Good morning, and welcome to the Antero Resources Investor Conference Call. All participants will be in listen only mode. Please note, today's event is being recorded. I would now like to turn the conference over to Michael Kennedy, Senior Vice President of Finance. Please go ahead, sir.
Thank you for joining us for AR's investor conference call to discuss our simplification transaction and share repurchase announcement. We'll spend a few minutes going through transaction highlights and then we'll open it up for Q and A. I would also like to direct you to the homepage of our website at www.anteroresources.com, where we have provided a separate call presentation that we'll review during today's call as well as a supplemental presentation on natural gas liquids. Before we start our comments, I'd 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, Antero Midstream and AMGP 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 Glenn Warren, President and CFO of Antero Resources. Throughout the call, Paul, Glenn and I will be discussing details of today's announcement.
With that, I will now turn the call over to Paul.
Thanks, Mike, and thank you to everyone for listening in to the call today. I'll begin my comments today with the transaction summary and how the midstream simplification benefits AR. We will move on to a discussion of the share repurchase program we announced this morning and conclude with commentary on natural gas liquids given the substantial movement in prices over the last few months. Before getting into the numerous merits of the transaction, I want to highlight the key objectives for the Special Committee on Slide number 4, titled Special Committee Process Objectives. When we tasked our special committee with evaluating potential transactions and alternatives among the Antero family, we focused on 5 key objectives.
The first was evaluating an accelerated timeframe to return capital to shareholders. Our second objective was to align the interests of management, our private equity sponsors and all of our equity holders to address the perceived conflict of interest across the shareholder base. The 3rd objective was to simplify the current corporate structure in order to unlock shareholder value and appeal to a broader base of investors. 4th was achieving a win win win across the Antero family. We did not believe there was an entity that was disadvantaged or in a position of weakness.
So for that reason, any transaction had to improve the financial profile and deliver accretion to all entities. Lastly, we wanted to maintain our integrated strategy of the upstream and midstream business. We strongly believe in the tangible and intangible benefits of owning the midstream business and the value of the integrated model. Our vision and long term strategy remains unchanged and we believe this is the best way to create value and deliver it to our upstream and midstream shareholders. Glenn will now discuss the details of today's announcement.
Thanks, Paul. Let's turn to Slide number 5 titled AR Strategic Announcement. We are pleased to announce that we have completed the special committee process. The result of the process is a midstream simplification transaction where AMGP will acquire AM in a cash and stock transaction and eliminate the IDRs. We will discuss the details and how it impacts AR in a moment, but we believe this transaction creates a best in class Appalachian Midstream Corporation in the most tax efficient and investor preferred structure.
Additionally, AR announced its $600,000,000 share buyback program to be completed over the next 12 to 18 months, which is expected to be fully funded by a combination of proceeds from the simplification transaction and expected free cash flow to be generated over that time period starting in the Q4 this year. Importantly, the share repurchase program is predicated on our stand alone leverage being maintained at or below 2.25x by year end 2018 and atorbelow2.0x by year end 2019. Now to get into the details of the Midstream transaction, I'll direct you to Slide number 6 titled Midstream Simplification Transaction Overview. AMGP is acquiring all of the outstanding public AM units, including units owned by AR. AR will receive all in consideration of 1.78 AMGP shares or 30 point $4.3 per AM unit based on yesterday's closing price.
AR will receive approximately $300,000,000 plus 1.6023 shares of new AM subject to proration to ensure that the aggregate amount of cash consideration paid to all AM unitholders equals $598,000,000 That's the cash pool. The simplification transaction eliminates the IDRs and represents a 3% premium to AR based on yesterday's close at 15% premium to the unaffected price prior to the formation of the special committee in February. The new entity, which will be renamed Antero Midstream Corporation or new AM, will be treated as a corporation for both tax and governance purposes, receiving the benefit of a tax basis step up, which will be receiving the benefit of a tax basis step up, which will shield future corporate level taxes for new AM. Cash taxes at the AR level are shielded through the use of its $3,000,000,000 of NOLs as of year end last year. Even with utilization of the NOLs, AR does not expect to change its prior outlook as a non cash taxpayer over its long term forecast.
New AM is also not expected to pay material corporate level taxes through at least the year 2024. This tax efficiency is key to the transaction as it allowed for accretion to both parties and enabled new AM to target a dividend policy that keeps AR whole on the existing distribution targets on a per unit basis through the year 2022. The transaction is subject to a majority of minority vote and is expected to close in the Q1 of 2019. Slide 7 titled Antero Simplified Pro Form a Structure portrays the current Antero family corporate structure on the left hand side of the page and the pro form a structure on the right. This transaction simplifies Antero's corporate structure into 1 upstream and 1 midstream entity, both structured as C Corps.
Importantly, through this transaction, we have aligned the ownership of sponsors and management and Antero Resources, each owning the same security in new AAM. As cofounders with significant ownership, we will remain highly aligned with both our upstream and midstream investors and will continue to operate the business with our proven integrated strategy in the long term vision.
Moving to Slide number 8 titled New AM Same Cash Distribution Targets. New AM will target a dividend of $1.24 per share in 2019. Using the $1.24 per share in 2019 multiplied by the AR unitholder exchange ratio of 1.776 times results in a distribution to AR of $2.21 per unit, the same as AM's previously communicated status quo 2019 distribution target of $2.21 per unit. In 2020, new AM will continue to target distribution growth of 28% to 30% and then year over year distribution growth remains the same at 20% in both 2021 2022. The cash consideration from the transaction along with the dividend policy keeps AR whole on all of the previously communicated distribution targets and year over year growth rates at AM.
Additionally, Antero Midstream will target an increased DCF coverage ratio of 1.2x to 1.3x to maintain financial flexibility and for further delevering into the low 2x range, which is the same 2022 leverage target as status quo AM.
Turning to Slide number 9, titled Share Repurchase Program Details. The AR Board has approved an initial $600,000,000 share repurchase program, which represents over 10% of shares outstanding based on yesterday's closing price. The program is expected to commence in the Q4 of 2018 and is authorized over the next 12 to 18 months, providing the flexibility to be opportunistic with respect to market conditions. The program is expected to be fully funded through a combination of at least $300,000,000 in cash proceeds from the midstream simplification transaction and from a portion of the expected free cash flow generation over the next 12 to 18 months. It is important to note that we will maintain a disciplined approach and be opportunistic about buying back shares as our balance sheet remains the top priority with standalone leverage expected to be at or below 2.25x by year end 2018, and that's including some share repurchase and at or below 2x by year end 2019 with the same, which is in line with our prior targets.
Slide 10, titled Share Repurchase Program Funding, provides a summary of this fully funded program.
Directing you to Slide number 11 titled Compounding Leverage to Improving NGL Prices. I want to briefly discuss our leverage to liquids pricing as it serves as a key driver in our ability to generate free cash flow. As depicted with the green bars, Antero's C3 plus NGL production has increased by approximately 84% from 2015, which translates to a 22% CAGR. Over the same period, C3 plus NGL prices have improved by 94 The combination of significant NGL production growth with increasing liquids pricing results in compounding exposure to improving NGL prices. As you can see on Slide number 12 titled Leader in Leverage to NGL Prices, based on 2018 consensus estimates, Antero is the top NGL producer in the U.
S. With NGLs accounting for 33% of pre hedged commodity revenue, AR currently delivers the highest exposure to rising NGL prices among top producers.
Before I review the substantial revenue uplift from liquids that AR is positioned for, I want to remind everyone that these liquid slides being reviewed today are a subset of a new more comprehensive liquids presentation that we uploaded to our website today that details our premier liquids plan and platform. Slide number 13 titled Powerful C3 +NGL Pricing Upside Exposure details this compounded pricing leverage and how it drives cash flow growth. The chart illustrates the impact on C3 plus NGL revenue for the second half of twenty eighteen and twenty nineteen with respect to increased volumes, improved prices and pricing uplifts from our Mariner East 2 commitments. As shown on the chart, every $5 per barrel change in NGL prices is expected to generate an incremental $170,000,000 in revenue. Based on the current strip prices and approximately 20% production growth, this translates to incremental 2019 revenue of $330,000,000 to $500,000,000 as compared to 2018.
Similarly, on Slide number 14 titled Antero's Ethane Exposure All Upside portrays Antero's exposure to ethane pricing upside using strip pricing and assuming 20% production growth in 2019, every $0.10 per gallon increase in ethane price translates to approximately $40,000,000 in incremental revenue. Based on strip prices and expected ethane volume growth, this projects approximately $100,000,000 of incremental revenue in 2019 relative to 2018 from ethane alone. Given these liquids pricing tailwinds, it is important to highlight that Antero offers substantial liquid scale and exposure to improving prices at a discounted value. As you can see on Slide number 15 titled Antero's Liquid Scale at Attractive Value, Antero's liquid scale inclusive of ethane, C3 plus and oil for both production and revenue compares favorably to that of well known Permian operators, as shown on the chart on the left. With Antero being the only producer that trades at or below 5 times despite its growth in scale, the chart on the right highlights the significant valuation disconnect between Antero and these producers.
The aforementioned exposure to strong NGL prices combined with tremendous production growth in the second half of twenty eighteen, a focus on operating efficiencies and capital discipline brought Antero to an inflection point. Antero's standalone free cash flow profile is outlined on Slide 16, titled near term free cash flow inflection point. As highlighted by the yellow arrow, Antero is an inflection point with sustained free cash flow generation beginning this quarter, Q4 of 2018. During 2019, we expect to generate at least $500,000,000 in free cash flow, which will be used in part to opportunistically return capital to shareholders through the announced share repurchase program. Over the next 4 year period, we anticipate free cash flow of $1,600,000,000 based on year end 2017 prices and the 5 year drilling and completion capital forecasts.
Slide number 17 titled Capital Discipline Leads to Free Cash Flow further illustrates our commitment to sustain free cash flow generation through capital discipline. With a 48% reduction in drilling and completion capital and a 15 rig reduction since 2014, we've been able to close the gap on outspend versus free cash flow. Now that we have reached an inflection point, our future capital budgets and rig programs are designed to be measured and consistently within cash flow. Staying on the topic of financial discipline, Slide 18 titled Financially Disciplined Repurchase Program emphasizes our priority to reduce our standalone net debt to EBITDAX multiple to atorbelow2.25x by year end 2018 and atorbelow2x by year end 2019. With these disciplined leverage parameters in place, AR has the potential to return $3,000,000,000 to $3,500,000,000 of capital over the next 4 years, which represents 50% to 60% of AR's current market cap based on current prices.
Looking at only the approved 18 month share repurchase time period, we have capacity to return upwards of $1,300,000,000 while maintaining leverage at or below 2x. We continue to differentiate ourselves by executing on our long term strategy. We remain committed to creating value for our shareholders by focusing on our extensive liquids rich inventory and delivering on our long term targets, including a declining leverage profile to add or below 2x by the end of next year. As shown on Slide number 19, titled Antero Profile to drive multiple expansion, this momentum will place Antero in an elite group of just 5 other E and P companies that have scale, double digit production growth, low leverage and generate free cash flow, all of whom trade at premium multiple valuations relative to Antero. Given the steep valuation discount to our peers, we believe share repurchases are an extremely attractive use of our projected free cash flow.
Now turning to Slide 20 titled Simplification Transaction Highlights and Benefits to AR. Today's announcement provides significant benefits to AR's long term outlook. First, AR will receive at least $300,000,000 of cash from the midstream simplification to fund a portion of the share repurchase and delevering program. Secondly, the elimination of the IDRs along with AR's ownership of the same midstream security as the sponsors and management addresses the perceived misalignment of shareholder interest. 3rd, the creation of a midstream C Corp will broaden the investor base and improve stock liquidity.
Lastly, AR will maintain its integrated strategy as the largest shareholder of the Antero Midstream with a 31% pro form a ownership, which we believe is a key competitive advantage. With that, operator, let's open the lines for questions.
Thank you. We will now begin the question and answer session. And today's first question comes from Holly Stewart of Scotia. Please go ahead.
Good morning, gentlemen. Good morning. Maybe first, Paul, just thinking about how this changes kind of the midstream the changes to the midstream structure, how this could change your kind of long term ownership thoughts of midstream?
Well, there's really no change in the sense that really gives AR a good competitive advantage to be so integrated with AM and with the just in time capital and so on. So it doesn't change its long term. We do feel that AR will continue to hold a significant ownership in AM.
Okay, great. And then maybe just a follow-up to that. I guess maybe Glenn, if you could remind us what level of ownership and maybe this changes that level of ownership that you have to have to keep it consolidated?
Yes. Consolidation is not really driven by the ownership level here. It's from an accounting standpoint, it's really driven by the contract situation between AR and AM. So AM is essentially sole provider for AR and vice versa. So the contracts are long term contracts in place and AM doesn't have a lot of 3rd party business at this point.
So that's really the key driver. And I think that longer term, if AM had quite a bit more third party business, that would be a driver towards deconsolidation, Holly, but not the percent ownership.
Okay. Just trying to make sure that this change in structure didn't change that at all. Okay, great. And then maybe just kind of since you guys pointed out the NGL exposure, Could you just talk about a little bit about kind of where you stand currently on recovery versus rejection of ethane?
Yes.
So today, we're recovering between 40,043,000 barrels a day of ethane. We have about that DS space. We have a new DS that's coming on within the next month that gives us at least another 20,000 barrels a day of ability to recover. And so we'll probably climb in ethane recovery. And meanwhile, we are rejecting about 85,000 barrels a day of ethane and leaving it in the gas stream.
So we will be recovering more. The frac spread, of course, has improved dramatically for TECO equivalent, net of DF for our ethane. So we do see more recovery in our future. And there are successive DFs that are being built for us at Sherwood and our new processing complex at Smithburg. So I think as long as frac spreads stay strong for our ethane, we'll continue to climb in our ethane recoveries.
Great. And then maybe just one final one for me. Could you just tell us where you stand or where the project, I guess, stands right now for ME2 and those volumes starting to move?
Yes. ME2 is almost there. And as you're probably aware, they have an approved workaround for the very short segments that we're delaying them in the Philadelphia area. So Energy Transfer has forecast November 1 opening for ME2 and we can see the light, we can see their reasoning. So we support that and are planning for it to increase with that.
We'll be rather than selling our C3 plus into the Northeast market or railing it to other destinations, we'll be moving at least 50,000 barrels a day of C3 plus through ME2 for international export beginning in early November.
Great. Appreciate it guys.
Thank you, Holly. Thanks, Holly.
And our next question comes from Sean Sneeden of Guggenheim. Please go ahead.
Hi, good morning and thanks for taking the questions.
Good morning, Sean.
Glenn, maybe for you, can you talk a little bit about how you weigh the trade off between debt or leverage reduction and share buybacks as you kind of go through the plan that you guys have articulated here?
Yes. I'd say the bias is towards leverage reduction in the near term. We're on a great trajectory for investment grade here before too long and we want to stay on that trajectory. So we're just at such a nice inflection point with free cash flow coming in and very much being driven by liquids prices and our exposure to liquids. It puts us in a great position to be balanced and to be able to repurchase shares opportunistically, but 1st and foremost, continue to delever.
Okay. And that's helpful. And I guess, is there a point that you feel extraordinarily comfortable in terms of leverage? Is that like a 1.5 times type of number? Or how do you guys kind of think the trajectory there?
Yes, I think under 2 times.
And that's why we set that threshold level where we don't plan to repurchase shares if leverage next year is looking to end up at 2x or more, we'll not be repurchasing shares. But I think you can see from our forecast that we expect it to be well below that. So there's quite a buffer there, assuming current commodity prices to both repurchase shares and delever. I think you're right that the 1.5x to 2x is a nice target for an entity of our size.
Got it. That makes sense. And maybe just lastly, when you think about the strategy when you laid it out at Analyst Day and kind of compare that to how you think about the post simplification world? Does the trajectory towards investment grade look accelerated at this point or how are you guys thinking about that playing out?
No, I think it's pretty similar because at the time year end commodity prices last year, you had quite a backwardation in NGL prices and the starting point was lower. So you've had quite a run-in NGLs. And while C3 plus is about makes up about 33% of our revenues, we also have ethane exposure as well as oil production is now up in the 10,000 barrel plus per day range. So yes, quite a liquids contribution that's up in that 40% range now and climbing. We expect that with the current forecast to climb up towards 50% of revenue here over the next year or 2.
So I'd say we're in a stronger position overall in terms of being able to both delever and to repurchase shares.
That's helpful. Thank you very much.
Thanks, Sean.
And ladies and gentlemen, this concludes your question and answer