2023-11-13 21:32:26 ET
Summary
- Antero Resources reported neutral cash flows for the 3rd quarter.
- Markets for natural gas and natural gas liquids are shaping up for positive pricing improvements in 2024.
- Antero is perfectly positioned to take full advantage of price increases.
- 2024 is likely a positive year for the stock price.
Antero Resources ( AR ) reported its 3rd quarter financials showing a neutral cash flow after all expenses including discretionary categories such as capital. The cash flow status didn't surprise us or investors closely following the company with the increases in crude oil and natural gas pricing. Arguments continue to rage on both sides of natural gas ((NG)) and natural gas liquids ((NGL)), with bulls claiming higher prices approach with falling production while bears point at full or nearly full storage in the U.S. and world primarily Europe. With this article, we continue covering Resources with a bullish bias . Our last writing, Antero Resources: Cash Flow Analysis And Predictions, reviewed accuracy from previous predictions. Still, like cool water slapping across our faces on extreme summer days, Antero reported positive results. Shall we try drinking together the cool refreshing water straight from that backyard garden hose? Come join us, won't you?
The Company
The company's business resides in the Appalachia region with premium properties. It holds the most number of sub-$2.75 breakeven cost wells coupled with rich C3+ components. Antero exports over 50% of its NGL through Pennsylvania bypassing the capacity-restrained Gulf Coast and the pricing pressure associated. It also exports 75% of its gas through the LNG corridor. NG, NGL, minor amounts of crude oil production, and associated margins define the business.
The Quarter Performance & Market Place
For the quarter, the company :
- Realized a C3+ NGL price of $36.81 per barrel.
- Realized a pre-hedge natural gas price of $2.48 per Mcf, a $0.07 per Mcf discount to NYMEX pricing.
- Realized Adjusted EBITDAX at $271 million (Non-GAAP) and net cash operations at $183 million.
Other critical parameter changes include lower cash production costs at $0.05 Mcfe, lower marketing expenses by two cents, and a production increase of 1%. It also expects the normal premium with NYMEX Henry Hub to dissipate.
Continuing, one difference between the two quarters, June and September of 2023, is that June carried a premium difference between NYMEX pricing while September reported a discount of $0.07 per Mcf. C3+ NGL price increased slightly quarter over quarter from approximately $34 to $37 per barrel.
The results were significantly higher than the previous June quarter with EBITDAX at $113 million .
With respect to propane, management noted that high inventories pressured prices, but in recent weeks the pricing pressure was dissipating. With the Gulf Coast region experiencing capacity issues, Resources' use of East Coast export facilities bodes for positive pricing differentials in 2024. China plans include significant increases in propane dehydrogenation or PDH capacity which helps Antero.
All in all, the 3rd quarter results were positive and without drama.
Looking at 2024
The presentation by Antero focused on 2024 with valid and important reasoning. Management included in the 3rd quarter reports an important slide , in our view anyway, depicting the number of drilling rigs versus natural gas production.
From the slide, decreases in production follow approximately eight to twelve months later. The latest cut in rigs started late last year, early this year. If this past pattern predicts future production, up to a ten percent cut in natural gas production might follow. Thus far, on the far right of the slide, NG production flattened. Management offered their own commentary,
". . . U.S. natural gas production ultimately declined by as much as 10% . Further, it took almost two years to get back to the 2019 highs. . . . we are just about 6 months out from when rigs began to drop in a meaningful and sustained way. An important distinction this time around, however, is that over 70% of the rig declines this cycle have come from the higher decline in Haynesville Basin."
The above commentary suggests a natural regression relating price with storage.
The next presentation slide illustrates the magnitude of the relationship, with price being the solid green line on top and storage the gray shaded area below.
The relationship between the two reveals the possible dramatic change of several times between the two.
With basics defined, following the inventory status is a must. In our view, the EIA chart shown next equals a gem.
The difference between the 5-year and current storage was nicely closed until a few weeks ago.
The data-watching activity doesn't end with storage but must be supplemented with weekly production rate comparisons. Again, the EIA provides an excellent source . We include in the next table some data comparisons for some past weeks.
NG Production | 9/29 | 10/6 | 10/13 | 10/20 |
2023 | 106.9 | 108.1 | 107.9 | 107.9 |
2022 | 107.4 | 106.9 | 106.1 | 106.1 |
Although management commented that production was flat or flattening, the weekly data shows a slight bias higher, a comparison we continue to religiously follow.
Spending the Cash
Management, in the past, always stated that they planned to spend every penny of the company's positive cash. It has places for discretionary spending, including paying off debt, capital, and repurchasing shares of stock. The next slide shows plans for reducing capital expenses by an undetermined amount, but likely by either 10%, $100 million or up to 30%, $300 million, depending on product pricing.
At $300 million less, management believes it can hold production at 2022 values. Antero finds itself through careful operations with the ability to maintain production at a level.
During the call, a long discussion with Greg Brody of Bank of America and management added significant detail into management's thinking toward spending and possible changes in expenses. The first order is to pay debt to zero where possible followed with this statement,
"I mean our 2030s are 5.375 [ph]. So that's a good piece of paper, that's $600 million. So you may want to kind of keep that in the capital structure and buy back shares or return capital. But the other debt pieces are at pretty high interest rates that we'd like to take out."
Reducing debt and repurchasing shares of stock seem to be their targets, dividends aren't, but a series of 8.4% bonds valued at $500 million coming due in 2026 could be the prime target during 2024, that is if cash generation increases to even close to predicted levels.
Risks
Risks and rewards abound with Antero Resources. Management chose an unhedged approach to weather the 2023 down cycle. One risk, in our mind, is a continued warmer winter or a reduction in NG usage in Europe, an event that could happen. NG prices were clobbered recently with news that the natural gas storage was full. The Weather Channel's prediction with the El Niño pattern predicts much colder weather in the southern U.S. and warmer than normal weather in the northern portion. This dampens NG usage during a critical period. Although this might affect usage, it likely only increases the time for crossover between the actual and 5-year average.
In all, Antero minds and understands its business with data to back up its plans. 2024 could be a massively positive year, unlike the muted results in the down cycle of 2023. Although we aren't predicting cash flows for 24, 2022 illustrates the possibility with its approximate $2 billion generated.
We don't see any issues that signal bankruptcy, the company weathering admirably the difficult pricing now in place. We also strongly encourage savvy investors to watch the two critical pieces of data, NG storage, and production on a weekly basis.
With Antero, that cool refreshing feeling from drinking the water from the ever-forbidden garden hose might satisfy investors on those hot summer afternoons. We rate the stock a buy going forward at prices near or under $30. 2024 is likely shaping itself up for a nice positive run.
For further details see:
Finding Meaning In Antero Resources' Reporting Neutral Cash Flow