Energy Prospectus

Selling assets and buying back debt at a discount to shore up their balance sheet.

DENVER, Dec. 9, 2019 /PRNewswire/ -- Antero Resources Corporation (NYSE: AR) ("Antero Resources" or the "Company") today announced that it has entered into agreements expected to reduce its gathering, processing and transportation costs by approximately $350 million over the next four years. The agreements include a growth incentive fee program with Antero Midstream Corporation ("Antero Midstream" or "AM") that aligns with the Company's current 8% to 10% compound annual production growth plan through 2021 and additional agreements with other third party midstream providers. Antero Resources also announced commencement of an asset sale program targeting $750 million to $1 billion in proceeds to be completed in 2020. The asset sale program was initiated with a $100 million sale of AM shares to Antero Midstream.

Highlights Include:

> $350 million of midstream fee reductions expected between 2020 and 2023

> Announced asset sale program target of $750 million to $1 billion to be completed in 2020 to reduce debt

> Repurchased $215 million notional amount of unsecured notes due in 2021 and 2022 during the fourth quarter of 2019 at a 17% weighted average discount

> As a result of the midstream fee reductions and the previously announced well and operating cost savings, Antero expects a $0.15 per Mcfe reduction in its 2020 all-in cash operating costs as compared to 2019

> Revised 2020 free cash flow target to positive free cash flow from a previous forecast outspend of $100 to $150 million, driven by the announced reductions in cost structure and improved NGL pricing outlook

Antero Midstream (AM) says that they will have enough DCF coverage to maintain their dividend at $0.3075/quarter or $1.23/year. That puts annual yield at more than 24% based on today's share price. AM is a C-Corp.

Read details here: https://finance.yahoo.com/news/antero-m ... 00164.html

Based on AM's preliminary capex budget for 2020, they should generate over $300 million of free cash flow from operations next year.

Updating my forecast for AR. Since AR has ~90% of their 2020 natural gas hedged at $2.87, it is the price of NGLs that will have the most impact on AR's cash flow from operations next year.

AR is the largest producer of NGLs; selling 171,515 barrels of NGLs per day in Q3 2019.
In 2018 their realized NGL price was $26.48/bbl. In Q3 2019 it was just $18.17/bbl.

NGL prices should rebound. I am assuming an average realized NGL price of $22.00/bbl in 2020 for my model.

AR only sold 9,408 barrels of oil in Q3; less than 1.7% of their total production. Oil price movement have almost no impact on my forecast for AR.

AR is trading today at less than 1X operating cash flow per day, which is insane for a company that has lots of running room. They should be able to fund over 8% annual production growth with cash flow from operations for several more years. The stock valuation in the last edition of The View From Houston is reasonable.

Any thoughts on what the impact on Antero Midstream?
I have looked at the analysis a couple of times but haven’t been able to grasp what’s in it for AM. Looks like AR may be setting up to renegotiate their contracts with AM to more favorable terms while they control and then sell their stake to the public. I would appreciate any analysis or commentary on this deal. A bit like what Devon did with Enlink.

AM's future growth is heavily dependent on the growth of AR because AM's revenues are based on the volumes running through their systems. So...AM is OK with a lower fee agreement for gathering and processing if AR keeps growing. Plus, AM is buying back shares which reduces the total cash they have to payout for dividends and lowers the denominator for EPS calculations.

The biggest positive in the press release is that AM seems committed to sticking with their current quarterly dividend. Based on my forecast and the company's comments, they have more than enough DCF to cover the current dividend going forward.

AR's stake in AM is a "liquid asset", which could be converted to cash if they need to do it, but it also generates a lot of cash flow into AR.