Morningstar | Sensing Further Upside for Gas Prices, Antero Restructures Hedge Portfolio
We have reduced our fair value estimate to $14 per share for Antero Resources after refreshing our outlook for short-term commodity prices. To be clear, there is no change to our terminal price forecasts of $55 per barrel for West Texas Intermediate crude and $3/bbl for natural gas. However, our methodology incorporates strip prices for the first three forecast years, and the steep dip in crude prices since our last update is enough to dampen our valuation. The firm has a relatively high exposure given its leverage to natural gas liquids, which compete with crude products and make up about 30% of Antero's production.In contrast, natural gas prices have strongly rallied over the same period. Ostensibly this a boon for producers, including Antero. But the firm will see very little benefit, given its comprehensive hedge portfolio (it had already locked in prices for 100% of its expected 2019 production, with a substantial portion of subsequent volumes protected as well). Therefore, there is no offsetting impact on our valuation.
Management expects the surge in natural gas pricing to continue, given current storage levels (which are much lower than they typically are at the onset of the winter withdrawal period). As such, it has restructured a portion of its 2019 hedges, replacing swaps with collars. Ceiling prices from these instruments range from $3.31-$3.54 per thousand cubic feet, enabling the company to participate if prices exceed those levels. As it has also added downside exposure with lower floors, the restructuring will generate $235 million in cash (thus, a stronger balance sheet is a side benefit).
Antero Resources is an oil and natural gas company engaged in the exploration, development and production of natural gas, natural gas liquids (NGLs), and oil properties. The company focuses on unconventional reservoirs, which can generally be characterized as fractured shale formations. The company's drilling operations are focused in the Marcellus Shale and Utica Shale of the Appalachian Basin. The company's industry segments are: the exploration, development, and production of natural gas, NGLs, and oil; marketing of excess firm transportation capacity; and the gathering and processing of natural gas. All of the company's operations are conducted in the United States.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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