Antero Resources (NYSE:AR) recently closed the books on a solid 2018 from both operational and financial perspectives. The natural gas driller delivered record production, which thanks to some recent infrastructure expansions, enabled the company to generate even more cash flow.
However, despite that strong performance, the company’s stock price has fallen about 50% over the past year. Its management team has been working hard to get its stock turned around. Executives outlined several of these efforts on the company’s fourth-quarter conference call, suggesting that its best days lie ahead.
1. We have a strong competitive position
CEO Paul Rady stated on the call that “as we enter 2019, we like where we are positioned from both a scale and commodity diversification standpoint.” He pointed out that his company is “the largest NGL (natural gas liquids) producer in the U.S. and the fifth-largest natural gas producer. This scale across both commodities provides us with the ability to manage through commodity price volatility and prosper with an increase in either commodity.” He further noted: “Antero holds 40% of the core undrilled liquids-rich locations in Appalachia, over 2.5 times more than the closest competitor by our analysis. This extensive liquids inventory is a clear competitive advantage.”
Antero believes its dual focus on natural gas and NGLs gives it multiple ways to win in the future. On the gas side, the company should benefit from the continued expansion of the country’s liquefied natural gas (LNG) export capacity, while its NGL business will benefit from both exports as well as increased demand from new petrochemical plants. Both factors should help boost the value of these commodities.
2. We’re planning to remain disciplined and flexible
Despite the bright future of both commodities, Rady noted on the call that the company plans to “remain disciplined, spending within cash flow in a low case, but have the ability to prudently grow production to maximize free cash flow if commodity prices improve, ultimately delivering an appropriate mix of return of capital to shareholders and further deleverage.” The company noted that in an environment of $50 oil and $2.85 natural gas — below the current market price — that it could grow production at a 10% compound annual growth rate over the next five years, while living within its projected cash flow.
Meanwhile, in a stronger market of $65 oil and $3.15 natural gas, the company could grow output at a 15% compound annual growth rate, while generating between $2.5 billion and $3 billion in free cash flow over those five years. That’s significant cash flow potential for a $3 billion company by market cap, and could enable it to buy back a substantial portion of its beaten-down stock.
3. We have an improving financial profile
Rady concluded his prepared remarks on the call by saying that “entering 2019, we now have significant scale, product diversification, and a strong balance sheet to manage through commodity price volatility.”
Chief financial officer Glen Warren then drilled down a bit more into the company’s balance sheet, noting that the upcoming simplification transaction with its MLPs (master limited partnerships) will further clarify its financial profile. Warren pointed out that “as of year-end 2018, Antero’s consolidated net debt to adjusted EBITDAX (earnings before interest, taxes, depreciation, amortization, and exploration expenses) was 2.7 times.” However, after adjusting for the debt associated with its midstream companies, leverage “was 2.2 times, or .5 times lower” than what most investors see when they look at its balance sheet. That level puts it more in line with its peer group, and should help lift some of the weight holding down Antero’s stock price.
4. We have access to the infrastructure we need to deliver on our expansion plan
Another issue that has weighed on Antero and many of its gas-focused peers is the lack of infrastructure to get production to higher-priced markets. However, Warren noted that the company has worked to line up the firm transportation on pipelines it needs to support its growth forecast. With these pipes now all in service, “this provides us with significant visibility into our expected pricing for the foreseeable future.”
For example, pipeline giant Energy Transfer (NYSE:ET) recently finished work on its Mariner East 2 pipeline, which moves liquid petroleum gas (LPG) to an export dock on the East Coast. That new pipeline by Energy Transfer enables Antero to earn $2 to $4 per barrel more than it realized by utilizing existing rail options to domestic markets. That will allow the company to generate $50 million to $60 million in incremental cash flow each year. Antero will also benefit from the recent completion of the Sherwood Lateral on Energy Transfer’s Rover pipeline, which connects it to higher-priced Midwest and Gulf Coast markets.
Set up for success
Antero Resources believes that it has everything it needs to be successful in the coming years. Not only does the company have a strong resource base and balance sheet, but its flexibility and access to infrastructure give it the ability to adapt to market conditions and maximize the value of its production. The natural gas driller believes these factors position it to create significant value for its investors in the coming years, even if commodity prices don’t improve.