Antero Resources: Slightly Reducing Fair Value Estimate on Higher Cost of Capital and Weaker Gas Differential

We’re lowering our Antero Resources AR fair value estimate from $23 to $21 after incorporating the firm’s first-quarter financial and operating results. The decrease was primarily driven by increasing our weighted average cost of capital estimate to 9.8% to reflect the higher equity mix in the capital structure now that the firm has substantially reduced its indebtedness (after a period of very strong natural gas prices in 2022). We’ve also incorporated a $0.05 per thousand cubic feet deterioration in guidance for realized natural gas prices in 2023, and marked our model to market to capture the further deterioration in the underlying Nymex natural gas benchmark since our last update in February. While Antero has very little natural gas hedging, the firm is still expected to generate about $2 billion in free cash flows this year, even in a weak natural gas market, because it sells gas at premium prices outside Appalachia and is further insulated from a revenue standpoint by its high exposure to natural gas liquids (almost a third of production).

As we previously highlighted, the firm delivered production of 3,274 mmcfe/d in the first quarter of 2023, of which 2,152 mmcf/d was natural gas. That’s 2% higher sequentially and almost exactly in line with the firm’s guidance for full-year volumes. And that guidance--along with the $1.05 billion capital budget--was unchanged. Given slightly disappointing gas realizations the firm’s first-quarter financials were a little lower than FactSet consensus estimates. And in an otherwise quiet quarter, the release focused on incremental operating milestones, including what management claims is a world record for drilling (12,340 lateral feet drilled in 24 hours) and a company record for completion stages per day. The firm also highlighted its low base decline rate. However, as guidance for completion activity and drilling capital were both unchanged, we do not see these as needle movers for incremental capital efficiency.