Antero Resources Corporation AR is well poised to grow further, backed by robust Appalachian performance and growing capital efficiency.
The company — with a market cap of $1.8 billion — has an expected earnings growth rate of 20% for the next five years. For second-quarter 2019, its earnings per share are projected at 9 cents, indicating a significant rise from the year-ago reported figure of 2 cents. The estimate remained unchanged for past 30 days.
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Courtesy of solid prospects, this Zacks Rank #3 (Hold) stock is worth holding on to at the moment.
What’s Driving the Stock?
Antero Resources is among the fast-growing natural gas producers in the United States. Its strategic acreage position in the low-risk/long reserve-life properties of Appalachian Basin is a major positive. Antero Resources’ core acreage position offers significant long lateral drilling opportunities and capital efficiencies.
The company boasts 486,000 and 126,000 net acres in Marcellus and Utica, respectively, which positions it well to boost production. Antero Resources’ proved reserves have seen a 4% year-over-year growth in 2018. Notably, the company’s solid output growth of 30% drove total revenues by 18% year over year to $1,212 million in first-quarter 2019.
For 2019, Antero Resources targets average production of 3,150-3,250 million cubic feet equivalent per day (MMcfe/d), significantly up from 2018 production of 2,709 MMcfe/d. Moreover, the company expects production to witness a CAGR of 10-15% from 2020 through 2023. What’s more encouraging is the fact the company plans to achieve the production growth through conservative capital expenditure. This reflects its improvement of capital efficiency.
Antero Resources boasts a healthy balance sheet with a manageable debt-to-capital ratio of 29.5%, which is significantly lower than the industry average of 42.6%. This provides the company with ample flexibility to make acquisitions or grow internally.
Antero Resources expects to generate free cash flow of $2.5-$3 billion over the 2020-2023 period, given oil price stays around the $65 per barrel level. On the contrary, if oil and natural gas prices stay lower than the said level, the company expects free cash flow neutrality. Excess cash generation may further prompt the company to resort to more investor-friendly moves, including share buybacks and dividend payout, in the long run.
There are a few factors that are impeding the growth of the stock lately.
Antero Resources’ per unit cash production expense in first-quarter 2019 was $2.19 per Mcfe, reflecting a 6% increase from the year-ago period. For 2019, the company makes an upward revision of the upper limit of cash production expense guidance to the range of $2.15-$2.25, primarily due to a rise in transportation expenses.
Although it has strong foothold in the Appalachian region, the company’s lack of geographic diversification is concerning. As such, it is more vulnerable to basin-specific delays and interruptions in production from wells, which can potentially hamper growth.
Given the existing glut in the market and dampening demand outlook, demand growth for natural gas is expected to decline. Per U.S. Energy Information Administration (EIA), Henry Hub natural gas spot price is expected to be $2.77/MMBtu in 2019, indicating a 13.7% decrease from 2018 levels.
This will hamper the company’s profits as its total production comprises more than 70% natural gas. Natural gas prices in 2020 are expected to be flat with this year’s estimation. Hence, things are not expected to improve anytime soon.
To Sum Up
Despite riding on significant growth prospects as mentioned above, increasing costs and dampening demand outlook are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Some better-ranked players in the energy space are Berry Petroleum Corp. BRY, Chevron Corp. CVX and Apache Corp. APA. While Berry Petroleum sports a Zacks Rank #1 (Strong Buy), Chevron and Apache both hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Berry Petroleum’s earnings growth is projected at 23.8% through 2019.
Chevron’s earnings growth for second-quarter 2019 is projected at 14.6%.
Apache surpassed earnings estimates in each of the trailing four quarters, with the average being 31.1%.
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