There has been some recovery in the energy industry in the recent past, but even when conditions were challenging, there were few stocks that stood apart from peers.
Antero Resources (AR, Financial) is one stock that has continued to perform exceedingly well even in difficult times. Positive momentum will sustain for the stock in the coming quarters; in line with this view, fresh exposure to this quality energy name can be considered at current levels.
The first point on which I want to focus is a recent acquisition by Antero Resources. On June 9 Antero Resources signed a definitive agreement with a third party to acquire approximately 55,000 net acres in the core of the Marcellus Shale for a consideration of $450 million. In addition, an agreement has been signed with another third party for an additional 13,000 net acres, and this translates into total acquisition of 68,000 net acres for $558 million.
With the acquisition adding 17MMcfe/d, 625 identified 3P locations and undeveloped properties potentially including 5.1 Tcfe of unaudited Marcellus 3P reserves plus 2.2 Tcf of dry Utica resource potential, the long-term returns from the asset can be robust.
Approximately 75% of the acquired acreage is located in Antero's Highly-Rich Gas/Condensate, Highly-Rich Gas and Rich Gas regimes. Therefore, the acquisition is certainly appealing and is concentrated in the company’s core assets. The acquisition is the first reason to be bullish on Antero Resources and believe that the stock has more upside in coming quarters.
The next important reason to be bullish on Antero Resources for the medium to long term is the production growth outlook along with robust hedged positions. For the fiscal year, Antero Resources expects production growth of 17%. Further, for fiscal year 2017, the production growth guidance is in the range of 20% to 25%. With robust growth outlook boosted by organic and inorganic growth, I expect the stock to trend higher.
An important point to note here is that Antero Resources has 94% of forecasted production hedged through 2018 at $3.81/MMBtu. This is likely to ensure steady cash flows even if energy price recovery is slow in the next 12 to 24 months. Just to put things into perspective, Antero Resources reported realized average natural gas price before hedging of $1.93 per Mcf for the second quarter. However, realized natural gas price after hedging averaged $4.31 per Mcf. With strong hedges in place, the coming quarters will have a similar outlook and with strong production growth the earnings visibility (including hedging) is robust.
When talking about robust growth and continued inorganic growth, it is also important to briefly discuss the company’s financial profile and financial flexibility. Antero Resources completed common stock offering on June 9, and the net proceeds from the offering were $753 million. With this offering, Antero Resources had $3.8 billion in consolidated liquidity available before the acquisition of Marcellus acreage.
Even with outflow of $560 million related to the acquisition, the company still has liquidity of $3.2 billion for robust investments. In addition, operating cash flows will continue to provide additional cash buffer in the coming quarters. Clearly, liquidity is not a concern for Antero Resources, and I expect significant upside in investment targets once there is further recovery in energy prices.
In conclusion, Antero Resources is not just good for the medium term, but the stock is also an excellent long-term investment. With robust financial muscles, the company is also well positioned for further inorganic growth in its core area. In the next three to five years, the stock can be a major portfolio catalyst.
Disclosure: No positions in the stock.
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