Antero Resources: Starting To Look A Bit Overvalued At Long-Term $3.75 NYMEX Gas (NYSE:AR)

Antero Resources (NYSE:AR) has performed relatively well operationally, allowing it to announce some modest improvements to its production and cost guidance in its Q1 2024 earnings report.

Antero’s free cash flow was minimal in Q1 2024, but with the 2024 natural gas strip at around $2.60 now, it is projected to generate a bit over $250 million in free cash flow for the full year.

Despite its operational improvements and stronger near-term natural gas prices, I now believe that Antero is somewhat overvalued at $35 per share.

My long-term outlook on NYMEX natural gas prices remains unchanged at $3.75 and at that long-term natural gas price I estimate Antero’s value at around $30 per share.

That is $2 to $3 per share more than the $27 to $28 per share that I valued Antero at in December 2023, when it was trading at $22 per share. Antero’s value has increased due to the improvement in projected 2024 free cash flow and its positive guidance revisions. However, I believe that Antero’s share price has reacted too much to short-term changes in natural gas prices.

Commodity Prices

Near-term natural gas prices have increased a decent amount recently, with 2024 strip going up around 25 cents over the last several weeks. However, longer-term strip prices remain relatively unchanged, having moved only a few cents over the same time period.

The current NYMEX gas strip for 2025 is around $3.53 and the current NYMEX gas strip for 2026 is around $3.97, averaging out to $3.75 over that two year period.

While near-term natural gas prices have improved, there has been some softening in the prices for C3+ NGLs. For example, Mont Belvieu propane prices averaged around $0.84 per gallon in Q1 2024, but have dropped to around $0.68 to $0.69 per gallon in the last couple weeks.

The overall impact of these commodity price changes is still positive for Antero.

Updated 2024 Outlook

Antero now expects approximately 3.375 Bcfe per day in 2024 production, a roughly 1% increase from its earlier guidance. Antero also expects slightly improved differentials (by $0.50 per barrel) for its C3+ NGLs.

At current 2024 strip of approximately $79 WTI oil and $2.60 NYMEX gas, Antero is projected to generate $4.355 billion in revenues net of distributions to Martica and dividends received from Antero Midstream.

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Antero trimmed its 2024 cash production and net marketing expense projections by $0.05 per Mcfe. This saves it a bit over $60 million for 2024.

Antero’s revised cost guidance is closer to my original expectations for 2024, since I was a bit surprised that Antero’s initial 2024 guidance called for its cash production and net marketing expense to increase around 7% to 8% from 2H 2023 levels.

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Antero is now projected to generate $253 million in 2024 free cash flow. It reported $11 million in Q1 2024 free cash flow (and this would have been zero without the benefit of changes in working capital). Antero is likely to have minimal free cash flow in Q2 2024 as well due to weak natural gas prices. Nearly all of Antero’s free cash flow is expected to come in 2H 2024, with NYMEX gas strip around $3 over that part of the year.

Notes On Valuation And Debt

At last report, Antero had approximately 311 million outstanding shares and $1.52 billion in long-term debt. Antero is projected to reduce its debt by close to $250 million over the rest of 2024.

I now estimate Antero’s value at approximately $30 per share at long-term $75 WTI oil and $3.75 NYMEX gas. This would give it an enterprise value of approximately $10.6 billion based on its projected year-end 2024 net debt.

I believe that Antero’s current share price of $35 per share is more appropriate for roughly $4.00 NYMEX gas in the long-term. While this is possible, I prefer to value companies based on long-term $3.75 NYMEX gas instead (and some believe that is too high for natural gas prices). The current 2025/2026 strip is approximately $3.75.

Conclusion

Antero Resources provided a positive update in Q1 2024, with slight improvements to its production guidance and cost guidance for the full year. It is now projected to generate a bit over $250 million in free cash flow for 2024.

Antero’s improved guidance and the improvement in 2024 strip prices both add a bit of value to the company and I now estimate its value at $30 per share. However, I believe that Antero’s stock has been overly sensitive to near-term natural gas prices.

Antero’s share price has gone up approximately 55% year-to-date, while other natural gas producers have typically gone up much less. Chesapeake Energy is up 19% year-to-date for example. I believe that Antero is now a bit overvalued and pricing in around $4 long-term natural gas prices instead.