(Idea) Antero Resources
Antero Resources (AR) is a U.S. natural gas-weighted E&P with operations in the Marcellus and Utica shale basins. Its production is 64% natural gas, 34% NGLs, and 2% crude oil. AR has distinguished itself through creative marketing agreements that allow it to sell its natural gas as LNG feedstock and sell its NGLs at the U.S. Gulf Coast hub. These arrangements allow AR to achieve premium pricing for its production.
Source: Antero Resources website.
Management estimates the company has 20+ years of premium drilling inventory, less than its closest peer’s—Range Resources (RRC)—claim of 30+ years. However, RRC management doesn’t specify whether its purported 30+ years of drilling inventory is of higher or lower quality than its current wells. AR management, by contrast, is clear that its remaining inventory is of high quality. It estimates the wells break even below $2.75 per mcf equivalent (mcfe).
AR’s deep inventory of high-quality locations removes the need for acquisitions for at least a decade, thereby reducing risk to shareholders. AR is free to stick to its operational knitting, and shareholders can benefit from low-cost and highly efficient operations for decades.
AR’s low-cost status also allows it to remain unhedged, unlike many of its peers, which will enable AR shareholders to benefit from higher commodity prices to the greatest possible extent.
By and large, AR’s cost structure is similar to that of RRC, but AR’s higher liquids weighting and more favorable price realizations give its cash flow significantly more torque to commodity prices—both natural gas and oil. The oil exposure comes through AR’s significant NGL production. The high price realizations also provide more of a downside cushion if natural gas prices remain low, as they are today.
AR has reduced unit costs by focusing on improving its capital efficiency. It has done so primarily by increasing the rate at which it drills new wells. The company has also worked to improve well productivity, which was the reason it grew production volumes by 6% in 2023 despite sticking to a maintenance capex budget. It is also the reason why the company is reducing total capex and yet keeping production flat in 2024.
AR has also improved capital efficiency by lowering its decline rate from the mid-20% range into the low-20% range during the past four years in which it has been in maintenance mode. All these operational improvements have enabled the company to spend less capital for every barrel of oil and gas produced. This is particularly important for a company that may be in maintenance mode for a long time, given the egress constraints in its operating region.
The slide depicts the most important feature of AR from a long-term investment perspective. It compares AR’s capital efficiency—the amount of capital required per mcfe produced—with gas-weighted peers Chesapeake Energy (CHK), CNX Resources (CNX), EQT (EQT), Range Resources (RRC), and Southwestern Energy (SWN).
Source: AR May 2024 Investor Presentation.
AR’s superior economics will drive higher production with lower capex relative to peers. It will also cost AR less per unit of production to forestall declines and keep production flat. Overall, it leads to a lower cost structure, greater cash flow, and greater upside in the share price.
AR has a more favorable product mix than RRC due to its higher percentage of NGLs. AR’s reserves are comprised of 40% NGLs versus RRC’s mid-30%. The table below shows the product composition of AR’s proved reserves.
Its reserve product mix has been stable over time, implying it is not at risk from significant and adverse changes in the future.
Another attractive feature of AR is its heavy insider ownership. Directors and executives beneficially own 6.7% of the company’s common shares, representing a total investment of $718 million at the current share price of $34.35.
Capital allocation has been good, with the company focusing on debt paydown. It stepped up share repurchases when commodity prices were high.
In 2023, AR’s cash flow suffered from infrastructure maintenance and other incidents that prevented it from receiving its typical premium pricing. These were temporary in nature. Furthermore, AR was unhedged for nearly the entire year, while natural gas prices averaged a relatively low $2.74 per mcf during the year. It was also hurt by its $200 million payment for early settlement of some of its hedges. Consequently, 2023 results do not reflect the company’s long-term income and free cash flow generation potential.
At the end of the first quarter of 2024, AR’s long-term debt stood at $1.538 billion. Once long-term debt has been reduced to $1.0 billion, management intends to distribute “the majority” of free cash flow to shareholders. Unless commodity prices increase significantly from current levels, we expect AR to increase its capital distributions to shareholders in 2026.