Antero Resources (AR, Financial) is an independent exploration and production company engaged in the acquisition and development of natural gas, NGLs and oil properties located in the Appalachia Basin. The company has 395,000 net acres in the south-western core of the Marcellus Shale and over 148,000 net acres in the core of the Utica Shale. In the last year, Antero Resources has declined by 36%. However, considering the decline in oil prices, the stock has still been relatively resilient. This article discusses the reasons to consider Antero Resources at current levels with an investment horizon of 3-5 years.
The first reason to consider Antero Resources is the company’s bullish guidance for 2015, even when the overall market conditions are gloomy. From a capital expenditure point of view, Antero Resources has announced a capital spending plan of $1.8 billion for 2015. While this is significantly lower than $3.1 billion in capital spending in 2014, the investment will ensure that the company’s production growth sustains even in a difficult year.
Antero Resources had a production of 1,007 MMcfe/day in 2014 and the company’s production estimate for 2015 is pegged at 1,400 MMcfe/day. I believe this is excellent considering the fact that oil and gas prices are likely to remain depressed through most of 2015. High production guidance implies that the company’s revenue and cash flow will remain strong in 2015. In particular, I am bullish on strong cash flows for 2015 considering the fact that 94% of the company’s 2015 guidance is hedged. Therefore, overall fundamentals are likely to remain strong for Antero Resources in the current year even when most oil and gas companies are likely to witness worsening fundamentals.
From a cash flow perspective, I must also add here that Antero Resources has made strategic investment decisions for 2015. Most of the company’s resources that will be exploited in the current year have a low break-even and this ensures that the company’s EBITDAX margin remains healthy.
Another interesting bullish point about Antero Resources is the company’s 70% stake in Antero Midstream Partners (AM, Financial). For 2015, Antero Midstream is likely to generate an EBITDA of nearly $150-$160 million and a 70% stake for Antero Resources implies a cash inflow of nearly $100 million for Antero Resources from the distributable cash flow. The stake in Antero Midstream will translate into higher distribution cash flow from the LP over the next few years.
From a financial flexibility perspective, Antero Resources is well placed with $1 billion in undrawn revolving credit facility as of December 2014 coupled with a strong cash position of $230 million. A total liquidity of $1.23 billion ensures that the company has the funding in place for 2015 capital expenditure. In addition to the existing liquidity position, Antero Resources will be supplied with liquidity from operations during the year and I believe that internal funding will make for most of the capital expenditure during the year.
From a long-term perspective, I also want to mention that the company has a huge drilling inventory and the company’s proved reserves have surged to 12,683Bcfe as of 2014. With $1.8 billion in spending for 2015, the company’s proved reserves will continue to grow along with new prospective drilling locations.
All these factors make Antero Resources an excellent stock to consider from a medium to long-term perspective and the stock seems attractively valued at a current EV/EBITDA of 8.0. Therefore, I am of the view that investors can gradually accumulate the stock for strong returns over the next few years.
