A Compelling Opportunity in the Energy Sector

Dave Meats: Antero Resources is a natural gas company operating in the Marcellus and Utica Shales in West Virgina and Ohio. The stock is currently trading at a 25% discount to our fair value estimate, and is one of the few compelling opportunities in the generally overvalued E&P segment. The company is growing its production at a robust clip and expects 30% production growth this year and a CAGR of 20%-22% after that, according to its recently published four-year outlook.

There are two key advantages that separate Antero from its peers. The first is very strong realized natural gas prices. The company has fully hedged its natural gas output for 2017 and 2018, with significant volumes protected in subsequent years as well. In addition, the company has locked in enough firm transport and sales contracts to ensure that it can sell all of its production in premium markets outside Appalachia, sidestepping basis risk. As a result, management expects to earn a premium to Nymex through 2020 at least, which is pretty rare for a natural gas producer in the northeast.

The second advantage is leverage to liquids. Antero's acreage in the Marcellus and the Utica has a higher liquids content than the acreage of its peers. We expect increasing domestic demand and exports to boost the NGL/crude price ratio to 45%-50% by next year, up from a 2016 low of 35%.

We believe the current stock price reflects market apprehension over Antero's balance sheet, which appears to be highly leveraged at first glance, given its net debt to EBITDA in the 3-3.5 times range. But investors should bear in mind that the firm's investments in publicly traded Antero Midstream is currently worth more than $3 billion, and its derivatives portfolio has a mark-to-market value of around $1.5 billion as well. These marketable assets could be sold in a pinch for more than the company has currently borrowed. Therefore the company’s financial position is actually pretty healthy, which means the stock looks pretty cheap at the current price.