Antero Resources (AR)

[dan_s]

From Morningstar on June 15, 2017:

During the first quarter, Silver-rated Sound Shore (SSHFX) added Antero Resources (AR), a natural gas explorer and producer in the United States and Canada.
There are several reasons to like Antero, according to comanager John DeGulis.
"Although it's a reasonably young company, the management team has decades of experience. They have a very good acreage position in the Marcellus where they are the largest producer," DeGulis said.
In addition, he said, "natural gas prices and stocks are down, expectations are low, and you have a company that has very low cost reserves and production, that we think it endures even in a $3 gas environment, and it has been growing its units by 20% a year."
Further, DeGulis notes that the stock is relatively inexpensive, trading around 6 times 2018 cash flow while its peers trade at 8 times. And the company hedges more aggressively than its peers: DeGulis says that the company has hedged most of their production through 2020.
"The combination of hedging at good prices, having very low cost reserves, and using some leverage, they are able to get better returns on equity through the cycle than your average E&P company," DeGulis added.
Antero is among Morningstar's favorite ideas, too. It earns a 4-star rating as of this writing, suggesting its shares are undervalued.
"Antero Resources is the most active driller in the Appalachia region. We believe it is also one of the most attractively priced," Morningstar analysts noted in a recent white paper.
They note that although natural gas still makes up around 75% of the firm's production, a good portion of its acreage is in areas with a fairly high liquids content--which differentiates the company from its peers.
"Drilling and completion costs have declined steadily over the past two years in the Marcellus and Utica plays, and there is scope for further efficiency gains that could lower costs further," they note.
Like most E&P firms, the stock carries a high uncertainty rating, given how vulnerable its profitability is to natural gas prices. < Not true considering how much of their production is hedges. - Dan S.
Manuela Badawy is a freelance columnist for Morningstar.com. The views expressed in this article do not necessarily reflect the views of Morningstar.com.

[dan_s]

AR moves up and down with the daily changes in the front month NYMEX futures contract for natural gas. HOWEVER, Antero has over 100% of their 2017 natural gas hedged, so current gas prices do not impact their revenues. In fact, lower NYMEX prices cause bigger cash payments to AR on their hedges.

[ChuckGeb]

Lower prices/ more hedge revenue results in lower royalty and severance tax payments as well providing significant bump in cash flow as well!

[dan_s]

I agree. Sure does not look like Wall Street has figured this one out yet.