Antero Earnings: Large Strides on Capital Efficiency Mask Negative Free Cash Swing

Antero AR shares rocketed higher after the firm announced its second-quarter results, advancing around 6% even though natural prices collapsed on the same day. The company is on track to deliver 5% production growth in 2023, while keeping spending within what management thought was a maintenance budget ($3.3 billion). And the provisional plan for 2024 is to target flat production again, which management now believes it can achieve (at the level it now expects for 2023, incorporating the guidance raise) with a 10% year-on-year decrease in capital spending. The firm went even further, speculating that lower base declines would enable it to lower the maintenance budget yet again in 2025, while continuing to maintain output near 3.4 billion of cubic feet equivalent/day. Investors were evidently impressed with the doing-more-with-less projection, especially as the new outlook was purely based on improving capital efficiency and did not incorporate lower service costs (which could be an additional tailwind).

Unlike peers, Antero has minimal natural gas hedges and is sticking with that strategy. We agree with management’s assessment that increasing LNG export capacity and slower domestic supply growth will strengthen the U.S. natural gas market in 2024. But for 2023, that leaves the firm exposed. In the first half, it outspent cash flows by $190 million. The good news is that the firm’s much-improved balance sheet helps it tolerate weaker prices, and because Antero’s firm transport enables it to sell its gas at premium prices outside Appalachia, the gap versus well-hedged peers is small (for instance, though Range received $0.71/thousand cubic feet from hedges, its realized price after hedges was only $0.18 higher than Antero’s).

We intend to incorporate these results shortly, but for the time being, our fair value and no-moat rating are unchanged.