Summary
The advantage of the company strategy is becoming apparent to the market.
The breakeven price needed for natural gas is a function of prices received for other products produced.
In the commodity business there are usually several strategies that will be competitively superior over time at different points of the business cycle.
High costs or low costs are hard to determine when there is a production stream consisting of multiple significant products.
Extra costs such as transportation are more than justified if the sales prices more than offset the extra costs.
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 (NYSE: AR ) has long been criticized in some quarters for having high costs. These high costs resulted in an unattractive breakeven point for some investors when reviewing the natural gas prices needed to breakeven. However, the benefits of the company strategy are now becoming apparent as the price needed to breakeven on the sale of natural gas from the production stream is extremely low. This highlights the point that good strategies generally rotate to the top in a commodity industry like this one. Therefore, which of the top profitability strategies to execute is a management choice. In any event shareholders will now be benefitting from the choices management made. Natural Gas Breakeven Comparison In the past, a conservative presentation often meant to assume relatively low liquids pricing “just in case” to present a “worst case” scenario to the public. After all, it might happen in this very low visibility industry.
What actually happened is shown by management on the chart. The breakeven is far lower than the original assumptions would have suggested because the liquids pricing is much stronger than assumed. Note that no change in overall costs was needed for this to happen. So, the company was not a high-cost producer in the past that transitioned into one of the lowest cost producers in the industry (faster than any company ever has before).
As has often been the case with this company, the higher costs of production have enabled a higher selling price due to the more valuable production mix. Should that not be the case, then management has the option to drill more dry gas wells in the future to alter the company production mix. Shareholders have long benefitted from this flexibility because sometimes dry gas producers win in the profitability race and sometimes, they lose. This company attempts to win under both scenarios. A History Of The Premium Pricing Received Compared To Marcellus Pricing The last part is a marketing strategy that has consistently obtained better pricing for the natural gas produced than has been the case for neighboring competitors. As is demonstrated in the chart above, the difference in the price for natural gas is rather large at the current time. This is a strategy that will help a company seen by the market as having higher costs even when the liquids production is not as profitable as management has hoped.
Maybe at some point the competitors will have a similar strategy that would make the premium shown above disappear. But at the current time, such a strategy is not in evidence. It takes time to develop a premium price strategy because contracting the midstream capacity needed to execute a premium pricing strategy often takes time. Tellurian: Fully Integrated Pure-Play LNG The other industry change that is not getting as much notice is that both integrated (as Tellurian (NYSE: TELL ) shows above) and standalone companies are rapidly adding capacity to export natural gas to more lucrative markets.
Therefore, investors should expect that North America will have less of an excess supply in the future. Much of the natural gas produced is seen as low cost. The fact that much of the world pays more for natural gas than we currently do points to a long-term downside protection for the price of natural gas in the future.
That cycle change likely means that the low prices of the downcycle will gradually improve over time because much of the world is used to higher prices than has been the case in North America. So, after a long time of surplus due to the rapid growth of the unconventional business, it now appears that the future will be very different from market expectations at that it is far brighter. Natural Gas Fundamentals Are Strong It does not take much of […]
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