Company Reports

No-moat Antero Resources posted solid results, increasing overall volumes by nearly 6% year over year driven by natural gas liquids, or NGLs, and crude oil, growing 8% and 25%, respectively. This resulted in an improved product mix of 35% liquids (oil and NGLs) from 34% a year prior as natural gas prices remained under pressure. The concerted effort to push into the wetter acreage, which we outlined in our March 27 note, is paying off as the wells also appear to be more productive. As a result, management has very modestly boosted its full-year guidance by 25 million cubic feet per day. While this news is positive, we had largely already baked it in with our prior update, resulting in a modest increase in our fair value estimate to $25 from $24 driven by higher oil prices.

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 33% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

Each year, we reevaluate well productivity for our entire US shale coverage. For each covered company, we scrutinize third-party data on both a basin and region basis. As in prior years, our process prompted mostly modest valuation changes but left our moat, capital allocation, and uncertainty ratings unchanged.

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 31% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

We are reducing our fair value estimate to $21 per share from $23 for no-moat Antero Resources, despite operational improvements, due to our lower near-term gas price forecast. For the fourth quarter, our $0.50 earnings per share forecast was higher than the reported $0.30 due to weaker-than-expected natural gas and crude oil prices. Total volumes declined 1.5% from the prior quarter to 3.4 billion cubic feet equivalent per day, as natural gas liquids declined while natural gas and crude oil production improved. A drilling rig was also retired in December. The reduction was more aggressive than our expectation for a 0.6% decline. Cash production costs were in line with our expectations.

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 31% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

Antero Resources’ third-quarter results were quite good, and after incorporating them into our model, we’ve boosted our fair value estimate to $23 per share from $21. The primary driver of the increase is higher expected near-term production. Our no-moat rating is unchanged.

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 35% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

We have adjusted our valuation methodology for U.S. exploration and production companies. Our multistage DCF valuation incorporates five years of explicit projections for a fixed period, typically five years. Terminal values are derived by assuming firms eventually earn their cost of capital in perpetuity. This contrasts with our previous methodology, which modeled the harvesting of all company assets over a 30-year timeframe. The change brings our E&P valuations in line with Morningstar’s standard equity research methodology.

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 35% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

Antero 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).

We have refreshed our oil and gas producer valuations to incorporate the latest outlook for near-term commodity prices after a particularly volatile spell for both oil and gas futures during the recent reporting season. In addition, we have incorporated a slight reduction in well costs from 2024 across our upstream coverage, based on consistent commentary from both producers and oil service firms. The latter supplies equipment and services to the former to enable the drilling and completion of oil and gas wells. This includes oil-country-tubular goods, or OCTG, which is sensitive to prevailing steel prices, proppant (typically sand, for fracking), and labor. Supply and demand for these services also impacts pricing. As oil services firms typically operate under contract, there is a lag between inflationary pressures and the resulting impact on upstream spending levels, when contracts are renewed at current rates. And the same holds true in reverse. Producers mainly agree that inflation has cooled off, with several anticipating moderate price declines in the back half of 2023, and service providers are reporting that the markets for rigs, OCTG, and proppant have leveled off. The recent decline in commodity prices also supports a moderating environment for well costs, as these are historically correlated. And since the late 2022 peak, the North American rig count has declined by about 6%, signaling weakening demand for oil services in that region. Our upstream valuations now include a 5% decrease in well costs beginning in the first quarter of 2024.

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 35% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 35% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

We're lowering our Antero Resources 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).

In the first quarter of 2023 Antero delivered production of 3,274 mmcfe/d, 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. But realized natural gas pricing was slightly softer than expected, with a premium of just $0.03/mcf over the Nymex benchmark (Antero sells all of its gas outside the Marcellus region where it is produced, giving it a structural pricing advantage). Management shaved off $0.05/mcf from its full-year guidance for this natural gas price premium, with no adjustment to its liquids pricing estimates. Given slightly disappointing gas realizations the firm's first-quarter financials were a little lower than FactSet consensus estimates.

The U.S. gas price outlook looks weak in the short run, in our view, but the outlook should begin to improve in late 2023 and 2024. From a stock perspective, though, we think 2023 will present a potentially very good opportunity to acquire high-quality names leveraged to gas demand at a discount. We favor companies such as Kinder Morgan, Williams, Cheniere, and TC Energy.

Antero delivered fourth-quarter volumes averaging 3,191 million cubic feet per day of natural gas, which was enough to push the full-year average above the low end of the firm's 3,200-3,300 mmcf/d guidance range for 2022. And in 2023 management is looking for more of the same, with a production target of 3,250-3,300 mmcf/d (2% higher at the midpoint). The 2023 budget for drilling and completions has been set at $875 million-$925 million, which is 14% higher at the midpoint than last year's budget. The firm still intends to run three rigs and two completion crews, but it will drill and bring online fewer wells, and the average lateral length of its 2023 wells will be slightly shorter, as well. Shares traded sideways on the day of the release.

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 35% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

U.S. natural gas prices have tumbled by more than half in the last month alone, following a long spell of unseasonably warm weather across much of the Lower 48. That more than offsets the 30% surge in prices that occurred after our October updates on exploration and production, or E&P, companies, when the Henry Hub spot price climbed from $5.30/mmbtu to over $7/mmbtu given more wintry conditions across much of the U.S. northeast and Midwest. As of Jan. 27, the benchmark had dipped below our long-term midcycle natural gas forecast ($3.30/mcf) and was most recently trading under $3/mmbtu.