5.59 per Mcf. Average realized NGL prices increased by 16% to $53.01 per barrel, while average realized oil prices including hedges increased by 19% to $75.59 per barrel. Average gas-equivalent prices, including NGLs, oil and hedges, increased 1% to $5.81 per Mcfe. For the quarter, Antero realized natural gas hedging gains of $19 million, or $0.96 per Mcfe.
Reported GAAP earnings resulted in net income of $75 million, including a $98 million unrealized gain on commodity derivatives as natural gas prices declined from the prior quarter, a $9 million non-cash loss on asset sale and $34 million in deferred income tax expense. Excluding the unrealized gain on commodity derivatives, the loss on asset sale, and deferred income tax expense, adjusted net income, a non-GAAP measure, was $19 million for the quarter.
Driven by a 73% increase in revenues, cash flow from operations before changes in working capital, a non-GAAP measure, increased 123% from the prior-year quarter to $59 million. EBITDAX of $77 million for the second quarter of 2011 was 79% higher than the prior-year quarter, also due primarily to a 78% increase in natural gas production.
Net production of 20.1 Bcfe for the quarter was comprised of 19.0 Bcf of natural gas, 150,000 barrels of NGLs and 34,000 barrels of oil, representing a 29% sequential increase over the first quarter of 2011. Net daily production averaged 221 MMcfed for the second quarter, a record high for Antero, and was comprised of 209 MMcfd of natural gas (95%), 1,654 Bbl/d of NGLs (4%) and 369 Bbl/d of crude oil (1%). Net NGL production increased 1% over the second quarter of 2010, which included NGLs generated by processing third party gas in the Arkoma Woodford. As a result of the execution of a gas processing agreement effective January 1, 2011 in the Piceance Basin, Antero has replaced all of the third party NGL production lost in the sale of the Arkoma midstream processing assets which took place in the fourth quarter of 2010.
Per unit cash production costs (lease operating, gathering, compression and transportation, and production tax) for the second quarter 2011 were $1.56 per Mcfe, a 12% improvement from the prior year quarter and a 12% improvement over the previous quarter. This improvement was primarily driven by increased production volumes from new Marcellus Shale wells that generally have low per unit production costs compared to the Company's existing production base. Per unit depreciation, depletion and amortization expense decreased 36% from the prior year quarter to $1.94 per Mcfe, driven by low cost reserve increases. On a per unit basis, general and administrative expense for the second quarter 2011 was $0.41 per Mcfe, a 7% decline from the second quarter of 2010, primarily driven by the increase in gas-equivalent production.
Antero Operations
Antero's current gross operated production is 280 MMcfd, and estimated net production is 250 MMcfed, including non-operated production, NGLs and oil. Antero estimates that an additional 25 MMcfd of gross operated production is constrained, primarily waiting on infrastructure completion in West Virginia. During the first six months of 2011, Antero completed 37 gross operated wells (28 net wells) and currently has 38 gross operated wells (29 net wells) in various stages of drilling, completion, waiting on completion or pipeline.
Marcellus Shale
Antero is operating five drilling rigs in the Marcellus Shale play, all of which are drilling in northern West Virginia. The company plans to add a sixth drilling rig in October and a seventh rig before year-end 2011. Antero has 180 MMcfd of gross operated production of which 98% is coming from 47 horizontal wells, resulting in 133 MMcfd of net production. An additional estimated 25 MMcfd of gross operated deliverability is constrained, waiting on the completion of pipeline and compression facilities. Antero has 10 horizontal wells either completing or waiting on completion or pipeline and has two frac crews currently working in West Virginia. The 48 horizontal Marcellus wells that Antero has completed to date have an average lateral length of 6,000' and the company is currently completing its longest horizontal lateral drilled to date, a 9,600' lateral.
Antero expects to alleviate the gas takeaway constraints by the end of September when a number of West Virginia infrastructure projects are completed. Those projects include additional compression at the existing Jarvisville compressor station, completion of the Jarvisville low pressure gathering system, completion of the Tichenal low pressure gathering system and high pressure pipeline as well as the new Tichenal compressor station. The addition of several more compressor units and another new compressor station planned for November 2011 will raise Antero's West Virginia compression capacity to 400 MMcfd. Based on drilling and completion schedules, Antero believes that it will have adequate gathering and compression capacity to accommodate anticipated production growth into the second quarter of 2012. Planning is underway for additional compression and pipeline projects to be completed in 2012 in order to continue to raise lean gas compression and pipeline capacity as well as to deliver rich gas production to a processing plant to be completed by a third party midstream company in the third quarter of 2012.
Antero has 194,000 net acres in the Appalachian Basin Marcellus Shale play of which only 9% was classified as proved at mid-year 2011.
Woodford Shale
Antero is operating one drilling rig in the Arkoma Woodford Shale play. The company has 58 MMcfd of gross operated production from 135 operated horizontal wells online and 67 MMcfed of net production including net non-operated production, NGLs and oil. Antero has three operated horizontal Woodford wells waiting on completion and one horizontal well waiting on pipeline connection. In addition, Antero has three non-operated wells drilling with a combined 36% working interest on its Arkoma acreage.
Antero has 68,000 net acres in the Arkoma Woodford Shale play.
Piceance Basin
Antero has one operated drilling rig running in the Piceance Basin. The company's gross operated production in the Piceance is currently 42 MMcfd and 43 MMcfed net including 3 MMcfed of non-operated production from 231 wells online. A third party midstream provider recently completed the start up of a new compressor station for Antero, the Hunter Mesa compressor station located in Antero's Gravel Trend area. The Antero-dedicated facility has four compressors and will add a fifth unit in late August giving the station an estimated 55 MMcfd of compression capacity. This facility should enable Antero to improve the reliability of its takeaway capacity and rapidly grow Mesaverde rich gas production volumes in the Piceance Basin. Antero has three Mesaverde wells currently in the process of completing and 14 Mesaverde wells waiting on completion in its Gravel Trend rich gas area. The company has one frac crew currently working in the basin.
Antero has 63,000 net acres in the Piceance.
Fayetteville Shale
Antero has 7 MMcfd of net production and 5,000 net acres in the Fayetteville Shale play. The Company has one non-operated Fayetteville Shale well drilling with a 6% working interest.
Net Risked Resources
Antero has an estimated 17.0 Tcfe of undeveloped net risked resources in its three core areas. This estimate excludes proved developed producing reserves but includes proved undeveloped reserves.
In the Marcellus Shale, 12.0 Tcfe of net risked resource is attributable to 2,160 future gross horizontal wells with estimated net capital spending of $10.5 billion yielding a net development cost of $0.87 per Mcfe. The Marcellus Shale net risked resource estimate assumes that ethane is recovered from rich gas production beginning in 2013 and that a viable ethane market develops in the Marcellus. Recovering ethane in the Marcellus adds an estimated 2.4 Tcfe of net risked resource to Antero's proved, probable and possible (3P) Marcellus reserves as of June 30, 2011.
In the Piceance, 3.5 Tcfe is attributable to 2,166 future gross wells with estimated net capital spending of $5.4 billion yielding a net development cost of $1.55 per Mcfe. The Piceance resource includes both Mesaverde rich gas vertical wells and deeper Mancos/Niobrara Shale horizontal wells.
In the Arkoma, which includes both the Woodford Shale and the Fayetteville Shale, 1.5 Tcfe is attributable to 2,753 future gross horizontal wells with estimated net capital spending of $2.8 billion yielding a net development cost of $1.88 per Mcfe. Combining the resources from all three core areas, Antero has an inventory of 17.0 Tcfe of undeveloped net resources with over 7,000 future gross wells to drill with an estimated average net development cost of $1.10 per Mcfe.
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