Energy Prospectus

First Quarter 2018 Highlights:
•Net daily gas equivalent production averaged a record 2,376 MMcfe/d (26% liquids), an 11% increase over the prior year period < This compares to my forecast of 2,350 MMcfe/day, but the percentage of liquids is less.
•Realized natural gas price averaged $3.14 per Mcf, a $0.14 per Mcf premium to the NYMEX natural gas price, before hedging
•Liquids production averaged 102,798 Bbl/d, a 4% increase over the prior year period, and contributed 35% of total product revenues before hedging
•Realized combined natural gas equivalent price of $3.56 per Mcfe before hedges, driven by a $0.42 per Mcfe uplift from liquids production
•Realized natural gas equivalent price of $4.04 per Mcfe after hedges
•Net income of $15 million, or $0.05 per diluted share, non-GAAP adjusted net income of $141 million, or $0.44 per diluted share, and non-GAAP Stand-Alone adjusted net income of $136 million < Adjusted Net Income compares to my forecast of $105.5 million.
•Adjusted EBITDAX of $551 million and Stand-Alone adjusted EBITDAX of $488 million, a 51% and 52% increase over the prior year period, respectively
•Stand-Alone net debt to trailing twelve months adjusted EBITDAX declined to 2.5x
•100% hedged on targeted 2018 and 2019 natural gas production at $3.50 per MMBtu

Commenting on the quarter, Paul Rady, Chairman and CEO said, "We are off to a strong start in 2018 with record first quarter results that delivered strong cash flow growth during the quarter. This included a net marketing gain, and reduced leverage from year-end levels. We continued to achieve strong operational execution with fewer drilling days per well and higher completion stages per day during the quarter than forecast. Furthermore, the ongoing liquids focus in the Marcellus and strong production performance in the Utica Shale during the quarter boosted results. We continue to execute on the plan we laid out at the beginning of the year targeting strong cash flow generation and debt reduction over the next several years."

Per AR:
"The sequential decline in liquids production from the fourth quarter of 2017 was a result of the impact of winter weather and downtime associated with processing plants."

"Antero's average realized natural gas price before hedging was $3.14 per Mcf, a $0.14 per Mcf premium to the average NYMEX price during the period. Including hedges, Antero's average realized natural gas price was $3.85 per Mcf, an $0.85 premium to the NYMEX average price, reflecting the realization of a cash settled natural gas hedge gain of $111 million or $0.71 per Mcf. Based on current strip prices, Antero's full year realized natural gas prices are trending toward the high end of its guidance range of a $0.00 to $0.05 per Mcf premium to NYMEX before hedges."

"Antero's estimated natural gas production for the last nine months of 2018 at the midpoint of guidance is fully hedged at an average index price of $3.47 per MMBtu. The Company's target natural gas production for 2019 is also fully hedged at an average index price of $3.50 per MMBtu. In total, Antero has hedged 2.6 Tcfe of future natural gas equivalent production using fixed price swaps covering the period from April 1, 2018, through December 31, 2023, at an average index price of $3.38 per MMBtu. As of March 31, 2018, the Company's estimated fair value of commodity derivative instruments was $1.2 billion."

Notably they have 2 12 well pads being placed on production in April that will yield estimated gross 90 day streams of NGLs of over 20,000 bels/day and 350-400 million cf of gas per day. That should turn some heads when the second quarter is reported!

AR's cash flow from operations before changes in current assets and liabilities was $485.46 million for the first quarter or $1.53/share. That compares to First Call CFPS estimate of $1.22 for the first quarter.

For the year, AR's operating cash flow per share s/b approximately $6.00.

The company's capital program for this year is $1.45 Billion, so they are clearly funding their production growth (forecast at 20% YOY) with cash flow from operations.

A company with this rate of production growth and this much running room s/b trading at a lot higher multiple of operating cash flow.
Here is what I think weighs on the share price:
> Wall Street's overall negative view of the gassers.
> AR's strong results depend quite a bit on their outstanding hedge position. Investors wonder how the company will do when the hedges expire. AR has over 100% of their gas hedges at ~$3.50 thru 2019 and they are fairly well hedge beyond 2019.
> EIA keeps telling the market that natural gas supply exceeds demand, but it never shows up in the weekly storage reports. My take is that EIA is grossly underestimating demand.

I have updated my forecast/valuation model for AR and it will be posted to the EPG website later today.

My valuation remains at $29.00/share, but there is definitely upside to that number because AR is generating strong cash flow from operations and they appear to be on-track for at least 20% year-over-year production growth. If you listen to their Q1 conference call, I think you will get a better feel for this company's potential.

First Call's target price is $24.75.

All of our "gassers" have been and probably will remain out of favor with the Wall Street Gang. I'm sure their clients are not keen on hearing about the potential of natural gas at this time of year. Just remember that the "herd" can change direction quite quickly. EIA keeps telling us that we have a surplus of natural gas, but gas in storage keeps falling. Based on what EIA has been telling the market, storage levels should be bursting.

When I take 6 times 2017-19 cash flow per share I get 35.34 not 29. What’s up with that?

Put your curser on the valuation and you will see that I subtract the big $750 million cash that they got from the derivative monetization in Q3 2017. I try to exclude one time stuff like that in the valuations.

IMO we can easily justify a much higher valuation of 8X to 10X CFPS for AR. Show me another upstream company with a strong balance sheet, 20% annual production growth, generating FREE CASH FLOW and lots of running room.

The Wall Street Gang is valuing our Permian Basin companies at 8X to 10X operating CFPS. Does it matter that much where the money comes from?

RSPP recently sold to CXO for over 9X CFPS.

Sorry. The cursor thing doesn’t work on my IPad. Don’t get me wrong, I’m all in on AR and have a long view. They are top notch and eventually cash flow per share and reduced leverage will get the respect it deserves for this one.

Appreciate your prompt attention to these releases.