Edgar Filing: ANTERO RESOURCES Corp

ar_Current folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-36120

ANTERO RESOURCES CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		80-0162034
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1615 Wynkoop Street Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

(303) 357-7310

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company) Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ Yes ☒ No

The registrant had 317,086,304 shares of common stock outstanding as of July 27, 2018.

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TABLE OF CONTENTS


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS		2
PART I—FINANCIAL INFORMATION		4
Item 1.	Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62
Item 4.	Controls and Procedures	64
PART II—OTHER INFORMATION		64
Item 1.	Legal Proceedings	64
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 6.	Exhibits	67
SIGNATURES		68

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

business strategy;

reserves;

financial strategy, liquidity, and capital required for our development program;

natural gas, natural gas liquids (“NGLs”), and oil prices;

timing and amount of future production of natural gas, NGLs, and oil;

hedging strategy and results;

costs and outcomes associated with the ongoing review of potential transactions by the special committee of our board of directors as described herein;

ability to meet minimum volume commitments and to utilize or monetize our firm transportation commitments;

future drilling plans;

competition and government regulations;

pending legal or environmental matters;

marketing of natural gas, NGLs, and oil;

leasehold or business acquisitions;

costs of developing our properties;

operations of Antero Midstream Partners LP (“Antero Midstream”), including the operations of its unconsolidated affiliates;

general economic conditions;

credit markets;

uncertainty regarding our future operating results; and

plans, objectives, expectations, and intentions.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incidental to our business. These risks include, but are not limited to, commodity price volatility, inflation, availability of drilling, completion, and production equipment and services, environmental risks, drilling and completion and other operating risks, marketing and transportation risks, regulatory changes, the uncertainty inherent in estimating natural gas, NGLs, and oil reserves and in projecting future rates of production, cash flows and access to capital, the timing

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of development expenditures, conflicts of interest among our stockholders, and the other risks described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”) on file with the Securities and Exchange Commission (“SEC”).

Reserve engineering is a process of estimating underground accumulations of natural gas, NGLs, and oil that cannot be measured in an exact manner. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data, and the price and cost assumptions made by reservoir engineers. In addition, the results of drilling, testing, and production activities, or changes in commodity prices, may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of natural gas, NGLs, and oil that are ultimately recovered.

Should one or more of the risks or uncertainties described in this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

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PART I—FINANCIAL INFORMATION

ANTERO RESOURCES CORPORATION

Condensed Consolidated Balance Sheets

December 31, 2017 and June 30, 2018

(Unaudited)

(In thousands, except per share amounts)


	December 31, 2017		June 30, 2018
Assets
Current assets:
Cash and cash equivalents	$	28,441		50,608
Accounts receivable, net of allowance for doubtful accounts of $1,320 at December 31, 2017 and $1,195 at June 30, 2018, respectively		34,896		35,676
Accrued revenue		300,122		321,214
Derivative instruments		460,685		420,842
Other current assets		8,943		6,590
Total current assets		833,087		834,930
Property and equipment:
Natural gas properties, at cost (successful efforts method):
Unproved properties		2,266,673		2,108,109
Proved properties		11,096,462		11,924,864
Water handling and treatment systems		946,670		979,937
Gathering systems and facilities		2,050,490		2,255,385
Other property and equipment		57,429		60,766
		16,417,724		17,329,061
Less accumulated depletion, depreciation, and amortization		(3,182,171)		(3,647,910)
Property and equipment, net		13,235,553		13,681,151
Derivative instruments		841,257		763,592
Investments in unconsolidated affiliates		303,302		358,830
Other assets		48,291		52,104
Total assets	$	15,261,490		15,690,607

Liabilities and Equity
Current liabilities:
Accounts payable	$	62,982		96,477
Accrued liabilities		443,225		438,829
Revenue distributions payable		209,617		211,234
Derivative instruments		28,476		30,661
Other current liabilities		17,796		11,532
Total current liabilities		762,096		788,733
Long-term liabilities:
Long-term debt		4,800,090		5,288,344
Deferred income tax liability		779,645		763,192
Derivative instruments		207		—
Other liabilities		43,316		47,427
Total liabilities		6,385,354		6,887,696
Commitments and contingencies (notes 12 and 13)
Equity:
Stockholders' equity:
Preferred stock, $0.01 par value; authorized - 50,000 shares; none issued		—		—
Common stock, $0.01 par value; authorized - 1,000,000 shares; 316,379 shares and 317,052 shares issued and outstanding at December 31, 2017 and June 30, 2018, respectively		3,164		3,171
Additional paid-in capital		6,570,952		6,597,537
Accumulated earnings		1,575,065		1,453,513
Total stockholders' equity		8,149,181		8,054,221
Noncontrolling interests in consolidated subsidiary		726,955		748,690
Total equity		8,876,136		8,802,911
Total liabilities and equity	$	15,261,490		15,690,607

See accompanying notes to condensed consolidated financial statements.

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended June 30, 2017 and 2018

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended June 30,
	2017		2018
Revenue:
Natural gas sales	$	454,257		473,540
Natural gas liquids sales		170,819		255,985
Oil sales		26,512		38,873
Commodity derivative fair value gains		85,641		55,336
Gathering, compression, water handling and treatment		3,192		5,518
Marketing		49,968		160,202
Marketing derivative fair value losses		—		(110)
Total revenue		790,389		989,344
Operating expenses:
Lease operating		16,992		30,164
Gathering, compression, processing, and transportation		266,747		307,786
Production and ad valorem taxes		22,553		25,891
Marketing		77,421		213,420
Exploration		1,804		1,471
Impairment of unproved properties		15,199		134,437
Impairment of gathering systems and facilities		—		8,501
Depletion, depreciation, and amortization		201,182		238,050
Accretion of asset retirement obligations		649		700
General and administrative (including equity-based compensation expense of $26,975 and $19,071 in 2017 and 2018, respectively)		64,099		61,687
Total operating expenses		666,646		1,022,107
Operating income (loss)		123,743		(32,763)
Other income (expenses):
Equity in earnings of unconsolidated affiliates		3,623		9,264
Interest		(68,582)		(69,349)
Total other expenses		(64,959)		(60,085)
Income (loss) before income taxes		58,784		(92,848)
Provision for income tax (expense) benefit		(18,819)		25,573
Net income (loss) and comprehensive income (loss) including noncontrolling interests		39,965		(67,275)
Net income and comprehensive income attributable to noncontrolling interests		45,097		69,110
Net loss and comprehensive loss attributable to Antero Resources Corporation	$	(5,132)		(136,385)

Loss per common share—basic	$	(0.02)		(0.43)

Loss per common share—assuming dilution	$	(0.02)		(0.43)

Weighted average number of shares outstanding:
Basic		315,401		316,992
Diluted		315,401		316,992

See accompanying notes to condensed consolidated financial statements.

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income

Six Months Ended June 30, 2017 and 2018

(Unaudited)

(In thousands, except per share amounts)


	Six Months Ended June 30,
	2017		2018
Revenue and other:
Natural gas sales	$	920,921		971,203
Natural gas liquids sales		365,471		490,155
Oil sales		53,472		69,146
Commodity derivative fair value gains		524,416		77,773
Gathering, compression, water handling and treatment		5,796		10,453
Marketing		115,892		304,591
Marketing derivative fair value gains		—		94,124
Total revenue and other		1,985,968		2,017,445
Operating expenses:
Lease operating		32,543		56,886
Gathering, compression, processing, and transportation		533,576		599,724
Production and ad valorem taxes		47,346		51,714
Marketing		167,414		409,159
Exploration		3,911		3,356
Impairment of unproved properties		42,098		184,973
Impairment of gathering systems and facilities		—		8,501
Depletion, depreciation, and amortization		403,911		466,294
Accretion of asset retirement obligations		1,286		1,390
General and administrative (including equity-based compensation expense of $52,478 and $40,227 in 2017 and 2018, respectively)		128,797		121,717
Total operating expenses		1,360,882		1,903,714
Operating income		625,086		113,731
Other income (expenses):
Equity in earnings of unconsolidated affiliates		5,854		17,126
Interest		(135,252)		(133,775)
Total other expenses		(129,398)		(116,649)
Income (loss) before income taxes		495,688		(2,918)
Provision for income tax (expense) benefit		(150,165)		16,453
Net income and comprehensive income including noncontrolling interests		345,523		13,535
Net income and comprehensive income attributable to noncontrolling interests		82,259		135,087
Net income (loss) and comprehensive income (loss) attributable to Antero Resources Corporation	$	263,264		(121,552)


Earnings (loss) per common share—basic	$	0.84		(0.38)

Earnings (loss) per common share—assuming dilution	$	0.83		(0.38)

Weighted average number of shares outstanding:
Basic		315,179		316,733
Diluted		315,927		316,733

See accompanying notes to condensed consolidated financial statements.

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Statements of Equity

Six Months Ended June 30, 2018

(Unaudited)

(In thousands)


	Common Stock				Additional paid-		Accumulated		Noncontrolling		Total
	Shares		Amount		in capital		earnings		interests		equity
Balances, December 31, 2017		316,379	$	3,164		6,570,952		1,575,065		726,955		8,876,136
Issuance of common stock upon vesting of equity-based compensation awards, net of shares withheld for income taxes		673		7		(6,656)		—		—		(6,649)
Issuance of common units in Antero Midstream Partners LP upon vesting of equity-based compensation awards, net of units withheld for income taxes		—		—		(4,057)		—		2,739		(1,318)
Equity-based compensation		—		—		35,732		—		4,495		40,227
Net income (loss) and comprehensive income (loss)		—		—		—		(121,552)		135,087		13,535
Effects of changes in ownership interests in consolidated subsidiaries		—		—		1,566		—		(1,566)		—
Distributions to noncontrolling interests		—		—		—		—		(119,023)		(119,023)
Other		—		—		—		—		3		3
Balances, June 30, 2018		317,052	$	3,171		6,597,537		1,453,513		748,690		8,802,911

See accompanying notes to condensed consolidated financial statements.

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2017 and 2018

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2017		2018
Cash flows provided by (used in) operating activities:
Net income including noncontrolling interests	$	345,523		13,535
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, amortization, and accretion		405,197		467,684
Impairment of unproved properties		42,098		184,973
Impairment of gathering systems and facilities		—		8,501
Commodity derivative fair value gains		(524,416)		(77,773)
Gains on settled commodity derivatives		75,913		197,225
Marketing derivative fair value gains		—		(94,124)
Gains on settled marketing derivatives		—		94,158
Deferred income tax expense (benefit)		150,165		(16,453)
Equity-based compensation expense		52,478		40,227
Equity in earnings of unconsolidated affiliates		(5,854)		(17,126)
Distributions of earnings from unconsolidated affiliates		5,820		17,895
Other		472		1,932
Changes in current assets and liabilities:
Accounts receivable		13,188		10,237
Accrued revenue		43,339		(21,092)
Other current assets		(2,385)		2,353
Accounts payable		2,072		2,948
Accrued liabilities		4,204		24,065
Revenue distributions payable		39,162		1,617
Other current liabilities		610		(1,842)
Net cash provided by operating activities		647,586		838,940
Cash flows used in investing activities:
Additions to proved properties		(179,318)		—
Additions to unproved properties		(129,876)		(87,861)
Drilling and completion costs		(629,308)		(752,781)
Additions to water handling and treatment systems		(95,451)		(58,127)
Additions to gathering systems and facilities		(155,365)		(206,753)
Additions to other property and equipment		(6,564)		(3,502)
Investments in unconsolidated affiliates		(191,364)		(56,297)
Change in other assets		(12,452)		(7,026)
Other		2,156		—
Net cash used in investing activities		(1,397,542)		(1,172,347)
Cash flows provided by (used in) financing activities:
Issuance of common units by Antero Midstream Partners LP		246,585		—
Borrowings on bank credit facilities, net		585,000		485,000
Distributions to noncontrolling interests in consolidated subsidiary		(61,869)		(119,023)
Employee tax withholding for settlement of equity compensation awards		(8,433)		(7,967)
Other		(2,747)		(2,436)
Net cash provided by financing activities		758,536		355,574
Net increase in cash and cash equivalents		8,580		22,167
Cash and cash equivalents, beginning of period		31,610		28,441
Cash and cash equivalents, end of period	$	40,190		50,608

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	125,284		130,231

Increase in accounts payable and accrued liabilities for additions to property and equipment	$	31,182		2,089

See accompanying notes to condensed consolidated financial statements.

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ANTERO RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

December 31, 2017 and June 30, 2018

(1)Organization

Antero Resources Corporation (individually referred to as “Antero” or the “Parent”) and its consolidated subsidiaries (collectively referred to as the “Company”) are engaged in the exploration, development, and acquisition of natural gas, NGLs, and oil properties in the Appalachian Basin in West Virginia and Ohio. The Company targets large, repeatable resource plays where horizontal drilling and advanced fracture stimulation technologies provide the means to economically develop and produce natural gas, NGLs, and oil from unconventional formations. Through its consolidated subsidiary, Antero Midstream Partners LP, a publicly-traded limited partnership (“Antero Midstream”), the Company has gathering and compression, as well as water handling and treatment operations in the Appalachian Basin. The Company’s corporate headquarters are located in Denver, Colorado.

(2)Summary of Significant Accounting Policies

(a)Basis of Presentation

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC applicable to interim financial information and should be read in the context of the December 31, 2017 consolidated financial statements and notes thereto for a more complete understanding of the Company’s operations, financial position, and accounting policies. The December 31, 2017 consolidated financial statements have been filed with the Securities and Exchange Commission (“SEC”) in the Company’s 2017 Form 10-K.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and, accordingly, do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Company’s financial position as of December 31, 2017 and June 30, 2018, the results of its operations for the three and six months ended June 30, 2017 and 2018, and its cash flows for the six months ended June 30, 2017 and 2018. The Company has no items of other comprehensive income or loss; therefore, its net income or loss is equal to its comprehensive income or loss. Operating results for the period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the full year because of the impact of fluctuations in prices received for natural gas, NGLs, and oil, natural production declines, the uncertainty of exploration and development drilling results, fluctuations in the fair value of derivative instruments, and other factors.

The Company’s exploration and production activities are accounted for under the successful efforts method.

As of the date these financial statements were filed with the SEC, the Company completed its evaluation of potential subsequent events for disclosure and no items requiring disclosure were identified.

(b)Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Antero, its wholly-owned subsidiaries, any entities in which the Company owns a controlling interest, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary.

We have determined that Antero Midstream is a VIE for which Antero is the primary beneficiary. Therefore, Antero Midstream’s accounts are consolidated in the Company’s condensed consolidated financial statements. Antero is the primary beneficiary of Antero Midstream based on its power to direct the activities that most significantly impact Antero Midstream’s economic performance, and its obligation to absorb losses of, or right to receive benefits from, Antero Midstream that could be significant to Antero Midstream. In reaching the determination that Antero is the primary beneficiary of Antero Midstream, the Company considered the following:

Antero Midstream was formed to own, operate, and develop midstream energy assets to service Antero’s production and completion activities under long-term service contracts.

Antero owned 52.9% of the outstanding limited partner interests in Antero Midstream at June 30, 2018.

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ANTERO RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

December 31, 2017 and June 30, 2018

Antero Midstream GP LP (“AMGP”) indirectly controls the general partnership interest in Antero Midstream and directly controls Antero IDR Holdings LLC (“IDR LLC”), which owns the incentive distribution rights in Antero Midstream. However, AMGP has not provided, and is not expected to provide, financial support to Antero Midstream. Antero does not control AMGP and does not have any investment in AMGP.

Antero’s officers and management group also act as management of Antero Midstream and AMGP.

Antero and Antero Midstream have contracts with 20-year initial terms and automatic renewal provisions, whereby Antero has dedicated the rights for gathering and compression, and water delivery and treatment services to Antero Midstream. Such dedications cover a substantial portion of Antero’s current acreage and future acquired acreage, in each case, except for acreage that was already dedicated to other parties prior to entering into the service contracts or that was acquired subject to a pre-existing dedication. The contracts call for Antero to present, in advance, its drilling and completion plans in order for Antero Midstream to develop gathering and compression and water delivery and handling assets to service Antero’s operations. Consequently, the drilling and completion capital investment decisions made by Antero control the development and operation of all of Antero Midstream’s assets. Because of these contractual obligations and the capital requirements related to these obligations, Antero Midstream has and, for the foreseeable future, will devote substantially all of its resources to servicing Antero’s operations.

Revenues from Antero provide substantially all of Antero Midstream’s financial support and, therefore, its ability to finance its operations.

As a result of the long-term contractual commitment to support Antero’s substantial growth plans, Antero Midstream will be practically and physically constrained from providing any substantive amount of services to third-parties.

All significant intercompany accounts and transactions have been eliminated in the Company’s condensed consolidated financial statements. Noncontrolling interest in the Company’s condensed consolidated financial statements represents the interests in Antero Midstream which are owned by the public and the incentive distribution rights in Antero Midstream. Noncontrolling interests in consolidated subsidiaries is included as a component of equity in the Company’s condensed consolidated balance sheets.

Investments in entities for which the Company exercises significant influence, but not control, are accounted for under the equity method. Such investments are included in Investments in unconsolidated affiliates on the Company’s condensed consolidated balance sheets. Income from investees that are accounted for under the equity method is included in Equity in earnings of unconsolidated affiliates on the Company’s condensed consolidated statements of operations and cash flows.

(c)Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions which affect revenues, expenses, assets, and liabilities, as well as the disclosure of contingent assets and liabilities. Changes in facts and circumstances or discovery of new information may result in revised estimates, and actual results could differ from those estimates.

The Company’s condensed consolidated financial statements are based on a number of significant estimates including estimates of natural gas, NGLs, and oil reserve quantities, which are the basis for the calculation of depletion and impairment of oil and gas properties. Reserve estimates, by their nature, are inherently imprecise. Other items in the Company’s condensed consolidated financial statements which involve the use of significant estimates include derivative assets and liabilities, accrued revenue, deferred income taxes, equity-based compensation, asset retirement obligations, depreciation, amortization, and commitments and contingencies.

(d)Risks and Uncertainties

The markets for natural gas, NGLs, and oil have, and continue to, experience significant price fluctuations. Price fluctuations can result from variations in weather, levels of production, availability of transportation capacity to other regions of the country, the level of imports to and exports from the United States, and various other factors. Increases or decreases in the prices the Company receives for its production could have a significant impact on the Company’s future results of operations and reserve quantities.

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ANTERO RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

December 31, 2017 and June 30, 2018

(e)Cash and Cash Equivalents

The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these instruments. From time to time, the Company may be in the position of a “book overdraft” in which outstanding checks exceed cash and cash equivalents. The Company classifies book overdrafts within accounts payable within its condensed consolidated balance sheets, and classifies the change in accounts payable associated with book overdrafts as an operating activity within its condensed consolidated statements of cash flows.

(f)Derivative Financial Instruments

In order to manage its exposure to natural gas, NGLs, and oil price volatility, the Company enters into derivative transactions from time to time, which may include commodity swap agreements, basis swap agreements, collar agreements, and other similar agreements related to the price risk associated with the Company’s production. To the extent legal right of offset exists with a counterparty, the Company reports derivative assets and liabilities on a net basis. The Company has exposure to credit risk to the extent that the counterparty is unable to satisfy its settlement obligations. The Company actively monitors the creditworthiness of counterparties and assesses the impact, if any, on its derivative positions.

The Company records derivative instruments on the condensed consolidated balance sheets as either assets or liabilities measured at fair value and records changes in the fair value of derivatives in current earnings as they occur. Changes in the fair value of commodity derivatives, including gains or losses on settled derivatives, are classified as revenues on the Company’s condensed consolidated statements of operations. The Company’s derivatives have not been designated as hedges for accounting purposes.

(g)Asset Retirement Obligations

The Company is obligated to dispose of certain long‑lived assets upon their abandonment. The Company’s asset retirement obligations (“AROs”) relate primarily to its obligation to plug and abandon oil and gas wells at the end of their lives, as well as Antero Midstream’s future closure and postclosure costs associated with the landfill at its wastewater treatment facility. AROs are recorded at estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligations, which is then discounted at the Company’s credit‑adjusted, risk‑free interest rate. Revisions to estimated AROs often result from changes in retirement cost estimates or changes in the estimated timing of abandonment. The fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If an obligation is settled for an amount other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement.

(h)Income Taxes

For the three and six months ended June 30, 2017, the Company’s overall effective tax rate was different than the statutory rate of 35% primarily due to the effects of noncontrolling interests, state tax rates, and permanent differences on vested equity compensation awards. For the three and six months ended June 30, 2018, the Company’s overall effective tax rate was different than the statutory rate of 21% primarily due to the effects of noncontrolling interests, state tax rates, and permanent differences on vested equity compensation awards. Additionally, due to a change in Colorado tax laws that decreased our effective state tax rates, we recognized a $20 million benefit during the three and six months ended June 30, 2018 from the resulting reduction of our deferred tax liabilities.

(i)Industry Segments and Geographic Information

Management has evaluated how the Company is organized and managed and has identified the following segments: (1) the exploration, development, and production of natural gas, NGLs, and oil; (2) gathering and processing; (3) water handling and treatment; and (4) marketing and utilization of excess firm transportation capacity.

All of the Company’s assets are located in the United States and substantially all of its production revenues are attributable to customers located in the United States; however, some of the Company’s production revenues are attributable to customers who resell the Company’s production to third parties located in foreign countries.

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ANTERO RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

December 31, 2017 and June 30, 2018

(j)Earnings per Common Share

Earnings per common share—basic for each period is computed by dividing net income attributable to Antero by the basic weighted average number of shares outstanding during the period. Earnings per common share—assuming dilution for each period is computed after giving consideration to the potential dilution from outstanding equity awards, calculated using the treasury stock method. The Company includes performance share unit awards in the calculation of diluted weighted average shares outstanding based on the number of common shares that would be issuable if the end of the period was also the end of the performance period required for the vesting of the awards. During periods in which the Company incurs a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all equity awards is antidilutive. The following is a reconciliation of the Company’s basic weighted average shares outstanding to diluted weighted average shares outstanding during the periods presented (in thousands):


	Three Months Ended June 30,		Six Months Ended June 30,
	2017	2018	2017	2018
Basic weighted average number of shares outstanding	315,401	316,992	315,179	316,733
Add: Dilutive effect of restricted stock units	—	—	710	—
Add: Dilutive effect of outstanding stock options	—	—	—	—
Add: Dilutive effect of performance stock units	—	—	38	—
Diluted weighted average number of shares outstanding	315,401	316,992	315,927	316,733

Weighted average number of outstanding equity awards excluded from calculation of diluted earnings per common share(1):
Restricted stock units	5,105	2,899	1,596	3,088
Outstanding stock options	679	639	681	646
Performance stock units	1,213	1,860	896	1,556

(1) The potential dilutive effects of these awards were excluded from the computation of earnings per common share—assuming dilution because the inclusion of these awards would have been anti-dilutive.

(k)Adoption of New Accounting Principle

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaced most existing revenue recognition guidance in GAAP when it became effective and was incorporated into GAAP as Accounting Standards Codification (“ASC”) Topic 606. The new standard became effective for the Company on January 1, 2018. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected the modified retrospective transition method. The adoption of this standard had no impact on the Company’s consolidated financial statements. See Note 4 to the condensed consolidated financial statements for the Company’s disclosures under ASC 606.

(l)Recently Issued Accounting Standard

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to present nearly all leasing arrangements on the balance sheet as liabilities along with a corresponding right-of-use asset. The ASU will replace most existing lease guidance in GAAP when it becomes effective. The new standard becomes effective for the Company on January 1, 2019. Although early application is permitted, the Company does not plan to early adopt the ASU. The standard requires the use of the modified retrospective transition method. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures. Currently, the Company is evaluating the standard’s applicability to its various contractual arrangements. The Company believes that adoption of the standard will result in increases to its assets and liabilities on its consolidated balance sheet as well as changes to the presentation of certain operating expenses on its consolidated statement of operations, including the accelerated recognition of expenses attributable to certain of is leasing arrangements. However, the Company has not yet determined the extent of the adjustments that will be required upon implementation of the standard. The Company continues to monitor relevant industry guidance regarding the implementation of ASU 2016-02 and will adjust its implementation strategies as necessary. The Company does not believe that adoption of the standard will impact its operational strategies, growth prospects, or cash flows.

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ANTERO RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

December 31, 2017 and June 30, 2018

(3)Antero Midstream Partners LP

In 2014, the Company formed Antero Midstream to own, operate, and develop midstream energy assets that service Antero’s production. Antero Midstream’s assets consist of gathering systems and facilities, water handling and treatment facilities, and interests in processing and fractionation plants, through which it provides services to Antero under long-term, fixed-fee contracts. AMGP indirectly owns the general partnership interest in Antero Midstream and directly owns capital interests in IDR LLC, which owns the incentive distribution rights in Antero Midstream. Antero Midstream is an unrestricted subsidiary as defined by Antero’s senior secured revolving bank credit facility (the “Credit Facility”). As an unrestricted subsidiary, Antero Midstream and its subsidiaries are not guarantors of Antero’s obligations, and Antero is not a guarantor of Antero Midstream’s obligations (see Note 16).

In connection with Antero’s contribution of its water handling and treatment assets to Antero Midstream in September 2015, Antero Midstream agreed to pay Antero (a) $125 million in cash if Antero Midstream delivers 176,295,000 barrels or more of fresh water during the period between January 1, 2017 and December 31, 2019 and (b) an additional $125 million in cash if Antero Midstream delivers 219,200,000 barrels or more of fresh water during the period between January 1, 2018 and December 31, 2020.

Antero Midstream has an Equity Distribution Agreement (the “Distribution Agreement”) pursuant to which Antero Midstream may sell, from time to time through brokers acting as its sales agents, common units representing limited partner interests having an aggregate offering price of up to $250 million. Sales of the common units are made by means of ordinary brokers’ transactions on the New York Stock Exchange, at market prices, in block transactions, or as otherwise agreed to between Antero Midstream and the sales agents. Proceeds are used for general partnership purposes, which may include repayment of indebtedness and funding working capital or capital expenditures. Antero Midstream is under no obligation to offer and sell common units under the Distribution Agreement.

During the six months ended June 30, 2018, Antero Midstream did not sell any common units under the Distribution Agreement. As of June 30, 2018, Antero Midstream had the capacity to issue additional common units under the Distribution Agreement up to an aggregate sales price of $157.3 million.

On February 6, 2017, Antero Midstream formed a joint venture (the “Joint Venture”) to develop processing assets in Appalachia with MarkWest Energy Partners, L.P. (“MarkWest”), a wholly owned subsidiary of MPLX, L.P. (see note 5). In conjunction with the formation of the Joint Venture, on February 10, 2017, Antero Midstream issued 6,900,000 common units, including common units issued pursuant to the underwriters’ option to purchase additional common units, generating net proceeds of approximately $223 million. Antero Midstream used the net proceeds to fund the initial contribution to the Joint Venture, repay outstanding borrowings under its credit facility, and for general partnership purposes.

Antero owned approximately 52.9% of the limited partner interests of Antero Midstream at December 31, 2017 and June 30, 2018.

(4)Revenue

(a) Revenue from Contracts with Customers

Product revenue

Our revenues are primarily derived from the sale of natural gas and oil production, as well as the sale of NGLs that are extracted from our natural gas. Sales of natural gas, NGLs, and oil are recognized when we satisfy a performance obligation by transferring control of a product to a customer. Payment is generally received in the month following the month that the sale occurred.

Under our natural gas sales contracts, we deliver natural gas to the purchaser at an agreed upon delivery point. Natural gas is transported from our wellheads to delivery points specified under sales contracts. To deliver natural gas to these points, Antero Midstream or third parties gather, compress, process and transport our natural gas. We maintain control of the natural gas during gathering, compression, processing, and transportation. Our sales contracts provide that we receive a specific index price adjusted for pricing differentials. We transfer control of the product at the delivery point and recognize revenue based on the contract price. The costs to gather, compress, process and transport the natural gas are recorded as Gathering, compression, processing and transportation expenses.

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ANTERO RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

December 31, 2017 and June 30, 2018

NGLs, which are extracted from natural gas through processing, are either sold by us directly or by the processor under processing contracts. For NGLs sold by us directly, our sales contracts provide that we deliver the product to the purchaser at an agreed upon delivery point and that we receive a specific index price adjusted for pricing differentials. We transfer control of the product to the purchaser at the delivery point and recognize revenue based on the contract price. The costs to further process and transport NGLs are recorded as Gathering, compression, processing, and transportation expenses. For NGLs sold by the processor, our processing contracts provide that we transfer control to the processor at the tailgate of the processing plant and we recognize revenue based on the price received from the processor.

Under our oil sales contracts, we generally sell oil to the purchaser from storage tanks near the wellhead and collect a contractually agreed upon index price, net of pricing differentials. We transfer control of the product from the storage tanks to the purchaser and recognize revenue based on the contract price.

Gathering, compression, water handling and treatment revenue

Substantially all revenues from our gathering, compression, water handling and treatment operations are derived from intersegment transactions for services Antero Midstream provides to our exploration and production operations. The portion of such fees shown in our consolidated financial statements represent amounts charged to interest owners in Antero-operated wells, as well as fees charged to other third parties for water handling and treatment services provided by Antero Midstream or usage of Antero Midstream’s gathering and compression systems. For gathering and compression revenue, Antero Midstream satisfies its performance obligations and recognizes revenue when low pressure volumes are delivered to a compressor station, high pressure volumes are delivered to a processing plant or transmission pipeline, and compression volumes are delivered to a high pressure line. Revenue is recognized based on the per Mcf gathering or compression fee charged by Antero Midstream in accordance with the gathering and compression agreement. For water handling and treatment revenue, Antero Midstream satisfies its performance obligations and recognizes revenue when the fresh water volumes have been delivered to the hydration unit of a specified well pad and the wastewater volumes have been delivered to its wastewater treatment facility. For services contracted through third party providers, Antero Midstream’s performance obligation is satisfied when the service performed by the third party provider has been completed. Revenue is recognized based on the per barrel fresh water delivery or wastewater treatment fee charged by Antero Midstream in accordance with the water services agreement.

Marketing revenue

Marketing revenues are derived from activities to purchase and sell third-party natural gas and NGLs and to market excess firm transportation capacity to third parties. We retain control of the purchased natural gas and NGLs prior to delivery to the purchaser. The Company has concluded that we are the principal in these arrangements and therefore we recognize revenue on a gross basis, with costs to purchase and transport natural gas and NGLs presented as marketing expenses. Contracts to sell third party gas and NGLs are generally subject to similar terms as contracts to sell our produced natural gas and NGLs. We satisfy performance obligations to the purchaser by transferring control of the product at the delivery point and recognize revenue based on the price received from the purchaser.

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ANTERO RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

December 31, 2017 and June 30, 2018

(b) Disaggregation of Revenue

In the following table, revenue is disaggregated by type (in thousands). The table also identifies the reportable segment to which the disaggregated revenues relate. For more information on reportable segments, see Note 15—Reportable Segments.


	Three Months Ended June 30,				Six Months Ended June 30,				Segment to which
	2017		2018		2017		2018		revenues relate
Revenues from contracts with customers:
Natural gas sales	$	454,257		473,540		920,921		971,203	Exploration and production
Natural gas liquids sales (ethane)		21,404		32,687		39,873		59,762	Exploration and production
Natural gas liquids sales (C3+ NGLs)		149,415		223,298		325,598		430,393	Exploration and production
Oil sales		26,512		38,873		53,472		69,146	Exploration and production
Gathering and compression		2,324		4,263		4,863		8,408	Gathering and processing
Water handling and treatment		868		1,255		933		2,045	Water handling and treatment
Marketing		49,968		160,202		115,892		304,591	Marketing
Total		704,748		934,118		1,461,552		1,845,548
Income from derivatives and other sources		85,641		55,226		524,416		171,897
Total revenue and other	$	790,389		989,344		1,985,968		2,017,445

For our product sales that have a contract term greater than one year, we have utilized the practical expedient in ASC 606, which states that a company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under our product sales contracts, each unit of product delivered to the customer represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. For our product sales that have a contract term of one year or less, we have utilized the practical expedient in ASC 606, which states that a company is not required to disclose the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

(d) Contract Balances

Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606. At December 31, 2017 and June 30, 2018, our receivables from contracts with customers were $300 million and $321 million, respectively.

(5)Equity Method Investments

In 2016, Antero Midstream acquired a 15% equity interest in Stonewall Gas Gathering LLC (“Stonewall”), which operates a regional gathering pipeline on which Antero is an anchor shipper.

On February 6, 2017, Antero Midstream formed the Joint Venture to develop gas processing and fractionation assets in Appalachia with MarkWest, a wholly owned subsidiary of MPLX. Antero Midstream and MarkWest each own a 50% equity interest in the Joint Venture and MarkWest operates the Joint Venture assets, which consist of processing plants in West Virginia, and a one-third interest in a MarkWest fractionator in Ohio.

The Company’s consolidated statements of operations and comprehensive income (loss) includes Antero Midstream’s proportionate share of the net income of equity method investees. When Antero Midstream records its proportionate share of net income, it increases equity income in the consolidated statements of operations and comprehensive income (loss) and the carrying value of that investment on the Company’s consolidated balance sheet. When a distribution is received, it is recorded as a reduction to the carrying value of that investment on the consolidated balance sheet. The Company uses the equity method of accounting to account for its investments in Stonewall and the Joint Venture because Antero Midstream exercises significant influence, but not control, over the entities. The Company’s judgment regarding the level of influence over its equity investments includes considering key factors such as Antero Midstream’s ownership interest, representation on the board of directors, and participation in the policy-making decisions of Stonewall and the Joint Venture.

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ANTERO RESOURCES CORPORATION

Notes to Condensed Consolidated Financial Statements

December 31, 2017 and June 30, 2018

The following table is a reconciliation of investments in unconsolidated affiliates for the six months ended June 30, 2018 (in thousands):


	Stonewall		MarkWest Joint Venture		Total
Balance at December 31, 2017	$	67,128		236,174		303,302
Investments		—		56,297		56,297
Equity in net income of unconsolidated affiliates		5,542		11,584		17,126
Distributions from unconsolidated affiliates		(4,590)		(13,305)		(17,895)
Balance at June 30, 2018	$	68,080		290,750		358,830

Investments in the Joint Venture during the six months ended June 30, 2018 relate to capital contributions for construction of additional processing facilities.

(6)Accrued Liabilities

Accrued liabilities as of December 31, 2017 and June 30, 2018 consisted of the following items (in thousands):


	December 31, 2017		June 30, 2018
Capital expenditures	$	155,300		126,476
Gathering, compression, processing, and transportation expenses		88,850		95,441
Marketing expenses		59,049		81,179
Interest expense		40,861		42,399
Other		99,165		93,334
	$	443,225		438,829

(7)Long-Term Debt

Long-term debt was as follows at December 31, 2017 and June 30, 2018 (in thousands):


		December 31, 2017		June 30, 2018
Antero Resources:
Credit Facility(a)		$	185,000		455,000
5.375% senior notes due 2021(b)			1,000,000		1,000,000
5.125% senior notes due 2022(c)			1,100,000		1,100,000
5.625% senior notes due 2023(d)			750,000		750,000
5.00% senior notes due 2025(e)			600,000		600,000
Net unamortized premium			1,520		1,382
Net unamortized debt issuance costs			(32,430)		(29,604)
Antero Midstream:
Midstream Credit Facility(g)			555,000		770,000
5.375% senior notes due 2024(h)			650,000		650,000
Net unamortized debt issuance costs			(9,000)		(8,434)
	&