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Stock Strategist

Antero Gears Up for NGL Growth

Its liquids-rich drilling inventory will enable it to outperform peers if NGL prices continue to strengthen.


 Antero Resources (AR) produces natural gas from the Marcellus Shale in West Virginia and the Utica Shale in eastern Ohio. Henry Hub prices are close to our midcycle estimate of $3 per thousand cubic feet, which is well above the company’s cost of production. Though basis differentials in Appalachia remain far wider than historical norms, Antero is managing this with its extensive firm transport portfolio, enabling it to sidestep takeaway bottlenecks and sell into premium markets outside the basin. Consequently, we expect the company to earn a slight premium over Henry Hub until at least 2020. That’s much better than what most peers can achieve, even after adjusting for the incremental cost of $0.50-$0.60/mcf.

Another advantage that separates Antero from other operators is leverage to liquids. Realized prices were disappointing in 2016, but the outlook is brighter as a result of increasing domestic demand, slower production growth, and more exports. We expect the natural gas liquids/crude price ratio to improve gradually over the next two to three years, and Antero, with 40% of the entire basin’s undeveloped liquids-rich acreage, is better positioned to capture this upside than its peers. Roughly 25% of its current production is NGLs and condensate, and half of its 3,500-plus future drilling opportunities will deliver significant liquids volumes (at least 20% of each well’s production).

Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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