- We are bombarded with news about cost price inflation and the Fed's coming attempts to stifle it.
- Antero Resources, AR, gives us other ways to beat that inflation - by outflating it with investment in AR shares.
- In the 2 years since I bought into AR, my investment is up over 1,300%. US inflation is up around 8.5%.
- I see many reasons why AR will be up another 75% by year-end. The FOMC forecast for US year-end inflation is 4.3%.
- One reason being Europe's natural gas prices recently hitting a high equivalent to oil prices at $600 per barrel.
Buying into Antero Resources (NYSE:AR) - as I did in April 2020 - during the pandemic crash entailed risk but the price then was so low and the potential so high for one of the best managed companies among US natural gas producers that I went ahead. I bought in at $2.43. At the time I am writing this the last closing price was $35.20 - a gain of 1348%.
I do not see a repeat of that in the next 2 years but AR's price today is still much lower than its peak price of $61.63 in June 2014, and AR is in better shape now than then, plus opportunities for growth are much greater.
Nor can those opportunities be spoiled by the Fed raising interest rates to control inflation because geopolitical conditions outside the Fed's control dictate otherwise.
I shall talk a bit more about those conditions later but first a bit more on AR.
Antero Resources (AR)
AR is one of the largest natural gas and natural gas liquids producers in the US with a large portfolio of repeatable, low cost, liquids-rich drilling opportunities in two of the premier North American shale plays, the Marcellus and the Utica shales. It is a major shareholder in Antero Midstream (AM) with a holding of 29%.
That is of vital importance because AM gives it the transportation pipelines out to LNG export hubs and US LNG exports are set to grow dramatically as many EU countries wean themselves off Russian supplied natural gas. Putin's invasion of Ukraine has been a rude awakening for many countries, like Germany, who trusted him to the point that Russia accounts for 25 to 40% of gas supplies.
Even prior to that invasion world demand and insufficient supply had driven natural gas prices outside the US much higher than those inside, but now a combination of those things has driven US NYMEX prices to long term highs:
That is benefiting AR, and the trend up will continue as AR leaves its past hedging policy. It is also interesting to note that the NYMEX price is higher today than the peak in 2014 yet AR's price is 43% lower than then.
Those wanting details of AR's financial position can find them in this recently published report.
Points I like most are the debt reduction program, share buybacks and capital expenditure plans that ensure future growth. A cursory look at the numbers of two other big producers EQT Corp (EQT) and Range Resources (RRC) shows AR to be the best.
However, rather than focus on published results I will highlight where the future growth opportunities come from...
Demand for natural gas has been growing in many parts of the world for several years. Much of it is supplied in LNG form.
Japan and South Korea. Both are big importers of LNG, Japan being the world's largest in 2021. China might overtake it this year.
China and India These two countries rank highly too and unlike countries in the west they have continued to invest in new power generation. Much of that has been coal fired and they are now trying to clean up environmentally by converting to gas, adding to demand for imported LNG as they have little gas of their own. The Chinese Government-owned entity, Sinopec, sees domestic natural gas demand rising to 395 billion cubic meters in 2022, up from an estimated 360 billion cubic meters in 2021, for another year of ~10% consumption growth. Sinopec sees domestic production growing 10 billion cubic meters annually, suggesting the country will rely on imports to supply ~2/3rds of demand growth.
EU and UK leaders have dug their citizens into an energy shortage hole.
The UK stopped maintaining gas storage facilities because wind would suffice and now it has a shortage of both.
That failure to plan properly has left the EU dependent on Russia for up to 40% of its gas and now Putin's war on Ukraine has led to a panic to reduce that dependence providing opportunities for US LNG companies. Likewise, the UK that is reliant for nearly 50% of its gas from the very mature UK Continental Shelf.
European gas prices increased threefold in 2021, reaching levels five times higher than average fourth-quarter 2020 prices. The war in Ukraine has worsened things as this chart shows.
I found this statement on Quartz: "The price of natural gas in Europe hit an all-time high on March 7, briefly touching €345 per megawatt-hour. "That's equivalent, in terms of British thermal units of energy, to oil prices of $600 per barrel. Late in the day, the price had settled back to about €190, still a record".
Yet, despite that huge jump, there has been relatively little impact on European gas demand, showing the limits to the price elasticity of European gas demand and the limits to fuel switching potential in the power sector.
With no pipelines to new sources, it will have to come in LNG form and Germany is allocating €3bn ($3.15bn) to acquire a fleet of FSRUs to build its LNG import capacity as quickly as possible.
That begs an answer to the question - where will the supply come from?
Much talk is about China's Covid lockdown reducing demand there and some cargoes have been diverted to Europe. That is not sufficient and will end when China picks up again.
Giant natural gas producers Qatar and Australia will supply some, and some will come from the US. Qatar may have limited uncommitted amounts to supply to Europe due to the start of a number of new deals with Asian buyers at the start of this year.
Also the US and some other supply countries have had constraints on investments in new production by blinkered ESG targets and shareholders - especially in the US - not wanting a repeat of the past boom that led to the bust of many oil and gas drilling companies. The Biden administration added to animosity towards drilling and, although it has now U-turned, companies will not because their 2022 capital expenditure budgets were fixed in 2021, plus they want to keep shareholders happy.
The United States has around 100 million tons of LNG export capacity, with another 20 million tons under construction and expected to come online by 2025. There are also a dozen or so projects that have export approvals by the Department of Energy and are permitted by the Federal Energy Regulatory Commission. These projects await the final touches to start construction: an equity investor, a financier, or credit-worthy customers (whose presence can help attract investors or finance). Combined, their export capacity is 187 million tons.
Most LNG suppliers have existing capacity committed meaning Europe will have to compete with the other big importing countries for a share of uncommitted existing and future supplies from plants in the construction and planning stages.
In short - it's a suppliers market and that brings me back to...
Antero Resources as a "Top Stock for A High-Inflation Environment"
Many companies in the US have supply constraints due to lack of pipelines to take the gas away. Antero Resources has increasing gas supply coming on stream and the pipelines to take it to LNG export terminals.
And those high prices in Europe mean much higher prices in future for US natural gas prices that until now have depended on US weather forecasts. Thus, gas is part of the current high-inflation environment.
US inflation in March was 8.5%. I suspect that is the peak or is close to a peak.
I will not hazard a guess on where natural gas prices might go up to but I will with AR's share price.
If we go back to that peak price of $61.63 in June of 2014, and put the 7-year cycle theory into practice we would have seen another peak around June 2021. The pandemic lost year of 2020 pushed that out to this year. I see no reason why we will not equal that former price perhaps in June, and certainly by year end, meaning a gain of 75%. That crushes the Fed's measure of inflation.
Risks. The biggest one is another world war and that would destroy most investment opportunities. Hopefully that does not happen in which case the old age boom and bust scenario will play out when too much supply again comes on stream.
Given the time lag to get to that point from here I believe AR is both a safe and a good bet for the foreseeable future and the time to buy is now!
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AR either through stock ownership, options, or other derivatives. 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.
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