idea for the board - Antero Resources (AR)
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. |
