Antero Stock: Higher Production And Lower Costs, But Upside Is Still Left (NYSE:AR)

Antero Resources (NYSE:AR) has underperformed since my initial write-up, but rebounded nicely after my May “Buy” reiteration, up over 18% since then, outpacing the S&P 500’s under 10% return. With the stock reporting its Q2 results, I wanted to catch up on the name.

Q2 Results

For Q2, AR delivered revenue of $953.3 million, down -57%. That was ahead of the analyst revenue consensus of $937.0 million. Natural gas sales plunged -72% to $437.1 million, while NGL sales sank -43% to $397.7 million. Oil sales dipped -35% to $58.0 million. The company saw a slight $8.2 million hedging gain versus a loss of -$265.7 million a year ago.

AR recorded EPS of -28 cents, which was in line with the analyst consensus.

Net production was 3.4 Bcfe/d, up 3% sequentially and 5% year over year. Natural gas production was virtually unchanged year over year, while ethane production climbed 59%. Other NGL production was largely unchanged, while oil production rose 7%. Overall liquids production rose 16%.

The company credited the continued increases in well productivity to its strong production growth. It said its average cumulative equivalent production per well is 20% higher than its peer average since 2020.

AR’s average realized price after hedging was $2.90 Mcfe, down -52%.

The company produced operating cash flow of $155.3 million in the quarter, down from $922.7 million a year ago. Free cash flow was an outflow of -$159.5 million in the quarter, compared to $633.6 million in the prior-year quarter. It spent $246.8 million in drilling and completion capex in the quarter.

AR ended the quarter with $1.49 billion in net debt. Its trailing twelve month leverage was 0.8x.

AR put up solid results given the circumstances, with nice production growth, especially for ethane. Meanwhile, it was able to drive down operating costs across the board.

Outlook

For the full year, AR forecast net production of between 3.35-3.4 Bcfe/d. That’s up from prior guidance of between 3.25-3.3 Bcfe/d. It is projecting net liquids production (excluding ethane) of between 110,000-115,000 Bbl/d, up from a previous outlook of 105,000-110,000 Bbl/d. It is now looking for ethane production of between 67,500-72,500 Bbl/d, down from an earlier outlook of 70,000-75,000 Bbl/d. Natural gas production is expected to be between 2.200-2.225 Bcf/d, up from its earlier expectation of 2.10-2.15 Bcf/d. Oil production guidance is for volumes of 10,500-11,500 Bbl/d, up from 9,000-10,000 Bbl/d previously.

Notably, the company called the production guidance conservative, as it is unsure on when the Shell Ethane Cracker will startup.

AR is currently running three rigs with two completion crews. It expects to drill 65-70 wells this year and complete 60-65. That is unchanged versus prior expectations.

With regard to costs, the company anticipates cash production expense between $2.35-2.45 Mcfe. That’s down from prior guidance of $2.40-2.50 Mcfe. Yearly drilling and completion capex is projected to be between $875-925 million, with land capex of $150 million, unchanged versus its prior outlook. The company is looking for a -10% reduction in maintenance capex in 2024, and thinks there could be another -5% to -10% reduction in 2025.

AR noted that all major U.S. liquids rich basins have seen a drop in rigs since the start of the year, with active rigs down 15% since the start of 2023. The company also noted that as it had predicted Haynesville rigs have dropped sharply. The basin has laid own 38 rigs from peak to trough, and now has 45 rigs drilling in the basin.

Meanwhile, the company said Chinese demand for NGLs is picking up. On its Q2 earnings call, CEO Paul Rady said:

“Turning to the Chinese market. Although, there have been various headwinds to economic recovery post-COVID we have seen some recent data points showing improvement in the petrochemical sector there. Chinese integrated polypropylene margins from PDH units have shown dramatic improvements year-to-date increasing from outright negative levels in February to almost $300 per metric ton in May. Unsurprisingly utilization rates in Chinese PDH units have been closely correlated with this margin improvement. Operating rates have improved from lowest during the first quarter to … reaching a year-to-date high of 69% in June 2023, which was the highest rate observed in over a year on the back of higher overall PDH capacity from new facility commissioning during that time frame. We believe the rapid uptick observed in PDH utilization in recent months in response to margin improvement, highlights the value of having spare petrochemical capacity already in place when demand recovery occurs.”

This was strong guidance from AR, with the company boosting its production guidance while lower its costs guidance. The company obvious can’t control natural gas of NGL pricing, so in terms of what it can control, AR is doing a very nice job. Meanwhile, it appears NGL pricing should begin to pick up as China comes back online and PDH utilization in the country continues to rise.

Valuation

AR trades at 8.5x EBITDA based on 2023 analyst estimates of $1.44 billion. Based on the 2024 consensus of $1.85 billion, the stock trades at a 6.6x multiple. Of course, the price of natural gas can and NGLs impact the actual results greatly.

As a reminder, the company also owns a 29% stake in Antero Midstream (AM), which is valued at $1.6 billion.

The stock trades at a premium to fell Appalachian E&Ps, with Range Resources (RRC) trading at 5.9x 2024 EBITDA and EQT (EQT) at 5.1x, when including its impending Tug Hill acquisition. AR, however, owns AM and has more liquids exposure. Its ability to go from dry gas to wet gas is advantageous, and its overall NGL exposure should be viewed as more valuable by investors.

Conclusion

AR turned in a solid quarter and most impressively increased its production guidance while lowering its expense forecast. Rigs counts are going down across the U.S., which should bode well for natural gas and NGL prices. Natural gas demand remains solid, so as supply comes down, prices should eventually rebound. Meanwhile, NGL demand should benefit as China re-opens and shipping rates come down. AR is a solid option to play this rebound in both nat gas and NGL pricing.

While the stock trades at higher valuation than its peers, its ownership in AM, as well as NGL exposure and ability to get to premium markets, more than justifies this in my view. I still see solid upside in AR, and continue to rate the stock a “Buy.”