Antero Resources (AR, Financial) has trended higher by 12.8% year to date, but the stock has been largely sideways in the last few months. This is a good time to accumulate Antero Resources with a time horizon of one to two years.
As a brief overview on the company, Antero Resources is an independent exploration and production company. It is engaged in the exploration and development of natural gas, NGLs and oil properties located in the Appalachian Basin. The company has the largest core drilling inventory in the Marcellus/Utica with over 4,300 undrilled core locations.
For all oil and gas stocks, I have initiated discussions with the companies’ liquidity and balance sheet profile. As energy prices remain relatively depressed, strong fundamentals are key stock-screening criteria.
As of Sept. 30, Antero Resources had total liquidity buffer of $3.0 billion along with potential cash flow (annual) in excess of $1.0 billion that will contribute to the investment targets. Antero Resources has debt of $3.6 billion as of the third quarter, but I don’t see debt as a concern considering strong EBITDAX and comfortable debt cushion. To elaborate on the debt cushion, Antero Resources has $2.9 billion worth in Antero Midstream coupled with availability of $2.4 billion in commodity derivatives. With strong liquidity available in the form of non-E&P assets, I don’t see debt levels as a concern.
With strong financial flexibility, the next upside trigger for Antero Resources is the company’s targeted production growth for 2016 and 2017. For fiscal 2016, Antero Resources expects production growth of 20%, and the production growth guidance for fiscal 2017 is in the range of 20% to 25%. With stellar growth coming, the stock is likely to trend higher.
The following factors will ensure that Antero Resources meets growth guidance in the next 12 to 18 months.
- Antero Resources has strong financial flexibility as discussed above and this will ensure that robust investments sustain in the coming quarters.
- Eighty-six percent of the company’s targeted production is hedged through 2019 at $3.72/MMBtu. This will ensure that production growth remains robust even if gas prices remain sideways in the coming quarters.
While these are medium-term factors that make me bullish on Antero Resources, it is also important to note here that Antero Resources is likely to sustain strong production growth even beyond 2017. Just to put things into perspective, the company has 4,300 undrilled core locations that include 1,600 high graded core locations. With strong hedged positions beyond 2017, I expect production growth to sustain well over 15% in the next few years.
It is also important to mention here that Antero Resources currently holds 61% stake in Antero Midstream (AM, Financial) and the stake is currently valued at $3.0 billion. As Antero Resources grows at a robust pace, cash distribution will increase for Antero Midstream as well, and this would create additional value in the coming years. For Antero Midstream, besides the gathering and compression business, the midstream water business is likely to be a long-term game changer.
In conclusion, Antero Resources has not moved significantly higher year to date, but the company’s fundamentals have remained strong and production growth target looks robust for the coming years. At current levels, the stock is worth accumulating and I see the stock breaking out of sideways movement relatively soon.
Disclosure: No positions in the stocks discussed.
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