Energy Prospectus

This is a good time to remind all of you that GAAP Net Income is a worthless number because the companies (like AR) that have a lot of their production hedged are required by GAAP to "mark-to-market" their hedges. These rules (thanks to the collapse of Enron) are extremely confusing to most investors and they cause ridiculous quarter to quarter net income swings during periods of big moves in oil & gas prices. For AR, just remember that they have 100% of their 2018 and 2019 natural gas production hedged at $3.50/MMBtu. < This is VERY GOOD.
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That said, I was a bit disappointed in AR's Q2 results.

Second Quarter 2018 Highlights:
• Net daily gas equivalent production averaged a record 2,520 MMcfe/d (27% liquids), a 15% increase over the prior year period and a 6% increase sequentially < Compares to my forecast of 2,559 MMcfe/day.
• Liquids production averaged 113,581 Bbl/d, an 11% increase over the prior year period and a 10% increase sequentially, and contributed 38% of total product revenue before hedging
• Realized natural gas price averaged $2.83 per Mcf, a $0.03 premium to the NYMEX Henry Hub natural gas price before hedging
• Realized natural gas equivalent price averaged $3.35 per Mcfe before hedges, driven by a $0.52 per Mcfe uplift from liquids production
• Realized natural gas equivalent price averaged $3.77 per Mcfe after hedges
• GAAP net loss was reported at $136 million, or $(0.43) per diluted share, non-GAAP adjusted net income at $6 million, or $0.02 per diluted share, and non-GAAP Stand-Alone adjusted net loss at $2 million. < Adjusted net income compares to my forecast of $16.8 million.
• Reported Adjusted EBITDAX of $405 million and Stand-Alone Adjusted EBITDAX of $335 million, a 26% and 25% increase over the prior year period, respectively
• Stand-Alone Net Debt to trailing twelve months Stand-Alone Adjusted EBITDAX was 2.6x at quarter-end
• Drilled longest lateral in West Virginia history at 15,100 lateral feet
• Antero targeted 2018 and 2019 natural gas production is 100% hedged at $3.50 per MMBtu

Commenting on the quarter, Paul Rady, Chairman and CEO said, "We have made significant progress towards achieving our financial and operating objectives during the first half of 2018. Our focus on operations execution resulted in meaningful efficiency gains during the first half of the year. This has positioned us to reduce the number of completion crews that we plan to operate in the field during the remainder of the year, while production growth of 20% and capital spending guidance remain on target. We continue to execute on our long-term 5-year plan in which we expect attractive production growth while generating significant free cash flow."

I am lowering my valuation of AR by $2.00 to $28.00/share. Q2 results were slightly disappointing, but nothing significant. Some logistical issues that should be resolved by Q4. They say they are on-track for 20% YOY production growth that is fully funded by cash flow from operations.

Aaron Bilkoski at TD Securities is the only Wall Street Gang member to update his forecast/valuation model for Reuters. He rates AR a BUY with a $25.00 price target.

When we update our profile later this month, I will take a harder look.

My take on all of our gassers (AR, RRC and GPOR) is that they won't get much "love" until after Labor Day when gas prices should begin the ramp up into year-end.