Antero Earnings: Stronger-Than-Expected Production Boosts Our Fair Value Estimate by 10%

Antero Resources’ AR 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.

Broadly, the firm has done very well on the execution front and boosted production guidance for the second consecutive quarter. Production is now expected to be at a midpoint of 3.4 billion cubic feet equivalent per day, with exit rate volumes up about 7% year over year while maintaining the same capital spending, which is impressive. Per-unit cash costs also fell modestly due to lower fuel costs and taxes, somewhat offset by higher per-unit marketing costs. The firm remains well positioned to benefit from increasing LNG demand in 2024 as new terminals come online, with about 75% of its gas being sold at premium points due to its attractive takeaway contracts along the LNG corridor. This is yielding excellent pricing at roughly flat with Nymex prices for the full year of 2023, versus typical discounts.

Looking ahead to 2024, the firm expects to deliver similar production to 2023 while spending less to do so in terms of capital. We expect modest production increases of about 6% at this stage with capital expenditures of about $900 million. The expected free cash flow should yield greater capital returns to shareholders beyond just debt reduction, including perhaps a dividend. The outlook for pricing in particular appears healthy. Industry gas drilling is down, limiting the ability to boost supply, while demand is increasing due to liquefied natural gas exports, Mexican gas exports, and higher domestic power generation demand.