Hello, and welcome to the Antero Midstream fourth quarter 2021 earnings call and webcast. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Justin Agnew, Director of Finance. Please go ahead, sir.
Good morning, and thank you for joining us for Antero Midstream's fourth quarter and full year 2021 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 website 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 can 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, Brendan Krueger, CFO of Antero Midstream, and Michael Kennedy, CFO of Antero Resources and Director of Antero Midstream. With that, I turn the call over to Paul.
Thanks, Justin. In my comments, I'll discuss AM's 2022 capital budget, along with our updated five-year, $1 billion organic project backlog. These projects are underpinned by AR's peer leading liquids-rich inventory in Appalachia, the lowest cost gas basin in the U.S. Importantly, this infrastructure drives growth at AM and plays a vital role in supplying clean natural gas, both domestically and abroad, to help lower overall global emissions. We believe that building and owning midstream assets with high throughput visibility in the lowest cost basin is the most attractive way to deliver value to our shareholders.
Now let's discuss some of the key infrastructure projects at AM. I'll start on slide 3, titled AM 2022 Capital Budget and Key Projects. First, as depicted on the right-hand side of the page, we placed the Lincoln Compressor Station in service in the fourth quarter of 2021, which was accelerated from the first quarter of 2022. For the full year 2022, we have budgeted capital investments of $275 million-$300 million, which is in line with our comments made on last quarter's earnings call. Antero Midstream's 2022 capital budget includes approximately $45 million for two additional compressor stations that will be placed online in 2022 and 2023. These compressor stations are located in the core of the liquids-rich Marcellus Fairway, where AR's development is focused over the next several years.
Importantly, AM's visibility into AR's development plan allows us to phase in capacity at these future stations on a just-in-time basis. Antero Midstream has also budgeted $50 million of remaining capital investment for a 20-mi high-pressure line from Wetzel County to the Sherwood and Smithburg processing complex highlighted in green. This trunk line connects AR's core development area, highlighted in blue, with our processing capacity and supports AM's throughput growth over the next several years. In addition to some of these larger projects, we will continue to invest in the low-pressure gathering and water delivery projects, which reflect the remaining capital in the 2022 budget.
Slide number 4, entitled AM Organic Project Backlog, illustrates AM's $1 billion organic project backlog through 2026. Once the major projects I just discussed are completed, AM will effectively complete the upfront capital investment required to support the drilling partnership. On a quarterly basis, our 2022 capital program is front-loaded, and we expect to invest approximately 70%-75% of our full year capital budget in the first half of 2022. This results in declining capital investments on a quarterly basis throughout the year.
Beyond 2022, we expect declining capital budgets from 2023 through 2026. These just-in-time capital projects include our bread and butter gathering, compression, and water projects infrastructure that support the low single-digit throughput and EBITDA growth over the next several years. Importantly, this development visibility, the short lead time projects, and the just-in-time approach allows us to generate peer-leading return on invested capital, or ROIC, which is illustrated in yellow. In 2021, AM generated its highest annual ROIC of 18%, and we expect to generate high teens ROICs over the next five years as our EBITDA growth and capital declines.
I'll finish my comments on slide number 5, titled AR Peer Leading Liquids-Rich Drilling Inventory. Every year at AR, we do an extensive technical analysis of the Appalachian Basin to evaluate undrilled locations, well performance, and EURs in Appalachia. The map on the right-hand side of the page illustrates this analysis with AR's acreage in yellow and drilled STIP locations in red compared to AR's premium and Tier 2 acreage outlines. As you can see, AR holds an extensive position in Appalachia, particularly in the liquids-rich core area of West Virginia, west of the 1,100 BTU line.
Specifically, AR holds over 925 liquids-rich premium core locations with laterals averaging over 13,250 feet, which is nearly 40% of the premium liquids-rich core undrilled locations in Appalachia. This leading liquids-rich inventory is the focus of AR's development program over the next decade, given the attractive economics for liquids-rich locations compared to dry gas locations at current commodity prices. The map also illustrates AR's highly contiguous acreage position that results in an efficient midstream build-out that generates peer-leading return on invested capital for AM.
Importantly, AR continues to be active in its organic leasing program, acquiring bolt-on acreage. This organic approach is both cost-effective for AR and capital efficient for AM compared to corporate M&A transactions, both in Appalachia or out-of-basin. This organic approach, historically avoiding the competitive acquisition markets, has resulted in strong balance sheets and attractive outlooks at both entities. With that, I'll turn the call over to Brendan.
Thanks, Paul. I'll begin my comments with fourth quarter results at AM. During the fourth quarter, AM generated $213 million of EBITDA, bringing the full year 2021 EBITDA to $876 million. This was $16 million above the midpoint of guidance and represents 3% year-over-year EBITDA growth. AM's 2021 EBITDA was above the midpoint of guidance due to higher gathering volumes throughout the year. Capital expenditures in the quarter were $80 million, bringing our full-year capital expenditures to $262 million, driven by the acceleration of the Lincoln Compressor Station that Paul just discussed in his comments. For the full year, we generated $439 million of free cash flow before dividends and $10 million of free cash flow after dividends, which allowed us to maintain a flat debt profile at $3.1 billion and leverage at 3.6 x.
Slide 6, titled Free Cash Flow Inflection Point, illustrates our historical and future free cash flow after dividends. As you can see, from 2017 through 2020, we were in an outspend mode as we built scale through our organic capital projects and downstream investments, such as the processing and fractionation JV with MPLX. In the 2021 to 2022 period, we will be approximately free cash flow breakeven due to expansion capital investments supporting the drilling partnership growth. However, with the declining quarterly capital throughout the year, the outspend is effectively behind us as we transition to generating free cash flow after dividends in the second half of 2022. This will mark a critical inflection point for Antero Midstream as we expect to consistently generate free cash flow after dividends for the foreseeable future.
As you can see on the right-hand side of the page, we expect increasing free cash flow after dividends in 2023 and further growth into 2024 and beyond. As capital declines, volume continues to grow as a result of the drilling partnership, and the LP fee rebate program with AR expires. In total, we are now targeting $700 million-$800 million of free cash flow after dividends from 2022 through 2026. That is up $250 million at the midpoint from our previous five-year target of $450 million-$550 million from 2021 through 2025.
I'll finish our prepared remarks on slide 7, titled Antero Midstream Guidance and Outlook Summary. The left-hand side of the page highlights our 2022 guidance, and the right-hand side illustrates our long-term outlook. First, we are still on track with our five-year outlook through 2025 and are now rolling forward that outlook through 2026, as just mentioned. While our EBITDA guidance for 2022 is approximately flat, we are still targeting a low single-digit EBITDA CAGR through 2026, driven primarily by throughput growth at AM.
Our 2022 capital budget of $275 million-$300 million is approximately one-third of our total organic project backlog of $1 billion through 2026, which implies declining capital in 2023 through 2026. This EBITDA growth and declining capital results in AM now targeting $2.9 billion-$3 billion of free cash flow before dividends and $700 million-$800 million, as just mentioned, of free cash flow after dividends, assuming a $0.90 per share dividend from 2022 through 2026. This profile results in declining leverage from our 3.6x level today to our target of 3x or less by year-end 2024. Once we reach this leverage target, we will be in a position to evaluate further return of capital to shareholders, additional growth investments and further debt reduction.
As a reminder, we have used $150 million of our $300 million share repurchase program, resulting in $150 million of remaining capacity. In the near term, our primary focus will continue to be debt reduction and to use this program only opportunistically, as we have in the past when AM share price does not reflect the underlying business fundamentals. Once we reach our leverage targets and have significant financial flexibility, we can further utilize this program or evaluate dividend growth depending on market conditions. In summary, we remain very excited about the future of Antero Midstream, particularly as we reach this inflection point in the second half of this year, where we expect to generate consistent free cash flow after dividends for the foreseeable future. With that, operator, we are ready to take questions.
Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please, while we poll for questions. Our first question today is coming from John Mackay from Goldman Sachs. Your line is now live.
Hey, good morning, everyone. Thanks for the time. I wanted to talk about a little bit about capital allocation and the new free cash after dividend guidance. You know, I guess it sounds like the focus is on leverage now through year-end 2024. But I guess I wanna ask, you know, given the improvement at AR, is 3.0 still the right leverage for you, just given how much better the sponsor's gotten? Could you just talk a little bit more about what's driving that increase in the full year cumulative free cash outlook? Thanks.
Yeah. I think on your first question, you know, we are still very focused on the 3x leverage target. I think, you know, Midstream continues to move lower in terms of focus on lower leverage. We've seen, you know, a nice response from the AR side as it's taken its absolute debt down, and we think we'll see something similar on the AM side. It just gives you more flexibility in long-term, you know, strategic planning. On the second question, you know, really the addition of rolling forward a year in a maintenance capital program, you know, we've talked about the fact that both in 2021 and 2022, we were really investing related to the drilling partnership.
Those are the years you saw more heavy investment to support that drilling partnership. When you get out to 2023, you should see that capital come down nicely from this year. 2024 and beyond, it will come down even further into more of a maintenance capital mode, which, you know, we like to think about in terms of $150 million-$200 million overall being a maintenance capital level for Antero Midstream. When you roll off another year with the growth we expect of the drilling partnership, the fee rebate expiring and then that lower level of capital, it drives that $250 million of additional free cash flow on that five-year cumulative basis.
All right. That's really helpful. Thank you and makes sense. Maybe I can just squeeze in one more. I understand you can't comment too much, so I'm just kinda wanna ask on process and timeline. I think next Thursday is the next step in the wastewater court case. I'm just curious, are we expecting an answer from the court at that point, or is that, you know, just one step and we probably won't see resolution until later? Thanks.
Next Thursday was an additional day added to the trial, so just additional items to cover, I think, for the trial. As we disclosed, it's a bench trial, and there's no definitive timing in terms of when a decision will necessarily be made. Of course, you'll likely see appeals as you do in most court cases. Tough to gauge when we'll come to a final conclusion there. Just to be clear, we have not included any sort of assumption of anything in our targets and cash flow guidance that we've provided.
Got it. All right. That's helpful. Thanks for the time. Appreciate it.
All right. Thanks, John.
Our next question is coming from Ned Baramov from Wells Fargo. Your line is now live.
Hi. Thanks for squeezing me in. Just one quick question. It seems that, with the expected in-service of Shell's ethane cracker, later this year, ethane production will increase at AR. Are there any thoughts of having the de-ethanizers at AM at some point in the future as opposed to keeping them at AR?
No. Those were not part of the JV to begin with. Frankly, that's kind of the lowest part of the economics on the processing complex anyway. We're happy to kinda keep those outside of AM's business.
Yeah. Just to reiterate, that's not AR. That's part of the JV.
Yeah. That's held at MPLX.
At MPLX.
Got it. I guess with AR announcing its capital allocation plan, could increasing ownership in AM be part of this framework?
No, I mean, I don't think anything. You know, AR has not come out and said anything there. I mean, you have seen some of those transactions certainly out there. You know, Shell is a recent one, much different structure there. But as we look out at the business today, I think, you know, the separate entities are working well today, so no current plans as we look out right now. Whether that changes as the companies become more mature, you know, to be determined. Right now, I think the outlook makes sense for both entities.
Thanks for the time. That's all I had.
Thanks, Ned.
Thank you. Our next question today is coming from Michael Ensley from Tudor, Pickering, Holt. Your line is now live.
Morning, guys. Thanks for the time. My first question is just around 2022 expectations for the water business. I understand that gross AR completions guidance was tabbed at 75-80 for the year. But could you guys just kinda walk us through the quarterly cadence that you're expecting there?
Yeah. I think overall, you know, roughly 60% or so in the first half of the year and the other 40% in the second half as it relates to volumes there.
Got it. Thanks. That's helpful. I guess just pivoting to capital allocation. It sounded like you guys really wanna kinda reach your debt target before taking a peek at what you could do on the capital returns side of things. I guess as you look out to 2024 plus, kinda how do you weigh distribution increases versus buybacks? Do you have, like, an ultimate goal to get back to the prior distribution at around the $1.23 per share level?
Yeah, I mean, I think as we look out there, you know, if we look at the business today, you know, we certainly think the equity looks attractive, you know, trading where it does, given the organic growth we have, the low leverage that we have, and just the visibility, frankly, from a midstream entity that we have, you know, over, you know, not just multiple years, but, you know, over multiple decades with the inventory that AR has. You know, if you get out to 2024 and things have not changed to a certain extent, I think share buybacks certainly look more attractive to us, versus increasing the dividend overall. You know, we'll go from there. Obviously quite a ways out, and we'll have to evaluate when we get there.
Got it. Thanks for the time.
Thank you.
Thank you. As a reminder, that's star one to be placed into question queue. Our next question is coming from Tarek Hamid from JPMorgan. Your line is now live.
Good morning, guys. Just following up on capital allocation. You know, given sort of your targets for free cash flow and the flip over in the second half of 2022, just wondering kind of as you get to that 3x leverage target, sort of how much of that is sort of continued EBITDA expansion versus how much of that is just sort of using free cash flow to pay down revolver as you think about getting to that target by year-end 2024.
Sorry, Tarek, what was the first part of your question?
Just given the flip over to free cash flow in the middle of this year.
Yeah. I think overall, as we look at debt pay down, we certainly have some notes with coupons that are not very attractive to us today. I think that would be the first use of it. I think we're comfortable having a bit drawn on the revolver. Once you get through some of the higher cost debt, you'd likely just turn out or pay down the revolver over time, and you wouldn't have anything drawn on that as well. A lot of flexibility there, I think on the AM side with the debt to be able to attack it.
Got it. Just, you know, on ratings, you know, sort of AR and AM have been kind of unique with AM being rated effectively the same as AR. Given the debt reduction at AR, just wondering kind of, you know, the conversations you're having with the agencies, do you expect them to sort of continue to rate AM the same as AR or do you expect them to sort of start to change that methodology over time?
Yeah, I mean, I'd say both agencies, you know, they look at the structures a little bit different. You know, one likes to look at it on kind of more of a combined, one likes to look at it more separate. Overall, you could see some differentiation between the two. AR certainly has, you know, it's leveraged at 1.3x and heading lower in the future. AM does have leverage moving down as well. You know, the push will obviously be to keep them connected and continue to move those ratings up. We do have frequent conversations there, but tough to tell what the rating agencies do. You know, a little bit of a black box sometimes there.
I can appreciate that. Thank you very much.
Thank you.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.
Yeah. Thanks for joining us today for the call. We're available for any questions, should you have any follow-up. Thank you.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time. Have a wonderful day. We thank you for your participation today.