Antero Resources: The Stock Is A Buy As The Market Is Strong (NYSE:AR)
Antero Resources (NYSE:AR) will likely benefit from the market condition in the following quarters as it did in the first half of 2022. Due to higher household energy consumption as a result of colder temperatures, the OPEC+ production cut, the continuing war in Ukraine, and continuing sanctions on Iranian oil and gas, I think crude oil and natural gas prices will remain high for the rest of 2022 and the first quarter of 2023. I expect the company to report significant third-quarter results on 27 October 2022. The stock is a buy.
In its 2Q 2022 financial results, AR reported total revenues of $2202 million, compared with 2Q 2021 total revenues of $487 million, driven by increased natural gas, NGL, and oil sales. The company’s operating expenses increased from $1130 million in 2Q 2021 to $1140 million in 2Q 2022. AR reported net income attributable to Antero Resources of $765 million in the second quarter of 2022, compared with a net loss of $523 million in the same period last year. AR reported a net income per diluted share of $2.29 in 2Q 2022, compared with a net loss per diluted share of $1.70 in 2Q 2021. The company reported daily combined production of 3228 MMcfe/d in 2Q 2022, compared with daily combined production of 3324 MMcfe/d in 2Q 2021, down 3%. AR’s natural gas production decreased from 208 Bcf in 2Q 2021 to 203 Bcf in 2Q 2022. Its CT ethane production decreased from 4356 MBbl in 2Q 2021 to 4025 MBbl in 2Q 2022. The company’s C3+ NGLs production decreased from 10440 MBbl in 2Q 2021 to 10156 MBbl in 2Q 2022. Also, AR’s oil production decreased from 940 MBbl in 2Q 2021 to 906 MBbl in 2Q 2022.
AR’s natural gas average realized price (before the effect of derivative settlements) increased from $3.01/Mcf in 2Q 2021 to $7.67/Mcf in 2Q 2022, up 155%. The company’s C2 ethane average realized price before the effect of derivative settlements increased from $9.97/Bbl in 2Q 2021 to $22.42/Bbl in 2Q 2022, up 125%. AR’s C3+ NGLs average realized price before the effect of derivative settlements increased by 50% YoY to $60.28/Bbl. Finally, the company’s oil average realized price before the effect of derivative settlements increased by 78% YoY to $98.49 in 2Q 2022. “Antero’s second-quarter results benefited from outstanding operations that included higher premiums to benchmark pricing and excellent well performance. Strong demand for natural gas along the LNG fairway has led to as much as a $0.25 per MMBtu increase in positive basis pricing on the Gulf Coast since the beginning of 2022,” the CEO commented. “We are uniquely positioned to directly benefit from increasing NYMEX prices, with 75% of our natural gas being sold at these premium priced hubs in the LNG corridor,” he continued.
The market outlook
Natural gas prices in the United States in 3Q 2022 were higher than in 2Q 2022. According to Figure 1, natural gas prices in the United States increased from $5.4/MMBtu on 30 June 2022 to $9.7/MMBtu in August 2022, and then, decreased to $5.17/MMBtu on 21 October 2022. U.S. natural gas prices decreased during the past month due to lower weather-driven demand, increased domestic natural gas production, and lower NGL exports. According to EIA‘s latest short-term energy outlook, Henry Hub’s natural gas spot price will be about $7.40/MMBtu in the fourth quarter of 2022. However, EIA expects Henry Hub’s natural gas price to be about $6/MMBtu in 2023 as U.S. natural gas production increases.
Due to colder weather in the following months, household expenditures for heating oil and natural gas will increase. EIA expects that the U.S. average household natural gas consumption will increase by 4.5% YoY from 62.4 Mcf in the winter of 2021-22 to 65.2 Mcf in the winter of 2022.23 (see Figure 2). Figure 3 shows that Henry Hub’s natural gas spot price will be $7.12 MMBtu in the first quarter of 2023.
Figure 1 – Natural gas price in the United States
Figure 2 – Average household natural gas and heating oil consumption
Figure 3 – Energy pieces in the United States
Moreover, U.S. oil production will likely continue increasing as oil prices will probably remain high due to the OPEC+ production cut of 2 million barrels per day, continuing war in Ukraine which has caused sanctions on Russian oil, and continuing sanctions on Iranian oil. However, due to the global recession, I do not expect oil prices to increase to their record highs. Also, U.S. average household heating oil consumption is expected to increase by 8.7% from 477 gallons during the winter of 2021-22 to 519 gallons during the winter of 2022-23. EIA expects the Brent crude oil spot price to be $93 per barrel in the fourth quarter of 2022 and $95/b in 2023. Furthermore, the U.S. net export of propane, ethane, natural gasoline, and butanes increased significantly in the past few years. EIA expects the country’s net exports of hydrocarbon gas liquids to continue increasing as U.S. production and global demand climb (see Figure 4). Thus, I predict the company’s NGL sales to increase in the following quarters. I expect AR’s financial results to be strong in the second half of 2022 and in the first quarter of 2023.
Figure 4 – U.S. net trade of hydrocarbon gas liquids
AR performance outlook
In this detailed analysis, I have done some analysis on Antero Resources Corporation’s profitability ratios to evaluate the company’s abilities to bring income and utilize its assets to generate profit for its shareholders. To cater beneficial insights into the financial position of the company, I have analyzed the profitability ratios across the board of margin and return ratios. To be more insightful, I have calculated these ratios compared to previous years.
Generally, margin ratios capture the capability of the company to convert sales into profits in different measurements. In this regard, I would investigate Antero Resources Corporation’s gross profit, EBITDA, and cash flow margin conditions and compare them with previous years. AR’s gross profit margin has been on an improvement path during the recent years and currently has sat at 0.75 in TTM. Its current gross margin has increased slightly by 10% to 0.75 versus its level of 0.68 at the end of 2021. It also increased by 50% compared with the end of 2020. Additionally, the cash flow margin indicates the relation between operating cash flow and the company’s total revenue. It is obvious that AR has been able to convert its revenue to cash after the pandemic and the downturn of 2019. Its cash flow margin was boosted by 10% to 0.282 versus its amount of 0.255 at the end of 2021. As a result, its cash flow margin is in a solid condition and shows that the management is able to balance its cash flow. Thus, to a good extent, not only can they minimize expenses, but also take advantage of upcoming growth opportunities.
Furthermore, after a deep drop to 0.04 in 2020 versus its previous level of 0.32 at the end of 2019, AR’s EBITDA margin increased back to 0.13 in 2021. Also, the EBITDA margin improved considerably and sat at 0.28 in TTM. The benefit of investigating the EBITDA margin is that it excludes volatile expenses and thus is a good measurement to represent a clear picture of the performance. In short, Antero Resources Corporation’s margin ratios indicate the company’s scope of capability to convert its revenues into profits (see Figure 5).
Figure 5 – AR’s margin ratios
To represent Antero Resources Corporation’s ability to cater returns to its shareholders, I have investigated its return on assets and return on equity ratios. The return on assets ratio reflects how much profit a company is able to generate for every dollar of its assets. After several years of negative ROA in a row, the company has improved and provided 0.068 return on assets in TTM. According to its financial prospects, I believe its financial metrics will develop more in future.
Similarly, its return on equity has been negative since 2018, while it developed and sat at 0.153 in TTM. This ratio indicates the net income of the company, which is relative to the shareholders’ equity. The return on equity ratio is crucial as it measures the rate of return on the money that has been invested into the company. Thus, Antero Resources Corporation’s increasing return on equity shows its capability of generating cash and, thereby, less dependency on debt financing (see Figure 6).
Figure 6 – AR’s return ratios
In summary, notwithstanding the existing volatility of the oil and gas industry, analyzing companies’ financial conditions is a good help to control existing risks in this industry. In other words, investigating Antero Resources Corporation’s solid financial position and profitability ratios indicates that the company has been on its recovery path after the downturns of recent years. Thus, I believe a Buy rating is appropriate for AR stock.