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Morningstar | Raising FVE for Antero on Stronger Outlook for NGLs

Antero Resources is heavily exposed to the prices of natural gas liquids, which account for 25% of its production and 34% of its hydrocarbon sales revenue. In the first quarter, Antero produced 34 thousand barrels per day of ethane and 63 mbbl/d of C3+ NGLs, making it is the largest domestic producer. And it received an average price of $26.85 for these products, putting it ahead of its peers on pricing as well (our coverage reported an average of $25.43/bbl in the same period, with other large producers Range, Anadarko, and EOG receiving $21.85, $24.95/bbl, and $24.46 respectively).

As petroleum products are effective NGL substitutes, the recent run-up in global crude prices also buoys our near-term outlook for NGLs. And in light of our latest NGL price forecasts, we think Antero is better off in the long run as well. We think the firm can fully capture the benefit from improving basis differentials that should offset the impact of declining benchmark prices for C3+ NGLs. After incorporating these updates, our fair value estimate has increased to $21 per share.

More specifically, we now expect midcycle (2022) prices for ethane at Mont Belvieu to be essentially flat at current levels (despite lower crude prices--our midcycle forecast for West Texas Intermediate crude is $55/bbl). This will be driven by incremental demand from ethylene crackers, including Shell’s 105 mbbl/d facility slated for service in 2021 (for which Antero is an anchor supplier). And due to strengthening differentials, realized prices for Antero should increase by a wider margin (up 24% at midcycle).

On the other hand, we now expect C3+ NGL prices at Mont Belvieu to decline by 2022 (owing to our bearish long-term views on crude). But Antero is relatively insulated, as narrowing differentials to Mont Belvieu should result in a net benefit – we project the firm's price realizations for C3+ NGLs will reach $40/bbl at midcycle. That equates to a discount of 28% relative to midcycle WTI, which is consistent with long-term guidance from management. The improvement in differentials will follow the start-up of Mariner East 2 and subsequent expansions, which will reduce or eliminate transport by rail and provide easy access to premium overseas markets (via Marcus Hook). Antero is an anchor shipper on Mariner East 2, with a commitment of 51.5 mbbl/d.