AR - Antero Resources

[Bojack]

Currently trading at $20.35, I come up with a fair value of ~$26. Not insanely undervalued, but fair value will increase over time imo.

 

Fair value is based on $4.34 billion cash flow from proved developed reserves over the next 5 years, $1.3 billion in hedge book value (they've realized hedge book gains in 36 of the past 38 quarters), $3.2 billion in value from their ownership in Antero Midstream (AM), plus another $4.2 billion in value in their proved, undeveloped reserves. Debt comes in at $4.3 billion with maturities not hitting for another 5 years. My valuations assume natural gas stays range bound at ~$3.

 

Probable reserves come in at 34.4 tcf compared to proven reserves of 15 tcf. AR has done a good job of improving well efficiency, so a good portion of these probable reserves will become proven reserves which will add to fair value over time.

 

AR also produces natural gas liquids and does not hedge this production. Liquids are typically priced at a % of WTI, and the pricing environment has significantly improved over the past few years. In 2015, AR realized liquids price of 35% of WTI, 43% of WTI in 2016, and 2017 guidance is for 50-55% of WTI, with guidance for pricing to stabilize around 55-60% of WTI for 2018+. Assuming $50 WTI and 55% liquids price realization, AR will see $0.9 billion in incremental ebitda over the next 3 years, which I have not included in my fair value estimate.

 

Management continues to recognize how undervalued the stock is, and they recently completed a monetization plan by realizing $750 million in hedge book gains and selling 10 million units of AM for a total of ~$1.1 billion all of which was used to reduce debt. Note, values mentioned above account for the changes after the monetization plan.

 

Natural gas production is fully hedged next year at $3.43, with hedges significantly falling off over the next few years which will allow AR to take advantage of a potential move higher in natural gas. The US is expected to be a net exporter of natural gas by the end of next year and total domestic energy market share is expected to remain ~30-31%, which should give natural gas a solid price floor. If we continue to see storage numbers move lower combined with a relatively normal winter, then we could see natural gas move higher to ~$4 and potentially stabilize in this area as long as we don't overproduce (not counting on that).

 

Main risk is a sustained move lower in natural gas prices. I believe this risk is relatively low as we continue to work off excess storage and see exports continuing to increase.

 

Catalysts include improving energy sentiment (read prices) or any number of value realization methods by the company like initiating a share buyback program.

 

 

[RadMan24]

I would add they have upside exposure to ethane prices - a market that is going to expand by volume and hopefully price. With exports and ethylene plants coming online over the next few years, you’ll finally have a demand pull. If ethane rejection slows (there’s still a lot of ethane rejection), increased ethane production will drop right to bottom line. Capital is slow moving in this segment, but I agree with your assessment.

 

The infrastructure in terms of pipelines, export terminals, ethylene plants should juice up over next 3 years. Their hedge book on nat gas provides shelter for sure. Plastics industry is pegged at a CAGR of 7% or so over next 5-10 years. Demand looks solid.

 

You really want to see them connect on more NGL takeaway capacity, particularly ethane, although propane exports are going to increase significantly with mariner east 2. This is b’c of China’s petro industry.

 

With respect of nat gas, My view on nat gas is as good as anyones, but around $3-4 seems optimistic.

 

Other interesting ethane/ethylene related plays are Enterprise Partners or Navigator Holdings.

[Bojack]

"With respect of nat gas, My view on nat gas is as good as anyones, but around $3-4 seems optimistic."

 

I agree, and it all lies on the export dynamic. As best as I can tell, US exports cost ~$4.50-5 while average global prices range between $6-10 based on data BP. It will be interesting to watch how global nat gas prices react to the supply of relatively cheap US nat gas. If past behavior is any indicator, then we will see a ton of supply flood the market if we see a sustained move higher in nat gas prices.

 

I agree on your point on ethane, I tried to keep my post relatively short so I didn't include as much about liquids. AR estimates that even with $2.75 nat gas, they can realize anywhere from $3.80 - $4.40 per mcf due to the liquids they produce.

 

Thanks for the related plays, I will have to check them out.

[LightWhale]

$1.3 billion in hedge book value (they've realized hedge book gains in 36 of the past 38 quarters), $3.2 billion in value from their ownership in Antero Midstream (AM)

 

 

Thanks for writing them up. How do you come at 3.2b for AM? Is it pretax?

and isn't their mark-to-market hedge book closer to 2b?

 

It's a tough company to understand.

[Bojack]

Mark to market was closer to $2B before the monetization plan, I've linked details below. They booked $750 million in gains off the hedge book to delever, they also sold 10 million units of AM, giving them ~99 million units still owned.

 

I valued AM using a dividend discount model given their focus on dividend growth. My estimate of $32/unit is fairly close to current market value. AR was able to sell their AM units at $31.45, so I guess my estimate wasn't too far off. My AM value assumes little to no tax due to the $1.5 billion in NOL carried on book.

 

By selling AM units and realizing hedge book gains, AR was able to reduce debt by $1 billion. Taxes from the proceeds will be partially offset by the NOL.

 

(outline here: http://investors.anteroresources.com/investors-relations/press-releases/press-release-details/2017/Antero-Resources-Announces-Completion-of-1-Billion-Delevering-Program/default.aspx)

[LightWhale]

Thanks

[awindenberger]

Anyone looking at Antero these days? I’m just starting to dig in and it’s looking very cheap. Standalone EBITDAX LTM is $1.6B vs market cap under $4B. If we back out the value of their 100M shares in AM ($2.7B), the market is only valuing he upstream at $1.2B or so. What am I missing?

[Lakesider]

Ive been buying this for a while, the NGL prices are getting hammered, the gas is fully hedged. One of the assumptions used in their forecasts was that a pipeline would be finished this quater giving them accesss to higher NGL prices, but I think its been delayed.

 

I dont think we will see the cashflow inflection this quarter like they have been touting because of the NGL weakness but should start paying out soon.

 

What do you think of the simplification of the structure? I am had a deep look at it, but they are selling a chunk the midstream and buying back a chunk of the shares... Cant work out if we are winners.

 

 

[rykelsap]

Anyone looking at Antero these days? I’m just starting to dig in and it’s looking very cheap. Standalone EBITDAX LTM is $1.6B vs market cap under $4B. If we back out the value of their 100M shares in AM ($2.7B), the market is only valuing he upstream at $1.2B or so. What am I missing?

 

You are comparing a levered numerator to an unlevered denominator, and not including Antero's net debt in the value of the upstream assets, so the Antero upstream assets are not nearly as cheap as you indicate. Antero has $4.0 billion of net debt attributable to the parent and $1.5 billion of net debt attributable to the midstream partners. So the better valuation math (in my opinion anyway) is the Antero upstream assets are trading at a market capitalization of $4.0 billion + net debt of $4.0 billion - share of Antero Midstream equity of $2.7 billion = $5.3 billion enterprise value.

 

You also need to remove the Distributions from Antero Midstream Partners LP line from stand-alone EBITDAX if you are netting off the value of the Antero Midstream equity (I don't know why they include this in the calculation) and I'd personally not add back the Equity-based compensation expense line as I think this is a real cost. This gets me EBITDAX of $1.04 billion in 2017 and $1.14 billion in the LTM period ending Q3 2018 for the standalone E&P assets.

 

Treating the impairments as a one time item, Antero's upstream assets are trading at a stub LTM EV/EBITDAX of 4.7x and stub LTM EV/EBIT of 15.0x ($788 million of LTM depreciation). This looks somewhat attractive given their expected production growth rate, especially in their liquids business, but is in-line with other US onshore producers.

[samwise]

Currently trading at $20.35, I come up with a fair value of ~$26. Not insanely undervalued, but fair value will increase over time imo.

 

Fair value is based on $4.34 billion cash flow from proved developed reserves over the next 5 years, $1.3 billion in hedge book value (they've realized hedge book gains in 36 of the past 38 quarters), $3.2 billion in value from their ownership in Antero Midstream (AM), plus another $4.2 billion in value in their proved, undeveloped reserves. Debt comes in at $4.3 billion with maturities not hitting for another 5 years. My valuations assume natural gas stays range bound at ~$3.

 

Probable reserves come in at 34.4 tcf compared to proven reserves of 15 tcf. AR has done a good job of improving well efficiency, so a good portion of these probable reserves will become proven reserves which will add to fair value over time.

 

AR also produces natural gas liquids and does not hedge this production. Liquids are typically priced at a % of WTI, and the pricing environment has significantly improved over the past few years. In 2015, AR realized liquids price of 35% of WTI, 43% of WTI in 2016, and 2017 guidance is for 50-55% of WTI, with guidance for pricing to stabilize around 55-60% of WTI for 2018+. Assuming $50 WTI and 55% liquids price realization, AR will see $0.9 billion in incremental ebitda over the next 3 years, which I have not included in my fair value

 

I also prefer to value this using the reserves rather than current income. However the pv-10 is a consolidated number which includes the midstream as an offset to costs of production. So everyone who is adding the midstream equity value and then saying that it's trading at an EV which is 50% of reserves might be double counting the reserves. Not clear if you are doing it Bojack, but worth noting anyway. I haven't been able to see it as extremely cheap as that, though equity does seem like a possible double, but not a 4x. But that just gets us back to the price you initially posted this idea. So not sure what else you saw that I am missing in my simplistic analysis below.

 

My valuation method is the following. Start from pv-10 and adjust for the costs which are not included in pv-10 with the aim of estimating a company-level standalone DCF: these are the G&A costs, and stripping out the credits from midstream from the production costs, and net marketing revenue which is slightly negative this year. This reduces the current year net revenue by about 40%. If I carry that all the way through future years cash flows (yes this might be too harsh given growth), then the latest pv-10 should drop by 40% before taxes. This results in a value of 12.6*0.6=7.56B . Since this is a stand alone DCF value for the operating assets, I can add the value of the midstream units: approx 2.5 to get a total value of 7.5+2.5= 10B. This compares to the EV of ~7B. So 30% undervalued. Given leverage, equity should double to fair value, if all commodity prices remain the same ( of course they won't).

 

I am not sure how I should adjust for taxes in this analysis. Also I can't reconcile the development numbers they use in the pv-10, so there may be more downward adjustments. Can add hedges to increase the discount from fair value.

 

For this 30% discount we get a commodity producer which is middle to low of the cost curve range(associated gas is cheapest, followed by shale), management that has more ownership in the pipeline than the E&P, so they may profit more from production growth than profit at the E&P. It's also n an industry that seems intent on destroying capital, but recently (as in last month) claims to have found religion about shareholder value.

 

AR's stated intention is to produce 0 to 3B FCF over the next 5 years. So let's take an average and that gets us to 1.5 B or 0.3B per year. That's a yield of 10% on the equity. Good, but not screaming good given the leverage, cyclical commodity cash flows and possible management misalignment.

 

No position yet. Not sure about management and capital allocation. Any feedback is appreciated.

 

[Spekulatius]

^ Good comments regarding double counting the midstream when using PV10 value and adding midstream market value to arrive at NAV. I think this is what most sum of part valuations are missing.

 

For me, there are most likely safer plays out there with less debt. Possibly CNX ( which also has bought back stock using asset disposition proceeds. Showing undervaluation in PP presentations to investors won’t solve the issue, the undervalued companies need to take action, dispose of assets and generate FCF from operations and reward shareholders, plain and simple.

[samwise]

Mr. Spek,  I did find some undervaluation even after eliminating all double counting. I also found that AR is exposed to both rising NGL prices and nat gas prices. So I eventually did take a position.

 

I took a bigger position in the midstream AM, after it became a CCorp and I could buy in my RRSP. That's because AR is committed to growing production to fill the pipeline capacity it has already purchased. This means AM will grow, and earn at contracted rates, no matter what the gas price. AR just needs to survive so it can't reject the contracts. Even if the went BK there probably isn't another gathering system built on the same lands. And management has a much bigger financial stake in AM.

Of course they could stop growing at some point (if they can sell the capacity). But then I still get a 9% yield on my cost.

 

It doesn't make sense to value AM as if production growth will soon stop, but value AR as if they will over produce and die.

 

No opinions on others like CNX. Antero is the only one which seems to have management with a decent ownership.

[tat2507]

It looks like the last post was in april when AR was trading above 8 dollars per share. Now the Stock is around 5.50 per share. Did something significant happen that I am not aware of?

My understanding is that AR owns 31% of AM. At current market prices that makes AR stake in AM worth approx 1.8b and the market cap of AR is 1.7b. Is my math correct?

[awindenberger]

It looks like the last post was in april when AR was trading above 8 dollars per share. Now the Stock is around 5.50 per share. Did something significant happen that I am not aware of?

My understanding is that AR owns 31% of AM. At current market prices that makes AR stake in AM worth approx 1.8b and the market cap of AR is 1.7b. Is my math correct?

 

Your math is correct. Since April NatGas is down significantly, as are NGLs, which has put significant pressure on all NG related stocks. I'm think we are very close to a bottom, but who knows when that will occur.

[samwise]

It looks like the last post was in april when AR was trading above 8 dollars per share. Now the Stock is around 5.50 per share. Did something significant happen that I am not aware of?

My understanding is that AR owns 31% of AM. At current market prices that makes AR stake in AM worth approx 1.8b and the market cap of AR is 1.7b. Is my math correct?

 

Your math is correct. Since April NatGas is down significantly, as are NGLs, which has put significant pressure on all NG related stocks. I'm think we are very close to a bottom, but who knows when that will occur.

 

Another source of selling pressure has been the Private Equity sponsors who have been exiting the Antero holdings. Probably more to do with their fund's end of life rather than their opinions on the stock, but maybe I am being wishful about that.

[mwtorock]

i have heard about PE pressure from many people now, however that does not explain the drops of other natural gas stocks. This whole industry is hated by equity investors for burning equity capital to chase production growth without even looking at profit margins.

[given2invest]

It's not the PE exit that has crushed the stock; one need to only look at RRC which is probably the closest comp, and didn't suffer from that.

[tat2507]

Samwise, you mentioned previously that you took a bigger position in AM. Does this mean that you believe that there is a good chance that AR will go bankrupt? I am just trying to figure out why you would buy AM instead of AR.

[samwise]

i have heard about PE pressure from many people now, however that does not explain the drops of other natural gas stocks. This whole industry is hated by equity investors for burning equity capital to chase production growth without even looking at profit margins.

 

Agreed, mwtorock, and gven2invest.

 

I agree with those primary drivers, which is why my comment begins with “*Another* source of selling pressure...”.

 

So it seems we agree that commodity spot prices have declined, investors favour companies which are generating FCF, and PE has sold down their shares. You could, if you were so inclined, try and attribute the drop as X% due to decline in commodity prices leading to lower profit expectations, Y % due to investors changing the multiple on those profits, and Z% due to additional selling pressure from PE, which is a short term technical factor affecting the voting machine in the market.

 

If your argument is the X%> Z% or that Y%>Z% then I would agree.

If your argument is that Z%=0 I think that’s harder to believe.

 

As an example of short term technical pressure on a stock look at AIM, which sold down rapidly a month ago as funds sold down shares which were not accepted in a tender. The stock has bounced back in the following month as that pressure eased.

 

Another example is AMTB, which was a spinoff distributed to Venezuelan investors but listed in the US. What a sell off it had, and it has recovered from that. This is the same process Greenblatt describes in his book for spin-offs.

 

Or look at WEB’s description of BRK’s possible share buybacks in the 2017 meeting: he mentions how their buying would help selling shareholders realize higher prices than they otherwise would. Extra selling has the corresponding effect of lowering prices.

[given2invest]

There is just brutal selling pressure in both nat gas names and even oil SMID names.  look at PVAC, BCEI, etc.  too many to list.  it has nothing to do with the price of oil.  all trading at lows. 

[samwise]

Samwise, you mentioned previously that you took a bigger position in AM. Does this mean that you believe that there is a good chance that AR will go bankrupt? I am just trying to figure out why you would buy AM instead of AR.

No I don’t think AR has a good chance of bankruptcy, although with commodities anything is possible.

I just think AM does well in almost any scenario and it’s income doesn’t depend on commodity prices directly. Management owns more dollars in it than AR. AR’s commitment to growth benefits AM. So it is  safer bet.

 

AM has only one client, so instead of comparing to other mid streams, it’s best to think of it as a sort of preferred equity of AR. But with growth, management alignment, and bankruptcy protections by contract (hard to reject contracts depending on state law) and business needs (Who else will lay pipe where it already exists).

 

The rejection of gathering systems contracts seems to be a hot legal topic, but I am out of my depth. Anyone curious can start with this link: https://www.gibsondunn.com/in-the-pipeline-understanding-post-sabine-midstream-contract-rejection-risk/

 

Contract renegotiation risk without bankruptcy is minimal while the same management runs both companies and has more dollars invested in AM.

 

The worst case I can construct is this: I buy AM at a 10% earnings yield, it grows at 18% for at least a couple of years to 13.5%. Note this is earnings yield, but dividend yield will be lower. Then assume AR goes bankrupt in 2021 when it’s senior notes are due. The debtors are able to reject the contract in Pennsylvania law (can they? uncertain since the link above says it depends on state laws), and uses that leverage to bargain for a lower rate which lowers earnings from the 13.5% level to a lower level. But it would not make business sense to lay pipes again, so they would not be able to lower rates too much. (ARq would need AM to sell their gas). Dividends get cut along the way. As I said this scenario seems pretty unlikely, and you still do ok. Most other cases you get a growing 10% dividend yield with possible upside in price. Happy to hear any feedback.

 

 

[given2invest]

As someone who understands none of this stuff, I think you looking at it right way and understand the incentives. 

 

I prefer to own both though AR just goes down every day.

[mwtorock]

what if there is enough pressure from AR shareholders to amend contracts with AM? no doubt of management conflict of interests as they hold AM more than AR.

[samwise]

what if there is enough pressure from AR shareholders to amend contracts with AM? no doubt of management conflict of interests as they hold AM more than AR.

 

AM has different shareholders who would want the contracts to be kept. AR cannot unilaterally amend them except possibly reject in bankruptcy and force a renegotiation.

 

Btw it’s not clear that the contracts are above market rates.

[mwtorock]

https://seekingalpha.com/article/4279202-antero-resources-case-number-one-position-equity-portfolio

 

interesting point about bonds trade near par.