2023-10-10 05:41:35 ET
Summary
- Antero Resources is a top stock for exposure to natural gas prices, with strong recent performance and a compelling valuation.
- The company's lack of hedging for gas prices suggests it may rally more in a bull market.
- Antero has shown outstanding performance at its sites in the Appalachian Basin, leading to increased production and reduced maintenance costs.
Thesis Summary
Antero Resources (AR) is my favourite stock to gain exposure to natural gas prices.
It stands out in terms of recent performance and has a compelling valuation. Furthermore, AR does not hedge for gas prices, so this means that it will probably rally more in a bull market.
From a TA perspective, we could have initiated a 1-2 set-up that will take us towards $40 over the next few years.
Last Quarter Highlights
Antero's revenue saw a significant blow compared to last year's quarter. Its revenue is down 61.86% to $937.40 Million from $2.4 Billion YoY. The company's net income (loss) stood at -$83 Million, down 110% from net income of $765.14 Million last year's same quarter. Antero reported an EBITDA of $106.61 Million, declining by 91% from 1.26 Billion in the same quarter the previous year. Similarly, its EPS was also down by a significant margin, standing at -$0.28, down 116% from $1.68. Although these numbers don't paint a good picture, the good part is yet to come. The company reported an outstanding performance at its sites in the Appalachian Basin, so investors are still hopeful about it.
AR results (Investor Slides)
As mentioned earlier, the company's most of the exploration sites are in the Appalachian Basin. So the company provided an update in its earnings report and Antero leads its Appalachian peers in well productivity trends and, importantly, continues to increase its liquids productivity. The company said they increased their completion stages by 93% since 2019, and in March, they achieved 16 stages per day. Its drilling efficiency at sites has also increased by 52% since 2019, showing promising progress. Antero's drill out 2795 feet per day in 2019; in March 2023, it hit a daily record of 6450 feet. They also reduced their cycle time per pad by a significant margin. Cycle time represents days from the surface spud to the first production date. So, in 2019, it was around 427 days; in March 2023, it was reduced by a significant margin to 129 days.
The company mentioned enhanced production forecasts and reduced anticipated maintenance costs. It also mentioned improvements in drilling and completion, paired with robust well outcomes, lead to elevated production levels and decreased maintenance capital requirements. Production guidance increased by 3%, and maintenance capital was reduced by 10%. Antero's U.S. propane exports hit a record high in 2023, setting a weekly record on June 23, 2023, of 1.895 MMBbl/d.
AR Production (Investor slides)
The Case For Gas And Antero
Right now is a great time to begin investing in gas, in my opinion.
Natural gas will be a key player in the global energy transition, and US gas will play an important role. The US boasts a high supply of gas but cannot make the most out of it due to limitations in its transportation infrastructure.
LNG capacity buildout (EQT presentation)
As we can see above, LNG capacity is drastically being built out in the next few years to address this issue.
This will allow US companies to take advantage of the current price differential.
On the other hand, AR is a great way to gain exposure to the gas price, because the company does not hedge its production. This means investors will be fully exposed to an appreciation in gas prices.
Peer Comparison
Antero Resources holds a distinctive position in the competitive landscape of energy resources. Its forward Price-to-Earnings ratio stands at 28.33, and its trailing twelve months at 5.38. These numbers suggest a market optimism regarding Antero's prospective earnings, especially when juxtaposed against peers like Southwestern Energy, with a notably low forward P/E of 2.76.
Antero's Price-to-Sales ratio of 1.09 aligns closely with most of its competitors, barring Southwestern's (SWN) notably lower 0.63, which might hint at its undervaluation or possible revenue challenges. As indicated by the Price-to-Book ratio, Antero's 1.36 is moderate regarding asset valuation. It's less optimistic than Range's (RRC) or Matador's (MTDR) nor as cautious as Civitas's (CIVI) or Permian's (PR), which hover below 1.
Valuation ratios (Seeking Alpha)
Leverage-wise, Antero's Total Debt to Total Equity ratio of 68.55 strikes a middle ground, being more conservative than Southwestern's high 105.62 but less than Civitas's lower ratio. Growth metrics further illuminate Antero's position with a 3-year revenue CAGR of 26.99% and a 5-year CAGR of 14.45%. Though solid, it's outpaced by Civitas's remarkable 3-year CAGR of 131.98%.
Finally, regarding profitability, Antero's Return on Equity stands at 23.71%. While this indicates efficient capital management, it's shadowed by Southwestern's staggering 146.60% and Range's impressive 63.34%.
With its specific valuation figures, Antero Resources carves out a balanced niche within its industry. Antero is fairly valued compared to its energy sector peers. It's neither undervalued nor overvalued. Its debt-to-equity ratio shows that the company's debt is moderate, meaning it has not overly relied on debt.
Valuation
Antero has reported a significant drop in earnings despite the rising oil and gas prices. Since the company announced its quarterly results, its stock has been on a roller coaster ride, presenting a mixed picture. Its numbers don't impress the investors, but its operations at Appalachian Basin sites are gaining investors' attention, so the stock has not dropped significantly.
Antero has generated an EPS of $4.44 in the last year. The company expects to grow its earnings by 574% next year, increasing its EPS from $0.28 to $2.90. Currently, the company is not offering dividends, especially when the sector offers a median yield of 3.57%. It is not a better pick for investors seeking a passive income stock. But Antero shows potential growth for investors willing to take risks.
Antero's P/S TTM ratio is 1.09, marginally below the sector's 1.35, while its forward ratio of 1.58 is slightly above the sector's 1.52. Its P/B ratios, both TTM and forward ratios, are 1.06 and 1.05, respectively. Both are lower than the sector medians, which shows it is undervalued according to its assets.
Technical Analysis
From a technical perspective, Antero looks like a good buy right now:
We have completed an impulse from the May lows, and the stock has managed to retrace close to 61.8% from its high. We have seen a strong impulse form from there, which gives me confidence that a 1-2 set-up could be in place.
Based on this analysis, we could have now begun a rally towards +$40, which is the 1.618 ext of wave 1 measured from the bottom of wave 2.
Risks
Like any other resources company, Antero also has potential threats that it could face. It ranges from threats that could arise within the company, industry or factors that aren't in its control and can affect from outside.
Companies operating in the energy sector are prone to commodity price fluctuations, which can significantly affect their revenue. Operational risk is also important to a resource company, as hazards could sometimes arise. If we look at Antero's debt-to-equity ratio, it indicates significant debt, which could make it vulnerable during an economic downturn.
One other important factor is the decline in its reserves. The value of the resource company is often subject to the reserves it owns. If its reserves start to deplete, its value could drop if it doesn't explore reserves to create new revenue streams. So, for Antero, it's important to regularly engage in exploring new reserves.
The oil and gas market is competitive, and for Antero to stay relevant in the game, it should always have a competitive edge to stay ahead. Other potential risks could be technological challenges, Dependence on the leadership, infrastructure constraints, legal and litigation risks, and economic downturns.
Conclusion
Antero is well-positioned in the energy sector after analyzing the ratios, risks, and relevance. It shows a balanced valuation when compared to its peers in the industry. The nature of the energy sector is volatile and has imminent risks. The company's debt, although not extreme, still is a threat in an economic downturn. Lastly, its survival is based on its reserves, so it's good that Antero continuously explores new reserves and secures its future to create value for its investors.
For further details see:
Antero Resources: Profit From The Nat Gas Bull Market