The energy sector sentiments are currently dominated by fear even as there are value buys to be found.
The stocks in the energy sector aren't likely to provide stellar returns in the next 12 months, but some stocks are trading at valuations that might be difficult to get any time in the foreseeable future. In line with this thought, there are some energy names that have quality balance sheets and quality assets and are trading at mouth-watering valuations.
Antero Resources (AR, Financial) is a quality stock pick for the long term, and exposure to this stock is advised in its phase of consolidation. If the company’s stock price trend is observed, the stock is trading at around the same levels as it was trading four months before. During this period, oil has declined, and industry sentiments have worsened. However, the stock trading sideways is an indication that the valuations are attractive.
There are strong fundamental factors that support the stock trading sideways. Antero Resources had $4.4 billion in debt as of Sept. 30, 2015. However, with the company generating an annualized EBITDAX of $1.1 billion, leverage is not high, and debt servicing is likely to remain smooth. In addition, the company’s annualized OCF is likely to be in the range of $1.0 billion to $1.1 billion, ensuring a strong cushion for capital investments.
Antero Resources expects production growth of approximately 40% for 2015 and production growth of 25% to 30% for 2016. Besides strong balance sheet and cash flow, this is the next important factor that explains why Antero Resources' stock has been resilient in the last few months. The decline in revenue due to lower oil and gas prices is offset to some extent through robust production growth.
To put things into perspective, Antero Resources generated consolidated adjusted EBITDAX of $832 million for the first nine months of 2015 as compared to $914 million in adjusted EBITDAX for the first nine months of 2014. The decline in EBITDAX has not been very sharp as compared to the decline witnessed in oil and gas price realization. The same trend is likely in 2016 with strong production growth and hedges. The company has strong hedges in position for 2016, and this will keep the EBITDAX robust along with the OCF.
From a fundamental perspective, another point that supports the stock and boosts overall fundamentals is robust growth in liquids production. From 246bbl/day in 2012, the company’s liquids production is likely to reach 37,000bbl/day in 2015, representing production growth CAGR of 431% during this period and production growth of 61% for 2015 as compared to 2014. Considering the company’s asset and drilling focus, liquids production is likely to increase at a robust pace in the next two to three years as well. According to the company, it has the largest core liquids rich position in Appalachia, and the company happens to be the most active operator in Appalachia.
As a potential upside trigger in the next 12 to 24 months:
- Antero Resources is pursuing a long-term LNG and NGL sales agreement; if any such agreement materializes, the stock is likely to trend higher on firm cash flow visibility. In the long term as well, LNG exports will be a strong value creator and upside trigger for the stock.
- Antero Resources owns a 67% stake in Antero Midstream Partners (AM, Financial); significant value creation from this LP seems likely in the long term. Antero Resources expects accelerated distribution payout from Antero Midstream.
- Antero Resources expects 25% to 30% production growth in 2016 with strong hedges coupled with a fully financed capital investment program. The company doesn't seem likely to struggle for liquidity even if oil and gas prices remain largely sideways. Production growth is likely to be robust even for 2017.
Considering these critical factors, Antero Resources is worth considering for the long term. The company has proved its execution capabilities in difficult times, and strong growth momentum can be expected to continue on the back of robust financial flexibility. Big exposure is not advisable to any energy sector stock at this point, but gradual exposure can be considered with a three- to five-year investment horizon.
Disclosure: No positions in the stock
