Antero Resources (AR) Q4 Results

[dan_s]

DENVER, Feb. 28, 2017 /PRNewswire/ -- Antero Resources Corporation (AR) ("Antero" or the "Company") today released its fourth quarter and full-year 2016 financial and operating results. The relevant financial statements are included in Antero's Annual Report on Form 10-K for the year ended December 31, 2016, which has been filed with the Securities and Exchange Commission ("SEC").

Fourth Quarter Highlights Include:

Net daily gas equivalent production averaged a record 1,990 MMcfe/d (26% liquids), a 33% increase over the prior year quarter < My forecast 1,950 MMcfe/d
This includes a record 86,857 Bbl/d of liquids production, a 59% increase over the prior year quarter < my forecast was 85,000 Bbl/day
Liquids production contributed 30% of total product revenues, before hedging
Realized $0.07 per Mcf premium to Nymex natural gas price before hedging, or $3.05 per Mcf
Realized C3+ NGL price of $25.22 per barrel, 51% of Nymex WTI price before hedging
Realized natural gas equivalent price of $4.26 per Mcfe including NGLs, oil and hedges
GAAP net loss of $486 million, or $(1.55) per share including $829 million of unrealized hedge losses, compared to net income of $158 million, or $0.57 per share, in the prior year quarter
Adjusted net income of $68 million, or $0.22 per share, a 26% increase compared to the prior year quarter < exactly what I forecast
Adjusted EBITDAX of $476 million, a 55% increase compared to the prior year quarter
Increased 2017 guidance for NGL price realizations, before hedging, to 50% to 55% of WTI oil prices

Full Year 2016 Highlights Include:

Net daily gas equivalent production averaged 1,847 MMcfe/d (25% liquids), a 24% increase over the prior year
GAAP net loss of $849 million, or $(2.88) per share including $1.5 billion of unrealized hedge losses, compared to net income of $941 million in the prior year
Adjusted net income of $209 million, or $0.71 per share, a 37% increase compared to the prior year
Adjusted EBITDAX of $1.54 billion, a 26% increase compared to the prior year
Net debt to trailing twelve months adjusted EBITDAX of 3.0x

Recent Developments

Increased 2017 NGL Pricing Guidance and NGL Infrastructure Update

Driven by the recent strength in Mont Belvieu prices and regional demand in the Northeast, Antero has increased its 2017 C3+ natural gas liquids ("NGL") price realization guidance before hedging to 50% to 55% of WTI oil prices, up from previous guidance of 45% to 50% of WTI. Importantly, the updated 2017 NGL price realization guidance does not include the anticipated positive effect of the Mariner East 2 pipeline project described below.

On February 13, 2017, the Pennsylvania Department of Environmental Protection issued permits for Sunoco Logistics Partners LP's ("Sunoco") Mariner East 2 pipeline project, which enables Sunoco to begin construction on the 350-mile NGL pipeline. The pipeline will transport NGLs from Southwestern Pennsylvania and Eastern Ohio to the Marcus Hook terminal and export facility near Philadelphia, Pennsylvania, which is also owned by Sunoco. As previously announced, Antero is an anchor shipper on Mariner East 2 with a 61,500 barrels per day commitment (35,000 barrels of propane / 15,000 barrels of butane / 11,500 barrels of ethane). The pipeline is expected to be placed into service by the end of the third quarter of 2017.

On February 6, 2017, Antero Midstream Partners LP (AM) ("Antero Midstream" or the "Partnership") announced the formation of a joint venture (the "Joint Venture") to develop processing and fractionation assets in Appalachia with MarkWest Energy Partners, L.P., a wholly owned subsidiary of MPLX, LP. The Joint Venture will develop cryogenic processing assets at the Sherwood Processing Facility in Doddridge County, West Virginia, and also at an additional site still to be designated, also located in West Virginia, to support Antero's continued liquids-rich production growth in the southwestern core of the Marcellus Shale. The Joint Venture participation will begin with the next three 200 MMcf/d plants at the Sherwood Processing Facility (Plants 7, 8 and 9), which are under development and scheduled to be placed into service during the first quarter of 2017, third quarter of 2017, and first quarter of 2018. In addition, Antero Resources recently committed to Plant 10 at the Sherwood facility, which is expected to be placed into service in the third quarter of 2018. The Joint Venture will also own C3+ fractionation capacity at the Hopedale complex in Harrison County, Ohio supported by Antero and other third party producers and will have the option to participate in incremental fractionation capacity to be built in the future as needed.

[dan_s]

This is EXTREMELY IMPORTANT:

Hedge Position

The Company's estimated natural gas production for 2017 is fully hedged at an average index price of $3.63 per MMBtu. Antero's target natural gas production for 2018 is also fully hedged at an average index price of $3.91 per MMBtu. Antero has hedged 3.4 Tcfe of future natural gas equivalent production using fixed price swaps covering the period from January 1, 2017 through December 31, 2022 at an average index price of $3.63 per MMBtu. At December 31, 2016, the Company's estimated fair value of commodity derivative instruments was $1.6 billion.

[dan_s]

When an upstream company has a HUGE amount of their production hedged, especially at prices much different than the current market for commodities, their reported (or GAAP) Net Income and EPS are worthless numbers. That is why Wall Street came up with "Adjusted Earnings".

Just remember to focus on operating cash flow per share ("CFPS") and ignore earnings per share. My pappy said: "Cash pays the bills, not earnings.".

I have updated my forecast model for AR and it will be posted to the EPG website tomorrow.

My valuation has increased $4.00/share to $54.00, which compares to First Call's price target of $34.19.

Why is the valuation so high?
> Antero has 20% to 25% annual production growth locked in.
> Antero has more than 100% of their projected natural gas production hedged at very good prices for 2017 and 2018. See note below.
> NGL prices are going a lot higher in 2017 (they went up 26% from Q3 2016 to Q4 2016)
> Antero will have access to even better markets for their production in the future.
> Antero's operating cash flows are ramping up:
2015 Actual = $976.3 million ($3.52 per share)
2016 Actual = $1,274.2 million ($4.32 per share)
2017 Forecast = $1,669.0 million ($5.30 per share) < Compare to AR's CapEx Budget for 2017 of $1,500 million
2018 Forecast = $2,073.3 million ($6.58 per share)

A company with 20% annual production growth locked in that is generating FREE CASH FLOW FROM OPERATIONS s/b trading for at least 10 X CFPS.

NOTE: In 2016, Antero collected $1,003,083 cash on their hedges. The present market value of their hedges is $1.6 Billion.