Antero Resources - Strong Growth Public Offering, But Revenues Are Driven By Derivative Gains

Oct.12.13 | About: Antero Resources (AR)

Antero Resources (NYSE:AR) made its public debut on Thursday, October 10. Shares of the independent oil and natural gas company ended their first day with gains of 18.2% at $52.01 per share.

While growth is spectacular and the company is profitable, I remain on the sidelines for now. The current valuation at over $13 billion values the firm at roughly 16 times current annual production revenues, as Antero's current revenues are inflated through gains on derivative contracts.

I will await the next quarterly earnings report to gather more information regarding sustainable production revenues going forwards, before considering to initiate a position in the firm.

The Public Offering

Antero Resources is an oil and gas company focused on the exploitation, development and acquisition of gas and oil properties in the Appalachian Basin in West Virginia, Ohio and Pennsylvania.

Antero focuses on creating shareholder value through two premier North American shale plays which offers low cost but repeatable drilling opportunities of liquids-rich properties.

Antero holds 329,000 net acres of the Marcellus Shale and 102,000 net acres in the Utica Shale. Besides these holdings, Antero has rights on other acreages in the Marcellus Shale and he Upper Devonian Shale.

Antero Resources sold 35.73 million shares for $44 apiece, thereby raising $1.57 billion in gross proceeds. All shares were sold by the company, with no shares being offered by selling shareholders in the initial offering.

Initially, bankers and the firm set an initial price range of $38-$42 per share, while intending to offer 30 million shares. Shares were eventually sold above the high end of the price guidance, while the offer size was increased by roughly 19% to 35.73 million shares.

Some 14% of the total shares were offered in the public offering. At Thursday's closing price of $52.01 per share, the firm is valued at $13.2 billion.

The major banks that brought the company public were Barclays, Citigroup (NYSE:C), JPMorgan (NYSE:JPM), Credit Suisse, Jefferies, Wells Fargo Securities (NYSE:WFC) and Morgan Stanley (NYSE:MS), among others.


Antero has estimated proved reserves of 6.3 Tcfe. Note that probable reserves reached 14.0 Tcfe at the moment. The drilling inventory consists about of 4,576 potential horizontal well locations, of which 64% represent liquids-rich drilling opportunities.

Antero has a strong management team with a proven track record in US unconventional plays. The company has been only founded back in 2002, but the majority of the key management team has been working together for over 30 years at companies like Amoco Production and Barrett Resources, among others.

The net daily production in the second quarter of this year averaged 458 MMcfe/d, including 4,160 barrels of NGLs and oil. Note that these numbers increased to 594 MMcfe/d and 8,630 barrels of NGLs and oil for the month of August. Besides showing a solid growth in production, the company kept adding to its reserves.

For the year of 2012, Antero generated annual revenues of $735.7 million, up 6.4% on the year before. Antero reported a full year loss of $285.1 million on the back of a $510.3 million charge on discontinued operations. Income from continuing operations fell by 16.9% on the year to $225.3 million.

For the first six months of 2013, Antero Resources generated revenues of $448.6 million, down 24.3% on the year before. Note that revenues in the first six months of 2012 included $291.3 million in revenues based on the sales of assets. Excluding this, revenues rose by 48.9% on the year before.

More importantly, in recent years Antero has generated a huge portion of revenues from commodity derivative gains. Production revenues for the first six months of the year rose by an incredible 260% to $325.1 million. Earnings for the period came in at $83.2 million.

Antero ended the first half of the year with $10.9 million in cash and equivalents. Total debt stood at $2.42 billion, for a net debt position of little over $2.4 billion. Factoring in gross proceeds of $1.57 billion from the public offering and Antero will operate with a net debt position of around $1 billion following the public offering.

With the equity in the business being valued around $13.2 billion, the market values Antero at roughly 18 times 2012's annual revenues and 58 times operating earnings.

Investment Thesis

As noted above, the offering of Antero Resources has been a great success. The company priced the offering at $44 per share, some 10% above the midpoint of the original preliminary offering range.

Shares have seen even more upside, rising to $52.01 per share, trading some 30.0% above the midpoint of the preliminary offering range.

A much overlooked fact in other commentaries is the fact that most of the revenues from Antero are the result of hedging operations. For instance, of the $387.1 million in revenues for the quarter ending in June, some $191.7 million came from actual production, about 50%. Of these production revenues, some $172.3 million, or 90%, was achieved through gas production. Note that Antero reported operating earnings of $131.2 million over the past quarter, but without hedges this would only be around $57 million.

Antero noted that production in September has continued to grow to some 640MMcfe/d, including 11,500 barrels NGL and oil, which implies revenues for the current quarter could rise another 10-20% from the second quarter production revenues.

So what happens if I strip out all hedging income? In such a case, Antero is about to generate at least $800 million in annual revenues at the moment, while reporting operating earnings of around $200 million. This is far below reported GAAP numbers which are inflated by unsustainable hedging results. Note that growth is spectacular though, with production revenues only totaling $265 million in 2012.

So in essence, Antero is mostly a gas production company at the moment, producing 90% of sales from natural gas, although liquids production is increasing.

Attaching a $13 billion valuation seems a bit rich though, valuing the businesses at roughly 16 times trailing revenues and 65 times operating earnings. Note that earnings could see some more accretion from debt repayments, although proceeds will be used to repay the relatively inexpensive credit facility of $960 million, while leaving expensive debt which carries rates of up to 9.375% intact. Risks from the offering include the geographic concentration of risk, exposure to natural gas prices and lack of current dividends.

I remain on the sidelines for now, closely watching the next earnings report in search for clues about production growth into 2014 and sustainable production levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.