Antero Midstream to acquire water business from Antero Resources

Antero Resources Corp. (NYSE: AR) has entered into a definitive agreement for Antero Midstream Partners LP (NYSE: AM) to acquire Antero Resources' integrated water business for an aggregate $1.05 billion in a combination of cash, assumed debt, and Antero Midstream common units. The acquisition is expected to close on Sept. 23.

Antero Resources is entitled to receive two potential $125 million earn-out payments at year-end 2019 and 2020 if certain fresh water volumetric delivery targets are met. The acquisition includes Antero Resources' freshwater delivery business, together with an exclusive right to provide fresh water for Antero Resources' well completion operations in West Virginia and Ohio, the to-be-constructed advanced wastewater treatment complex, and the exclusive right to provide fluid handling and disposal services for Antero Resources.

In consideration for the acquisition, the Partnership has agreed to pay Antero Resources a cash distribution equal to $552 million, less any assumed debt, and issue 23,886,421 common units representing limited partner interests in the Partnership to Antero Resources. Upon completion of the Partnerships' concurrent private placement of common units described below, the net proceeds will be paid to Antero Resources and the number of common units issuable to Antero Resources will be reduced by an equivalent number to that issued in the private placement. For tax purposes, Antero Resources elected to receive Antero Midstream units as a portion of the aggregate consideration. Pro forma for the transaction, Antero Resources' net debt to trailing 12 months EBITDA as of June 30 would have been reduced to 3.3x. On a consolidated basis, and pro forma for the transaction, Antero Resources would have had $4.3 billion of liquidity as of June 30.

On Sept. 17, the Partnership priced the private placement of 12,898,000 common units for gross proceeds to the Partnership of $243 million. The private placement is expected to close concurrently with the Partnership's acquisition of Antero Resources' water business. Upon completion of the private placement, the total cash consideration paid by the Partnership to Antero Resources will be $794 million and 10,988,421 common units, respectively, plus the potential earn-out payments described below.

Barclays is acting as sole placement agent for the offering.

In conjunction with Antero Midstream's acquisition of the freshwater delivery business, Antero Resources will enter into a 20-year water services agreement with Antero Midstream covering Antero Resources' 534,000 net acres in West Virginia and Ohio, with a right of first offer on all future areas of operation. Under the agreement, Antero Resources will pay a fixed fee of $3.69 per barrel in West Virginia and $3.64 per barrel in Ohio for fresh water deliveries by pipeline directly to the well site, subject to annual CPI adjustments.

In connection with the acquisition, Antero Resources will commit to pay a fee on a minimum volume of fresh water deliveries in calendar years 2016 through 2019. Minimum volume commitments are 90,000 barrels per day in 2016, 100,000 barrels per day in 2017 and 120,000 barrels per day in each of 2018 and 2019. Assuming average barrels of water used to complete a Marcellus and Utica well of 250,000 barrels and 275,000 barrels, respectively, and based on an average lateral length of 9,000 feet for 2015, the minimum volume commitment equates to 125 to 135 completions, which is less than the total completions currently targeted for 2016.

Additionally, the transaction includes a total of $250 million of potential earn out payments to be paid to Antero Resources at the end of 2019 and 2020, contingent on meeting specific average volume thresholds. Antero Midstream will pay Antero Resources $125 million if Antero Midstream's delivered freshwater volumes average 161,000 barrels per day or more between Jan. 1, 2017, and Dec. 31, 2019, and an additional $125 million if Antero Midstream's delivered freshwater volumes average 200,000 barrels per day or more during the period between Jan. 1, 2018, and Dec. 31, 2020.

No impact to Antero Resources' operating cash flow is expected as a result of this transaction because freshwater delivery costs are capitalized by Antero Resources as a component of drilling and completion capital, and the fees charged by Antero Midstream will be eliminated upon consolidation.


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