Antero Resources: No Crisis Here

Summary

• Debt was repurchased at a discount.
• The borrowing base increased.
• Shares were repurchased.
• The hedging program helped to maintain adequate cash flow.
• There is plenty of borrowing room to repurchase more debt at a discount.
• This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Get started today »

Antero Resources (NYSE:AR) just blew away any worries Mr. Market had about a crisis. For a while, there were all kinds of worries about rolling over debt when it came due. Never mind that the debt was not due until the end of 2021. That is an eternity in the commodity world. Debt due then was nothing to worry about now. Then, there was cash flow worries, high cost worries, counterparty worries, and in-general viability worries.

Somebody forgot to tell management there was even a problem because this company has been conducting business as usual with a few modifications in the extraordinary situation. The result is that the company has been repurchasing debt at a discount and repurchasing stock at rock bottom prices. There has always been a saying that the market can stay "irrational longer than you can stay solvent". This management is hoping for a long period of irrationality. Then, it can repurchase gobs of stock for pennies on the dollar value and bonds at a discount with plenty of bank line left over.

Source: Antero Resources First Quarter 2020 10-Q

This fiscal year the changes in current assets and liabilities added a whole $7.725 million to cash flow. In the last fiscal year (2019), those same changes added about $109.065 million to cash flow. The 2019 cash flow also received a boost of roughly $40 million from the inclusion of Antero Midstream (AM) during the period. In the last fiscal year, cash provided by operating activities totaled $1 billion.

Clearly, the hedging program has the company in a position to possibly attain that cash flow amount in the current year. That help would happen without the cash received from Antero Midstream in the past or the cash received from the buyout of the midstream by its general partner. This time around, Antero Resources appears poised to live within whatever cash flow is generated by the corporation itself plus the dividends received from Antero Midstream.

Hedging Benefits Yet Again

Much of the cash flow for the quarter came from the hedging program. That kept the latest commodity price dive from doing serious damage.

Source: Antero Resources First Quarter 2020 Earnings Press Release

As shown above, the hedging program clearly supplied the lion's share of cash flow for the quarter. This has happened before in the history of this company. Typically, the hedging program is a major source of profits both in good and bad times. Right now, those profits were needed. But those profits continue a long history of hedging profitability with this company.

For most companies, hedging is a "zero-sum" game. This is one of the very few companies that I follow where hedging has never been a zero-sum game. Instead, the hedges nearly always contribute to profits reported. Very few companies in any commodity industry can make that claim. That does make the hedging program a risk factor when calculating future profits. It also makes predicting future profits and cash flow tricky.

Other Progress

There was considerable misplaced concern about the ability of this company to meet the maturing debt challenges.

Source: Antero Resources First Quarter 2020 Earnings Press Release

If management saw a challenge, they certainly did not mention a challenge. Instead, management reported an increased lending base with the committed amount remaining the same. Very few companies can repurchase debt at any discount without repercussions from the lenders. The increase in the bank line has little practical meaning other than to send a message to the market that this misunderstood company is doing just fine. The bank commitments to loan remained the same even though the bank line increased.

Not only did management manage to report a gain on the debt. But the debt retired in this fashion now accrues interest at the lower rate on the bank line. For those worried about some debt ratios, the interest paid is about to decrease in the current fiscal year. Should the market stay irrational, there is plenty of room on the bank line commitment (to lend) to purchase some debt maturing later at a larger discount to materially help the debt ratios. This is exactly where management hopes Mr. Market stays irrational for a while.

The repurchase of common shares has to go down as "highway robbery". The common was below the bargain basement price. I am not sure any elevator at any department stores I know goes down to the level of that stock price. Clearly, repurchasing stock had to be a huge plus for shareholders. In short, this management has been spending money where that money offers the greatest returns by far and production grew in the first quarter.

Production Guidance

Despite cutting the capital budget again, management is maintaining production guidance for the year. Furthermore, management believes that storage facilities are sufficient to store some liquids should prices deteriorate to unacceptable levels. This gives management the option to store the liquids while waiting for a more favorable industry environment combined with the ability to realize the hedging profits. Cash flow at the end of this fiscal year could be very interesting if management is successful in this endeavor.

The costs of drilling and completing wells continue to drop. The weak industry conditions allowed those costs to drop ahead of schedule. This allows management to pursue a counter-cyclical production expansion policy while also generating free cash flow this year. Very few companies in the industry will be able to retire debt at a discount, grow production, and generate free cash flow. This management is, clearly, doing just fine with the current industry situation.

The Future

Very few managements can accomplish a small part of what is being done with this company. We are in uncharted territory and there is a way to go before we are past all the coronavirus challenges. But given all the worries caused by the "shelter in place" across the nation. This company has really performed a near miracle that few managements can emulate.

Taking advantage of a market panic the way this management has is something that is learned at business school but very seldom executed in practice. Part of the problem is that usually, companies with discounted debt are in so much financial trouble that the banks will generally limit the debt repurchases. Clearly, that is not the case here (yet).

This was a healthy company rated just below investment grade at the major ratings agencies before the coronavirus demand destruction and the oil price war. This company appears to be exiting the current situation in better shape than when the whole thing began. Any company that can improve its situation during a crisis deserves consideration by investors. Once things return to normal, this management will probably outperform significantly.

The only reason the company reported a loss was the decision by management to write down the goodwill part of the previous gain on investment from the general partner buyout of Antero Midstream. Additionally, Antero Midstream also reported a loss that Antero Resources reported as its share of an equity loss. There was also an impairment of oil and gas properties. None of these amounts involved any cash. Without those non-cash items, this company would have been profitable in the first quarter.

More importantly, Antero Midstream has not reported any financially significant damage that would limit future profitability. Instead, all that happened was the share price declined. That is hardly anything to worry about for long-term shareholders. Instead, the current pessimism of the market is a great opportunity to pick up some shares of a well-managed company on the cheap.

Analyst’s Disclosure: I am/we are long AR AM. 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.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

Comments

[georgefelix75]

@Long Player What are your thoughts on the recent price action.....is there the possibility of a RS coming? If so, while it often can apply downward pressure it should in this case subside if the fundamentals come together. When it does the float will be greatly reduced and the possibility of a short squeeze is likely. Your thoughts?

[Long Player]

I think we are getting a bit high for a reverse split. However, a lot depends upon the management strategy.

[georgefelix75]

@Long Player I'm happy ENLC is doing well but surprised its about to catch AR. I hope we don't have two ships passing in the night here...

[Long Player]

coincidences happen all the time. We will just have to see what is going on long term first.

[cigarettebutts]

AR's NGL Outlook - May 2020
d1io3yog0oux5.cloudfront.net/...

Management remains bullish w/r/t NGL pricing.

[Frank the Frowner]

One slight problem to that outlook is AR's dependence on ET's Mariner pipeline. 2X is totally stalled right now in PA (not an "essential activity"), and given the political winds, the slightest hiccup, or more like another massive explosion like Revolution, could shut down the entire line. Where would AR be on NGL's, scrambling to get it down to the Gulf like all the other schlubs? Relying on ET to run a pipeline safely has not been a great bet.

[nyc3053 Australia]

Read this article once again, even better than the first time I read it! Good time to add more for all you longs and others considering AM and AR. May add some more AM next week, dripped for another 267 shares earlier this week. These investments could be life-changing as I've said before, patience is required, profit-taking especially after AR's big run-up is all part of the game and not really a great surprise. This company's management just has to continue to wash, rinse, and repeat.

[georgefelix75]

wash, rinse, and repeat but please don't dump another 28M shares. That imo is why they are underperforming the group and it was avoidable with better communication about what they were doing...

[Long Player]

Remember though that was AM and not AR.

[nyc3053 Australia]

This AM sale was also done for tax reasons only. Mssers. Rady and Warren had to do this, not because of fundamental changes in the companies fortunes. It would have been much smarter to do this last year when other company officers effected their share transactions at far higher prices, however, it was what it was and well explained by their IR officer in a document made available to us by a contributor, I believe georgefelix75. Still AM is rising quite steadily at this time. Long both AM and AR, may add more AR in the next little while, especially on a dip back below $3.

[cigarettebutts]

It is painful to see the pullback in AR stock but I sense management was aware of the volatility we'd see in gas prices over the near-term and so wisely hedged the great majority of its 2020 and 2021 production. The hedges in turn have placed them in a position to continue opportunistically repurchasing the common stock and 2021 - 2023 notes on weakness.

[Long Player]

It is extremely rare for banks to allow note repurchases (more than a tightly supervised limited amount) under any circumstances. Therefore that redetermination has to come down as a huge plus for this management. Now if somehow they can float a new issue and continue that way, they would definitely be in the catbird seat. But the way that things are going right now is just excellent and beyond what the market clearly feared.

[galicianova]

AR TANKED TODAY 15%

[Long Player]

AR is volatile. It trades on natural gas news and ethane news even though it is very well hedged for this fiscal year. That was also one of the reasons I went 50.50 and kept the overall position small.

[jonjung]

I like prospects for both AR and AM but the author should look more carefully at the operatinng costs......AR is one of the highest cost producers in the Marcellus compared to Cabot which is one of the lowest. Author's statement "This is one of the more cost effective operators out here" doesn't match date I have seen on costs. And you have to factor in the huge writeoff ($600 mil) for the botched water facility in 2019. Not a sign of effective mgt. The plus side is their very long history of hedging production profitably. That saved them in this corona virus mess. It is helpful if authors give a more balanced description of a company.....don't be just a cheerleader.

[Long Player]

You need to look again. I have several times provided the comparison by Peyto who has no skin in the game. AR has superior margins to COG. That does not happen with high costs. It does happen with incremental costs and you need to learn the difference. Incremental costs go away when that processing is not needed. High costs (like CRC for example) make for insufficient cash flow and hinder growth. None of that is happening here AND they have steadily paid long term debt lower as they have noted several times. The water facility is not for AR and you do not have to factor it in. You have a lot of basic misconceptions here. The superior margins are a clue you need a different analysis.

[Long Player]

You have to ask yourself why the industry in general would leave low cost dry gas in both the Utica Shale and the Marcellus for rich gas in both areas despite the higher cost. The reason is bigger margins. True high cost producers do not have larger margins. As Peyto points out both RRC and AR are efficient at what they do and PEYTO has been in the industry a long time as an industry insider.

[Frank the Frowner]

"AR has superior margins to COG"

Only when NGL allows it. But the Peyto thing you keep referring to needs to be taken to the ultimate conclusion, not chopped off at the "margin" line, which doesn't even exist in their presentation. Keep in mind COG is predominately dry gas:

COG - Sales $2.56 - costs $1.35 = $1.21 profit
AR - Sales $3.69 - costs $2.43 = $1.26 profit

(Petyo presentation dated 11/11/19, page 23, per mcfe)

A nickel?? And this was in a very good year for NGL, 2018. It should be noted that AR's costs have improved since then, due to management action that was very skillful, including re-doing the relationship with AM, preserving the dividend and keeping it covered as tight as possible, maximizing the benefit to AR without screwing AM stockholders (at least keeping them paid). There's a good story here, no need to embellish it with rubbish "facts".

[TDJr]

2021 bonds amount outstanding at 595 million. Going down! Great news!

[galicianova]

could someone walk me quickly through differences between AR and AM??=thanks!

[georgefelix75]

@galicianova AR is the producer and parent company. AM is the midstream that provides transport and processing for the production. To a certain degree you can think of them much like you might a joint venture but they are different companies with some of the same owners.

[galicianova]

both issue K-1? (i like K-1!) the articlae was thus concerned with the parent

[priapnoir]

ar pays no dividend. AM is a C-corp, pays dividends and issues a 1099 Div

[westelk]

No crisis here? Why is AR about to reverse split anywhere 1-5 to 1-20? Your cost basis per share is about the be blown to kingdom come.

[georgefelix75]

@jeffkad The reverse split was put to shareholders for a vote. So unless they voted for it.......even so doesn't mean it will happen.

[Frank the Frowner]

Cost basis per share . . . now, why in the heck would that make any difference? You'd still have the same cost basis in your same AR holdings, the size of the pie doesn't change.

[jeffkad]

George, think you meant this reply for westelk

[jeffkad]

Is it ok not to like this drop lol? Have to admit my confidence is fragile these days

[Long Player]

It is never thrilling to see a drop like that. But if you have done your homework, then part of that homework is a strategy "just in case". Noting that management just sold stock to pay the tax bill from last year should tell you that management did not see the drop coming either. That speaks volumes about what management thought should have happened. But there has been a lot of confusion as to why companies would go from "low cost" dry gas Marcellus to liquids rich "high cost" Marcellus and Utica Shale. Clearly margins were not in the discussion. Then you don't know high cost from incremental costs. (value added etc...)

[Long Player]

This company has made money in some very untraditional ways. The market does not value untraditional/unconventional very highly, yet the company did just fine profits wise even if those profits came in lumps. (Gain on sale of AM, Gain from AM simplification, gain from liquidating hedges periodically etc.....). Literally billions more from things other than operations.

[jeffkad]

Well, we had a price pop (AR and ng) likely associated with the Tetco explosion, and a quick drop back down once it was clear that flow was rerouted, so AR seems to have simply followed the futures. The AM stock sale didn't help, but would assume most large investors understood why that happened. IR confirmed that they couldn't wait any longer to sell, so just bad timing, and not an indication that CEO thought AR price has topped out for now. As for my "just in case strategy", I have none other than to sell and lose money lol (I just added a ton at Tuesdays peak). I believe in AR, but never fun to take a 15% hit right out of the gate. Hoping for some near term upside to keep me steady and anchored (hoping we don't fall into a long price plateau). in any event, thanks much LP for the reply. Truly appreciate your input and optimism.

[MATTPEAKOIL]

the only thing that matters is that they continue to lose money, with coverage and everything. Don't look at creative accounting, just see that your costs are greater than your billing, everything else is decorated

[Long Player]

Costs here are not greater than billing. This is one of the more cost effective operators out here. What you need to understand is why people moved en masse from the "low cost" dry Marcellus to the "high cost" liquids rich Marcellus and Utica Shale. Once you figure that one out, then maybe we can talk accounting. That is before you understand one of the top 5 hedging programs in the industry. You have a lot of homework to do.

[MATTPEAKOIL]

They have operating loss with realization prices at 2.89. I don't need to see more than that

[Long Player]

Then you need an accounting lesson yourself. They do not have operating losses at $2.89. Their breakeven is currently running about $.50 below that. Let's get the basics right first.

[Old Doc Retired]

I am familiar with The Appalachian Basin having been a producer back in the 1960 s.Sorry I retired in the 90's.Currently pipeline capacity for market outlet is a restriction in my opinion.I am considering investing in the immediate future.

[5tradez]

Anybody have the intel as to why CEO and CFO dumped a ton of AM?

[georgefelix75]

@5tradez The $64K question of the day......

[Frank the Frowner]

No response from IR yet, not that I expected any.

[georgefelix75]

Their IR pretty much sucks b***z! A good example is why you would even have to call given the appearance they “dumped” shares.

[priapnoir]

Curious as to what benefit AR gets when it buyback its shares...Wouldn't it be more profitable to use that money to buy even more of its debt at a discount?

[Long Player]

The assets behind the shares are tremendous and you are in effect picking up those assets for a small fraction of their value. I don't think they will spend a lot of money. But then again they did not need to. It was a bargain that was seldom seen because you had so many on the "high cost" bandwagon not looking at the superior margins or wondering why someone would go from "low cost" dry Marcellus to "high cost" Utica Shale.

[Philip Mause]

Several benefits - 1. earnings per share automatically go up, and 2. dividends require less cash outlay.

[georgefelix75]

@[e-mail] They obviously believe the share price will move higher. Buying back your own shares is no different than you or I buying the shares with the intent of selling them later at a higher price. So to answer your question I'd rather see them buy back shares at $1.57 and re-issue them down the road at $15-20 and use those proceeds to buy back debt at that time than buy debt today at 17% discount. I'm not a rocket scientist but my back of the napkin math tells me that's a much better use of capital.

[hotdumplings]

Honest question...What’s everyone’s exit strategy here? I’ve been long ever since 4 and added all the way down to 0.70...but now it’s that moment where it’s like now what?

[georgefelix75]

@hotdumplings Now is the time to sit tight and add to your position. When you bought at $4 and added at .70 I'm going to assume by your question that you were gambling. Now that the circumstances are a little more clear the downside risk longer term has abated somewhat. I think if you look at the historical stock price and the corresponding price of natural gas you can come to your own conclusion. Its not in single digits that's for sure unless the train goes off the tracks.

[Long Player]

You want to get familiar with the natural gas cycle and sell when things are heading towards the top. right now the rally is just beginning. To cite an old example, I remember John Templeton buying Ford back in the 1980's and two years later it had fallen from the 30's where he bought it (9.8% yield too) to the low teens with no dividend. When interviewed he said it was too cheap to sell. About 5 years or so after than he had a roughly500% profit and restored dividends. I had friends getting out on the way down (and sure it would go under!!) and others getting out on the way back up patting themselves on the back for breaking even or making a small profit. But good investors like Templeton set goals of when to sell and then decide if the story changed. here, there was never a problem, only a market that worried to absurd lengths about a decent company. But you would have had to have done your homework to know that.

[georgefelix75]

@Long Player Or had some pretty bright folks that were knowledgeable enough to do the homework and willing to share that with others in a very detailed and understandable way. Not in some Yahoo irrational nonsensible way. All that contributed to this did a great job! One of the best dissections of a complex situation I've read.

[TDJr]

May 1, 2020 Gas rig count down to 81 from 85. That is good news down about 5% in one week.

[Orr77]

Thanks, Long Player. It's a great hedge book, but it doesn't allow them to benefit much from a rise in gas prices, and they don't generate much cash to buy in more debt. I would guess COG has the best leverage to a rise in the price of gas.
I do hink you have to be generally more optimistic on gas prices now. So COG, EQT, RRC and AR should finally be buys on dips. Pretty good heat wave in the southwest now so maybe we get an early start to cooling season.

[georgefelix75]

@Orr77 Correct me if I'm wrong but they hedged X production in 2021 at $2.84 i believe but if demand is there what about increased production? That would be unhedged wouldn't it? As for 2022 only 25% hedged so that leaves a lot of wiggle room for what may develop to add higher hedges and/or gamble on spot price or both?

[Long Player]

There is absolutely no reason this one cannot participate. All you do is outdrill your hedges and you are in the game. COG is unlevered so no its not the best at all. RRC is the most levered and by far the most dangerous. RRC and EQT have decent hedging programs. Both EQT and here are decently hedged. You need to go back and see what they have done with hedging here because so far it has added $5 billion to profits. It is not a zero sum game for this company.

[Long Player]

The other thing is they have beaten the hedging assumptions in the past. You can bet they will do that in the future if the opportunity comes up.

[Jargon]

LP, where do you see the stock going with every $.50 increase in nat gas moving forward?

[Long Player]

A lot depends upon what you think is a reasonable price for natural gas. Just the gas price moving up does not do much unless the market believes that price will last for while. plus a significant amount of money comes from ethane sales. Despite all that, the stock price hit the floor even with the hedging program. I would guess that each $.10 moves the stock $1 but the other products will affect this also.

[powerbob]

AR’s hedges worked so well because gas was in a 4 year rolling contango. Not the case anymore. The sub $2.5 hedges in 22 is a disappointment. The 21 and 22 strip should rerate above $3. Both COG and RRC are open. Giddy up!

[Long Player]

Growing up COG and BP were in the papers for one disaster after another. If I remember correctly, BP had more than one refinery that blew up. Until that spill came, I never thought they would care. Similarly COG had a history that was forgettable. They have gone about a decade or so without those headlines (maybe 2 now). But when it comes to mediocre management like them forget it. The management that got that acreage is long gone and what succeeded them just does not cut it.

Given AR's hedging track record, you had better pay attention if they hedged. That $5 billion states they know what they are doing and could be a forecast.

[nyc3053 Australia]

Most likely done in order to get over the line on the bank redetermination (the 2022 hedges, the banks want to see an ongoing cash stream over a longer period I would imagine) besides, it was not for a large amount of the total production expected during that time if I'm not mistaken.

[Frank the Frowner]

Management says no, that's not why they added the relatively low 2022 hedging:

" . . . it wasn't bank driven, it was opportunity driven and we just saw prices moving I think during the time that we were watching and rooting for it to go up. It probably went from $2.32 to $2.48. So we saw the opening there to add more hedges. We haven't hedged that level before."

No, they haven't, their costs haven't been that much below that level. Surprising they would add hedges in that range. Even CNX, with much lower costs, hedges well above those numbers, in the high $2's.

[AEGISBMD]

Reverse spilt gonna kill us again.

[Long Player]

Right now a reverse split is not needed. But it may need to be there "just in case".

[georgefelix75]

Its on their proxy for a vote.....it may not pass shareholders approval.

[JayinOK]

The only reason that it was there was to prevent a possible delisting when AR was sub $1. We’re well above that level now, so it’s not needed.

[James Hanshaw]

Good article. I too am long AR and AM. I did not include them in a recent article of my own but the potential I mention in there applies to them too; seekingalpha.com/...