Antero Resources: Cash Flow Growth At A Rate Investors Love

Summary

Stronger selling prices has led to far more cash flow growth than expected.

That cash has reduced debt more than expected as well.

Leverage ratios have improved tremendously as a result.

This is a shock to the market after years of steadily lower natural gas prices.

The recovery is likely to continue for a while longer.

This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »

onurdongel/E+ via Getty Images Antero Resources ( AR ) like much of the industry did not plan on producing a lot more net to the company. In fact, growth in the future will likely slow from the past now that the company is far larger. But cash flow growth and earnings before mark-to-market losses of hedges is growing far better than anyone anticipated. The strong commodity prices are enabling this natural gas producer to post results that no one saw coming before the current fiscal year. Since the industry is not rapidly increasing production, there will likely be more strong quarters of earnings ahead that will continue to please the market and investors. Source: Antero Resources Third Quarter 2021, Earnings Slide Presentation.

The fiscal year began with extra cash earned during the “big freeze” and continued with stronger natural gas pricing during a fairly hot summer. Now natural gas prices have remained stronger than they have for years. So a very good fourth quarter is likely to be in store for shareholders to close on a big cash flow year that no one saw coming.

The EBITDAX comparison shown above is very telling. After years of steadily lower natural gas pricing, the industry finally has some years of very profitable prices. Furthermore, there does not seem to be a rush to invest in the industry as there was in the past. So those strong prices are likely to continue.

The other change helping to maintain the prices is the ability of North America to export natural gas and related products to a very strong world natural gas market. The ability in the past either did not exist or was severely limited by a lack of facilities. Those facilities now appear to be rapidly expanding to handle more export business in the future. So the natural gas cycle may change somewhat to match the price of natural gas throughout the world rather than adjust to an oversupply in North America. Source: Antero Resources November 2021, Corporate Presentation.

Management has curtailed the hedging program in the face of continued strong commodity prices. That is a rather bullish statement about the future of the industry (even as the coronavirus causes concern from time to time).

For the company, the increasing prices of the commodities sold has meant an upgrade to the debt rating of the company debt. The company debt still has a speculative rating. But that rating is inching ever closer to a long-time management goal of investment grade.

More than likely the levels of debt will have to decline further because the industry is cyclical and it’s important to have decent debt ratios when market prices of products sold are weak. Clearly the strong results of the current fiscal year jump-started the debt reduction process. Source: Antero Resources Third Quarter 2021, Earnings Press Release.

The company clearly made more money with the natural gas sold than do many in the industry. It is just as clear that the hedging did cost the company some excellent market pricing. However, management after hedging still sold the natural gas for a price that many in the industry would have loved to report as well.

Should pricing remain strong, there are some that would question the hedging strategy at the current time. However, all one has to do is remember that no one saw the challenges of fiscal year 2020 all that far ahead of time. In the eyes of some, that justifies continuing to hedge because this industry will likely remain a low visibility industry. Source: Antero Resources Third Quarter 2021, Earnings Slide Presentation.

The superior pricing is due to the ability to sell natural gas in more profitable markets. The obvious pricing results has just led competitor EQT ( EQT ) to announce a strategy to ship natural gas towards the more profitable Midwest markets where this company already enjoys superior prices. Naturally there is some extra shipping flexibility as well. But it is clear that the company has designed a strategy that will allow for above average natural […]

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