Among oil and gas exploration stocks, I have opined in the past that Antero Resources (AR, Financial) is a quality stock, and it remains in an uptrend year to date, gaining 16.7% for the period. This is why I maintain my bullish view on the stock after the company reported first-quarter results.
Besides discussing the fundamental factors, the reason for discussing Antero Resources now is the company’s stock surged to $29.68 on April 27. The stock has subsequently corrected and traded at $25.47 Monday. I see this correction as a good entry point for investors considering exposure to the stock for the next three to five years.
Coming to the reasons for being bullish on Antero Resources, the company’s solid liquidity position is a big positive factor; the reason will be clear when I discuss the production guidance for 2016 and 2017. As of March, Antero Resources had liquidity buffer of $3.5 billion, and the company’s borrowing base of $4.5 billion is affirmed. With stable leverage in challenging times and enough liquidity to fund growth, I see Antero Resources well placed in challenging times when oil and gas companies have been cutting their capital expenditure guidance sharply.
The second factor for being bullish on Antero Resources is the point that the company expects strong production growth for 2016 and 2017. For these two years, the production growth guidance has been provided at 17% and 20%; considering the liquidity buffer that I discussed, I don’t see these investments as a challenge even if energy prices remain sideways or trend marginally higher.
The important point to note here is that Antero Resources has well-hedged positions, and this allows the company to increase production at a robust pace even if energy prices remain relatively depressed. The hedged positions ensure that cash flow from operations (critical for supporting strong investment guidance) remains strong in the next 24 months with the company having 94% of the forecasted production hedged through 2018.
From a long-term perspective, Antero Resources remains very attractive considering the fact that the company is a leader in the Appalachian Basin and has over 3,700 undrilled locations that can generate attractive IRR. If energy prices trend higher in the next 12 to 24 months, I expect Antero Resources to revise its investment guidance on the higher end with huge inventory for the coming years.
Antero Resources will continue to benefit from cash inflow from Antero Midstream Partners (AM, Financial) with the latter being a potential value creator in the midstream business in the value chain. Antero Midstream recently announced positive change in guidance for 2016, and I see upside in the unit triggering upside for Antero Resources as well.
Coming back to Antero Resources, another major positive is the company’s proven track record of cost reduction (well cost). The drilling and completion cost per well in Marcellus for the first quarter was $8.5 million as compared to $11.1 million in first quarter 2015. Similarly, for Utica, the drilling and completion cost per well for the first quarter was $10.3 million as compared to $12.4 million for first quarter 2015. This factor, coupled with low break-even assets (in general), translates into robust EBITDAX for Antero Resources.
In conclusion, Antero Resources is among the few stocks that have delivered strong returns even when energy prices have remained depressed. The stock will continue to create significant shareholder value in the coming quarters and is worth holding for the long term. With the stock witnessing some correction recently, investors can use this opportunity to consider exposure to Antero Resources.
Disclosure: No positions in the stock.
