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Morningstar | Restoring Antero FVE to $12 After Incorporating Simplification Transaction

We are restoring our $12 fair value estimate for Antero Resources after incorporating the forthcoming simplification transaction relating to the Antero Midstream subsidiary, which will be treated as an equity investment going forward, instead of being consolidated on the parent's financial statements.

This update also includes the company's fourth-quarter financial and operating results. Production rocketed to 3,213 million cubic feet of equivalent per day in the fourth quarter, which was 18% higher sequentially and 37% higher year over year. Even if the prior period had not been affected by trucking constraints, sequential growth still would have been 14%. However, this growth was telegraphed by the company (full-year volumes were merely consistent with guidance at 2,709 mmcfe/d).

Looking to 2019, the firm plans to spend $1,300 million-$1,450 million on drilling and completions, which is about 20% below the 2018 level. At the midpoint of guidance, 2019  production will average 3.15-3.25 billion cubic feet equivalent per day (up 18% year over year). The longer-term plan will vary with commodity prices, but volume growth over the next five years should range from 10% to 15% per year on average. Our forecasts are more closely aligned with the lower estimate, based on our commodity outlook (with natural gas at $2.80-$3.00 per thousand cubic feet and crude ranging at $55-$56 a barrel). At the current stock price, we think the market is overreacting to Antero's above-average unit costs and overlooking the benefit of its exposure to strengthening natural gas liquids prices as well as its record for premium natural gas pricing.