It seems like strong year-over-year results in the third quarter and rising gas prices have not been able to please the investors of Antero Resources (AR - Free Report) . The gas-weighted company has been on the red territory for a while now, with its shares hitting a 52-week low of $13.07 yesterday, before closing the session a tad higher at $13.40. Notably, the stock has plunged around 15% over a month, notably wider the broader industry’s decline of 5%.
Are Commodity Prices Affecting Investors’ Sentiment?
Oil prices have been trading in a bearish territory of late, on fears of oversupply, geopolitical concerns and economic headwinds. Notably, after touching multi-year highs of more than $76 a barrel in early October, the commodity has plunged in excess of 30% and is currently trading somewhere around $51. While this has weighed on the most of the oil stocks, shares of Antero Resources have also taken a beating, as the company is one of the major producers of natural gas liquids, which mainly derives its value from oil prices. Hence, the crude decline is likely to impact the company’s performance.
Antero is 100% hedged on gas production at $3.50 per MMBtu for 2018 and 2019. This had aided the company when the gas prices were low. However, gas prices have been picking up of late, thanks to cleaner energy demand, forecast of bitter cold and tighter natural gas supplies. Being completely hedged for gas production, the company may not be able to take advantage of the uptick in the gas prices, which may limit overall revenues.
With the hedged position for gas output amid price uptick, the company’s commodity leverage is entirely connected to NGL or oil pricing, which has been on a decline of late, denting investors’ sentiments.
However, the oil and gas prices are volatile. We believe that the company has strong fundamentals, which investors should take advantage of at this point, that make the stock an attractive pick.
Let’s delve deeper.
Key Catalysts That Make it an Attractive Pick
Antero has a strong presence in natural gas-rich shale plays like Marcellus and Utica. The company has more than 137,000 and 484,000 net acres in the Utica and Marcellus shale, respectively. Notably, the company estimated a total of 3,295 premium drilling locations in the core operating resources, reflecting strong production potentials.
Importantly, since more than 70% of Antero’s production comprises natural gas, the company is well positioned to capitalize on mounting clean energy demand. While the gas prices are now rallying, it may pull back any time. Unabated production from the Marcellus and Utica shale regions suggest that the odds are firmly stacked against a sustained rally. The company will then be able to limit losses through its hedged position. As far as the oil prices are concerned, all eyes are now on the OPEC meet due on Dec 6, wherein the countries involved in the meeting might introduce a set of production cuts. If that be the case, this may lead to a rebound in prices, with Antero benefiting from rising NGL costs.
The company’s drilling and completion activities in both the Marcellus and Utica shale plays are becoming more efficient over time, as reflected by declining drilling days and increasing average lateral length per well. Moreover, there has been a significant reduction in historical well costs in both the shale resources, which will boost its profits.
Notably, Antero targets a CAGR of 20% from 2018 to 2020. It is expected to increase output by another 15% per year in 2021 and 2022, further raising optimism surrounding the stock. What’s more encouraging is the fact the company plans to achieve the production growth through conservative capital expenditure. On a further positive note, it aims around $2.9 billion reduction in capital spending over the next five years.
Antero’s midstream arms — namely Antero Midstream Partners (AM - Free Report) and Antero Midstream GP LP (AMGP - Free Report) — have entered into a merger agreement to simplify their corporate structure. Per the deal, Antero will receive $300 million in cash along with 31% interest in the new entity.
The company has a less levered balance sheet, as its total debt-to-capitalization ratio stands at 38.8%, lower than the industry’s 45.4%. Per its latest five-year plan (2018-2022), Antero expects to generate a free cash flow of $1.6 billion over the aforementioned time frame.
What’s most notable is the fact that the company is planning to buy back $600 million shares over the next 12-18 months, which will partly be financed by the midstream simplification agreement.
Importantly, we are expecting the stock to see earnings growth of 230% and 60% through 2018 and 2019, respectively. Over the past 60 days, earnings estimates for this company for the current year have also moved north by 5 cents.
We believe that the movement of the commodity prices, not working in favor of the company, has made the investors overlook its otherwise strong fundamentals, pushing it to a 52-week low. However, considering its ambitious five-year plans, strategic acreage position and investor-friendly moves, it will be prudent for its shareholders to grab the stock now.
As it is, Antero currently carries a Zacks Rank #2 (Buy) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best opportunities for investors.
Meanwhile, investors can also consider another natural gas-focused stock, Cabot Oil and Gas Corporation (COG - Free Report) , which carries a Zacks Rank #2. Cabot expects to generate EPS growth of 30% in the next three-five years. You can see the complete list of today’s Zacks #1 Rank stocks here.
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