Welcome to Antero Midstream's Q1 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Justin Agnew, Director of Finance.
Good morning, and thank you for joining us for Antero Midstream's first quarter 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 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, Brendan Krueger, CFO of Antero Midstream, and Michael Kennedy, CFO of Antero Resources and Director of Antero Midstream. With that, I'll turn the call over to Paul.
Thanks, Justin. In my comments today, I will discuss AM's unique position in the LNG value chain, also our de-risk business model and our efforts to minimize the impacts of inflation and tight supply chains. Brendan will then discuss the highlights from our first quarter earnings and our long-term outlook. I'll start my comments on slide 3, titled The Critical First Link to LNG Supply. This slide illustrates AM's unique position in the increasingly important LNG value chain. Given the recent geopolitical events, it is clear that there will be a significant call on safe and reliable natural gas and LNG from the US. AM's custom-built, irreplaceable, and integrated gathering and processing infrastructure is the critical first step in transporting natural gas to LNG facilities.
As depicted on the left-hand side of the page, AM's infrastructure directly connects AR's production to one of the largest firm transportation hubs in Appalachia at the Sherwood and Smithburg processing complex. As a reminder, Sherwood and Smithburg is the largest processing complex in North America with 2.8 Bcf a day of processing capacity. AR currently has 2.3 Bcf of firm transportation that delivers gas to various LNG facilities or approximately 75% of its gross gas residue production. This 2.3 Bcf a day includes 2.0 to the Gulf Coast LNG facilities and 330 million a day to Cove Point. With this connectivity, AM is uniquely positioned to benefit from the increasing global LNG demand despite not operating along the Gulf Coast. In fact, operating in Appalachia has significant competitive advantages.
First, Appalachia is the lowest cost natural gas basin in the U.S. Finding and development or F&D costs for AR are approximately 30 cents per Mcfe. This compares favorably to other natural gas plays such as the Haynesville, where F&D costs are often 2-3 times higher. This translates to fewer rigs, completion crews, sand and water needed to grow production in Appalachia. To put it into perspective, AR is able to grow gross production volumes dedicated to AM, utilizing only 2-3 rigs and two completion crews. This is particularly important during times like today, where there's tight labor and supply markets in many parts of the U.S. We continue to believe that Antero's business model with lower capital intensity, repeatable results, and a prolific resource base is well-positioned for the years ahead and decades to come.
Now let's move to slide number 4, titled Inflation and Supply Chain Risks Minimized. This slide highlights the benefit of AM's business model and the measures we have taken to alleviate the broader impacts of inflation and tight supply chains across the industry. As depicted on the left-hand side of the page, our EBITDA margins are over 85%. With a low-cost structure, even a 10% increase in cost due to inflation only impacts our margins by less than 1.5%. In addition, our gathering and water agreements that run through the mid-2030s have annual CPI adjustments. Given the higher EBITDA margins, these CPI adjustments tend to more than offset any increase in costs we see in our operations. Lastly, since we have maintained consistent operations through the previous commodity cycle, we are benefiting from consistent labor supply.
Unlike other parts of the U.S., the labor market in Appalachia is well balanced. This is driven by several large pipeline or infrastructure projects that have recently been completed, thereby freeing up additional labor supply. Moving to the right-hand side of the page, we've also managed our capital budget to limit the impacts of inflation. Prior to 2022, we pre-bought over 85% of our raw materials. This includes all of the steel for our 20-mile high-pressure trunk line from Wetzel County that makes up a substantial portion of our 2022 capital budget. We've also received firm bids for over 85% of our capital budget. The remaining 15% that is still out to bid has already been risked in our capital budget. This results in minimal overall risk to our 2022 capital budget.
Looking ahead, even in a scenario of persistent inflationary and supply chain pressures, our capital budgets will continue to decline for the next several years. As a result, the overall exposure to these pressures will continue to decline. In summary, AM's business model as the critical first link to supplying LNG is well positioned in today's environment. With AR's 20-plus years of drilling inventory, plus global demand for U.S. LNG, the runway for AM's throughput volumes has become clearer for much longer. Antero Midstream's connectivity to growing demand, along with our high visibility into AR's development plan, de-risks our growth outlook for the next several years and beyond. With that, I will turn the call over to Brendan.
Thanks, Paul. I will begin my comments with first quarter results at AM on slide number 5, titled Year-Over-Year Midstream Throughput Growth. During the first quarter, AM's low pressure gathering volumes were 2.9 Bcf a day, a 3% increase year-over-year. Compression volumes were 2.8 Bcf a day, a 4% increase year-over-year, and joint venture processing volumes were 1.5 Bcf a day, which reflects a 6% increase year-over-year. Looking ahead, we expect throughput to be approximately flat in the second quarter as compared to the first quarter, and then are expecting an increase in throughput in the back half of 2022. As Paul mentioned, we have de-risked this growth profile through our visibility into AR's development plan and integrated business model acting as the first step in the LNG value chain.
Moving on to the water side of the business, fresh water delivery volumes in the first quarter averaged 87,000 barrels per day with 21 wells serviced. These 21 wells serviced includes seven wells on a pad that was utilizing simultaneous completions in late March, resulting in wells that started completion operations in the first quarter, but will have water volumes primarily delivered in the second quarter. This is expected to result in an increase in fresh water volumes in the second quarter as compared to the first quarter of 2022. Moving to slide 6, we wanted to highlight the consistent track record of AM growth and peer-leading return on invested capital. Our organic business model has resulted in consistent EBITDA growth since our IPO in 2014, despite the volatility in commodity prices during the high growth shale era.
While the industry and AR have transitioned to maintenance capital programs, we still expect to generate attractive low to mid-single digit EBITDA growth over the next 5 years as a result of volume growth from the drilling partnership and the fee rebates from AR rolling off after 2023. AM's organic approach, not relying on third-party business or competitive projects, further de-risks our ability to achieve this growth profile. The bottom half of the slide illustrates our historical return on invested capital, which has averaged 15% since 2015. These returns highlight the stability and consistency of our fixed fee, inflation-protected, high visibility business model. Looking ahead, we expect our volumetric and EBITDA growth, combined with lower capital budgets, to result in flat to increasing returns in the high teens over the next 5 years.
I will finish my comments on slide number 7, titled Free Cash Flow Inflection Point. This slide illustrates our free cash flow after dividends. As we discussed last quarter, in 2021 and 2022, we will be approximately free cash flow breakeven due to growth capital investments supporting the drilling partnership. However, with the first quarter outspend behind us and declining quarterly capital throughout the year, we are now transitioning to generating free cash flow after dividends as we enter the second half of the year. This marks 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 and EBITDA increases.
This is a result of both volumetric growth and margin expansion. In total, we are targeting $700 million-$800 million of free cash flow after dividends from 2022 through 2026, which remains unchanged. In summary, we remain very excited about the future of Antero Midstream. As Paul touched on in his remarks, we believe we have one of the most de-risked business profiles in the midstream space, with high visibility to attractive volume and cash flow growth and the ability to generate sustainable free cash flow for the years ahead. With that, operator, we are ready to take questions.
Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question today comes from John Mackay of Goldman Sachs. Please proceed with your question.
Hey, y'all. Thanks for the time. Wanted to ask about some of the moving pieces on CapEx. I think it makes your comments on kind of getting ahead of inflation makes sense there. You also have some comments on, I guess, pre-buying for 2023. I'm just curious if you could spend a little more time kind of walking through, you know, whether or not that's kind of properly pulling forward some of what we would have expected in 2023 into the 2022 budget or maybe just, you know, if that was already in there. Really just kinda looking for the kinda curve on CapEx over the next couple of quarters off of that. Thanks.
Yeah, John, thanks for the question. I think, you know, the quick answer is there's no change, I think, to the guidance and targets we put out there previously. Still expect to be in that $275 million-$300 million for capital in 2022. You know, I think we've highlighted on previous quarterly calls, we do have a couple of projects in 2022, particularly a high-pressure line that's about $50 million in 2022, and then some additional compression capital in 2022 that will not be there in 2023. As we look forward to 2023, we'd expect that to be more in the $200 million-$225 million of capital at AM.
Nice move down, and then expect to be in that low 200 level or lower in the years ahead, to hit the $1 billion overall five-year capital targets that we put out there. No change to that.
All right, that's helpful. Thanks. Maybe just one in the weeds here. You mentioned kind of the timing driver for why water was down a little bit quarter-over-quarter. I think that makes sense. In the release, there's also a comment, though, around, you know, starting water again back up in the Utica and some higher costs around that. Is that like a one-off start-up cost, or is that kind of a slightly higher cost rate going forward?
No, that was just related to a pad that we completed in the first quarter. We had a six-well pad in the Utica we completed in the first quarter. It was placed to sales early in the second quarter. Overall, that was just a one pad. We don't have development planned in the Utica beyond that this year.
Okay. That makes sense. I will, I'll leave it there. Thanks for the time. Appreciate it.
Thanks, John.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Michael Cusimano of Pickering Energy Partners. Please proceed with your question.
Hey, guys. Thanks for taking my question.
Yes, Michael.
To start, how are we thinking about capital allocation after you hit the 3x leverage multiple? I imagine, you know, whenever you get to that point, is it a, you know, an all-of-the-above approach? Do you continue to take leverage down? Or, just if you could talk through how y'all think about it today.
Yeah, I think, you know, just a reminder, the 3x target, you know, we do expect to hit that, in the, call it, 2024 period. At that time, we'll evaluate what is appropriate from further return of capital. I think, you know, as we sit here today, and we've talked about this in the past, you know, share buybacks certainly look attractive just given the valuation of AM today, on a number of different factors. You know, whether that be relative valuation, you know, we look at from just an inherent, discounted cash flow valuation.
Having that visibility that AM has, as we talked about during the call in terms of you know, decades of visibility into the infrastructure needed you know, that gives us a lot of comfort in the overall you know, inherent value of AM. I think most importantly, as Paul touched on earlier, I mean, AM has had such a irreplaceable you know, asset base in terms of being the first link to this growing LNG demand on a global scale. You know, we really like where AM's positioned. If you look at you know, what makes sense today from a return of capital share buyback certainly look very attractive to us.
Got it. Yeah, that definitely makes sense. You know, I have one follow-up. I guess it's kind of two-part question on the Veolia lawsuit. One, if there's any comments y'all have with an update in that process. Second, if y'all can comment at all on, you know, how you view the OpEx and G&A costs associated with that plant trending, kinda over time. I don't know if y'all quantified it. It seems like it's, like, around $10 million of annual costs. Is that something that we should just expect to continue from here, or does that roll off whenever this lawsuit resolves?
Yeah. I'll take the first one on the lawsuit. There's no change. I think we put in the queue. You can see that the court case ended, the jury ended end of February, and we're just awaiting a decision on that. No timing update other than that. As you think about costs, you know, you'd expect, you know, going forward at least this year, about $500,000-$1 million per quarter in overall costs as we move forward related to that facility.
Okay. Got it. That's helpful. That's all for me, guys. Thank you.
Thanks, Michael.
Thanks, Michael. There are no additional questions at this time. I'd like to turn the call back to Justin Agnew for closing remarks.
Thanks, everyone, for joining us today on today's call. Please feel free to reach out with any further questions.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.