Energy Prospectus

Comments below from Raymond James 12/27/2016

Utica Shale:
Antero completed its first Utica dry gas well in Tyler
County, West Virginia during 3Q15 (100% WI). Up
until now, results have been encouraging, with its
initial well, Rymer 4HD, producing at an average
restricted flow back rate of 20 MMcf/d for 90 days.
Antero has 231,000 net acres and 2,152 potential
locations in the Point Pleasant dry gas fairway in
Ohio, West Virginia, and Pennsylvania.

Marcellus Ongoing
Recent well results from “enhanced completion”
wells are tracking above existing type curves. We
believe it is only a matter of time before the
company raises type curves. Increased EURs could
provide sizeable upside to our estimates and NAV.

My take: With a much better outlook for natural gas and NGL prices in 2017 than a year ago, I expect Antero to report a significant increase in proven reserves at year-end.

Please elaborate on how the outlook for improved prices impacts year end proven reserves. I thought cap on year end reserves were determined by the average of last 12 months first day of month prices. I also understood that this pricing was used to determine the economics of the reserves expected to be produced.

Higher prices for gas and NGLs will extend the economic lives of the wells. Plus lower completed well costs will help. Proven reserves only include those which the companies plan to develop in the next five years. With improving outlooks, capex programs should be expanded.

All of the Sweet 16 are reporting better wells, primarily by using more sand and more frac stages. Improving type curves increase EURs.

A few more things I thought of while at the health club.

1. 3rd party reserve engineers, which must approve the year-end reserve report, are more "conservative" when gloom and doom is hanging over the industry. Year-end reserve reports are completed at the end of January or early February. Oil was under $30 and natural gas was under $2.00 at that point a year ago, so gloom and doom was at the maximum. A lot of "SWAG" is used in coming up with year-end reserves. SWAG = Scientific Wild Ass Guess. It goes up when the industry is more optimistic.

2. The cost of PUD wells goes into the computation. Completed well costs are 15% to 20% lower than a year ago. This will lower the cost basis that the DD&A rate is applied to.

Keep in mind that DD&A is a non-cash expense, so it has no impact on the cash flow from operations that I use to value a company. Lower DD&A expense will just improve reported earnings.