With oil trading below $50 on the Brent and with fear being dominant among traders and investors, I believe that it’s a good time to consider buying some oil and gas stocks with a long-term horizon. I am not recommending big exposure to the sector, but small positions in some attractive names can be considered.
Antero Resources (AR, Financial) is one such attractive stock that has corrected sharply by 33% in YTD15. However, the company’s long-term prospects are promising, fundamentals are strong and valuations attractive. This article discusses the key positives that make Antero Resources worth considering.
I will start with the company’s balance sheet and cash flow, as strong fundamentals are critical in challenging times. If fundamentals remain strong; the company can survive the crisis and also make meaningful investments to boost production. For Antero Resources, a balance sheet debt of $4.5 billion is not a concern considering the following points:
- First, even with debt of $4.5 billion, the company’s debt to capitalization is just 42% and this gives Antero Resources high financial flexibility.
- Second, based on 1H15 EBITDAX, Antero Resources is likely to generate an EBITDAX of $1.2 billion for FY15 and this implies that the company’s EBITDAX interest coverage will be strong.
- Third, the company has $2.4 billion in liquidity (cash and undrawn credit facility) as of 2Q15 and this makes Antero Resources well-funded for near-term investments.
- Fourth, Antero Resources generated $590 million in operating cash flow, and an annualized OCF of $1.0 billion will support the company’s growth objectives.
While the balance sheet and cash flow position is strong, I would also like to mention that financial fundamentals are not the sole reason for considering Antero Resources attractive. The company is worth investing for near-term and long-term considering the following key factors:
- First, for the second quarter of 2015, Antero Resources reported robust production growth of 67% to 135Bcfe from 81Bcfe in the second quarter of 2014. Therefore, strong production growth has sustained even in weak markets.
- Second, Antero Resources has provided early guidance for 2016, and the company expects 25% to 30% production growth even in FY16. This is a big positive considering the point that the weak oil price trend is likely to remain at least in early 2016. Strong production growth will imply robust cash flow.
- Third, Antero Resources is well-hedged for the remainder of 2015 and for 2016. I consider Antero Resources among the best hedged companies, and this will allow the company to generate decent cash flows even if oil and gas price recovery is not very significant in the next 6 to 12 months.
It is also important to mention here that the company’s Marcellus and Utica assets have a low break-even, and the assets the company has been drilling in FY15 have a break-even in the range of $1.94/MMBtu to $2.37/MMBtu. This is another reason why Antero Resources is able to maintain strong production growth even when the pricing environment is challenging.
Besides these positives, I must add here that Antero Resources owns a 70% stake in Antero Midstream Partners LP (AM, Financial), which has a current market capitalization of $3.5 billion. The important point to note here is that Antero Midstream has guided for distributable cash flow of $135 million to $145 million for FY15. This would imply a cash flow of $98 million for Antero Resources. Over the long term, the midstream business has robust growth prospects, and Antero Resources can further reduce stake in the midstream business when valuations are right and if additional cash is needed for Antero Resources.
From a valuation perspective, Antero Resources is trading at an EV/EBITDA valuation of 4.3, and these are attractive levels for a company that has robust production growth prospects in 2015 and 2016. In addition, Antero Resources offers a healthy dividend of $0.72 per share.
Considering these factors, Antero Resources seems worth accumulating with a long-term investment horizon. I don’t expect the stock to surge anytime soon, but it might not revisit these levels. Therefore, small exposure can be considered.
