Antero Resources Q2 Results

[dan_s]

I should not admit this since none of you noticed it, but I found a major screw-up in my forecast model for Antero while I was updating it for Q2 results. The good news is that when I fixed it my valuation went up.

Antero's 2nd quarter financial results are a perfect example of why you need to ignore "reported EPS" and focus on Operating Cash Flow Per Share. GAAP accounting rules for mark-to-mark adjustments on hedges are extremely misleading and IMO ridiculous, especially during periods of significant changes in commodity prices.

My valuation for AR goes up $2.10/share to $39.50/share, which compares to First Call's price target of $33.04.

Antero has more than 100% of their natural gas production hedged at good prices, so the cash settlements on those hedges results in a very high "realized price" for their gas. In the 2nd quarter their realized price for gas was $4.31/mcf. A lot of their gas also has a high btu rating, so they get a premium for it anyway. Antero's production mix is 74.4% natural gas, 23.8% NGLs and only 1.8% crude oil. So, the daily movement of oil prices has almost no impact on their revenues.

Antero's recent acquisition from SWN is a "Game Changer" in my opinion. We will see the first big impact of it in their Q4 results.

Of the three "gassers" in the Sweet 16 (AR, GPOR and RRC), Antero is the "safe bet" because so much of their production is hedged at very good prices. The company is now on-track to generate over $1.2 Billion of cash flow from operations this year and they have 20% annual production growth locked in for 2016 and 2017.

[dan_s]

On 8-3-2016 Stifel upgraded AR to a BUY with a $33 price target.

[jb2257]

I'm surprised that AM did not get a bump up like AR.

[dan_s]

Maybe because AM has a low dividend yield compared to other midstream MLPs, but AM has a heck of a lot more growth potential than its peer group. Take a look at AR's production growth. Most of that will go through AM.