Antero Resources Corporation (AR) Business Profile

What it does

Antero Resources develops and produces natural gas, natural gas liquids (NGLs) and oil from shale formations in the Appalachian Basin. It sells these commodities into markets in the United States and abroad. Its operations are concentrated in West Virginia and Ohio, and its headquarters is in Denver. The company is led by CEO and President Michael Kennedy.

Antero uses horizontal drilling and hydraulic fracturing to release hydrocarbons from unconventional formations. Some wells produce liquids-rich gas: the gas is processed to separate NGLs, which can be sold as individual products such as ethane and propane. Antero also produces dry gas, which contains fewer liquids. Its productive wells were all natural gas wells at the end of the fiscal year.

The business includes more than drilling wells. Antero holds an interest in Antero Midstream, which provides gathering, compression and water services and has interests in processing and fractionation plants. Antero also uses long-term pipeline capacity to move production to markets and markets excess capacity when feasible.

After the fiscal year-end, Antero closed the HG acquisition, adding acreage in West Virginia’s Marcellus Shale. The company said the acquisition and other transactions that increased its ownership interests helped raise production in the third quarter.

How it makes money

Antero earns revenue by producing and selling natural gas, NGLs and oil. The amounts it receives depend on production volumes and commodity prices, which move with supply and demand. In the third quarter, the company said production was up 23.0% year over year.

The company reports three segments: exploration and production, its equity-method investment in Antero Midstream, and marketing. The production segment develops wells and sells their output. Antero’s ownership interest in Antero Midstream gives it significant influence but not control. Antero Midstream provides services to Antero under long-term contracts.

The marketing business purchases and sells third-party natural gas and NGLs and markets excess firm transportation capacity where feasible. It also incurs the costs of purchased commodities and pipeline capacity, including capacity it does not currently use. The marketing segment reported a net expense for the fiscal year.

Antero can leave ethane in the gas stream or recover and sell it separately, depending on prices and recovery costs. It also uses commodity derivatives when circumstances warrant to manage price exposure. The company said its NGL production remained unhedged in the third quarter. Production and service contracts generate ongoing activity, but commodity prices and well output affect the cash generated.

Customers and how it sells

Antero’s operations are in the United States, with its acreage primarily in the Appalachian Basin in West Virginia and Ohio. Its year-end acreage did not give effect to the subsequent HG acquisition or the planned Utica Shale divestiture.

Antero sells into domestic and international markets using long-term firm transportation capacity on major pipelines. Its marketing activities also involve buying and selling third-party gas and liquids. MarkWest Energy Partners, L.P. accounted for 16.0% of revenue in an earlier fiscal year.

In the third quarter, Antero entered natural gas term sales deals with multiple parties at the Clarington market. The company also said it had received interest from downstream counterparties seeking gas at interconnections on Antero Midstream’s Eastside Express pipeline. Antero said the project would connect its eastern dry gas acreage to multiple pipeline options.

The company agreed to sell substantially all of its Utica Shale oil and gas assets in Ohio. The sale was expected to close after the fiscal year-end, but its eventual closing is not established.

Suppliers and costs

Antero relies on infrastructure providers to gather, compress, process and transport its production. Antero Midstream supports the substantial majority of its exploration and development activity with gathering and compression assets. Subject to existing third-party commitments, Antero has dedicated substantially all of its current and future West Virginia and Ohio acreage to Antero Midstream for those services.

Antero contracts with MarkWest for gas processing capacity. Liquids-rich gas is processed to remove NGLs, and fractionation separates those liquids into products with their own market prices. Antero also has access to third-party gathering pipelines, with certain gathering, compression and dehydration services contracted on a fixed-fee basis.

Gathering, compression, processing and transportation are expenses. Lease operating expenses included higher produced-water trucking and disposal costs. Antero’s capital expenditures included drilling, completion and leasehold spending.

Pipeline commitments also create costs when capacity is unused. Antero said agreements executed in the third quarter under its firm transportation optimization strategy resulted in $20.0 million in annualized free cash flow.

Competitive position

Antero competes with other oil and natural gas companies for properties, drilling prospects and industry personnel. Some competitors have greater financial or human resources, which may let them bid for more properties or continue exploration through periods of low gas prices. The company has not identified individual competitors by name in the available business discussion.

Antero’s acreage, pipeline access and relationship with Antero Midstream are elements of its operating position. At fiscal year-end, its leasehold included potential horizontal well locations classified as proved, probable and possible. Long-term firm transportation gives it access to multiple end markets, while Antero Midstream provides gathering and other services under long-term contracts.

Our reading: The acreage and drilling inventory offer a degree of competitive protection because they give Antero places to develop wells, but their value depends on drilling results and commodity prices. Our reading: Pipeline capacity and the midstream relationship support market access and development, although their associated costs and commitments limit how much protection they provide in weak markets.

Antero said it can shut in local dry gas when prices are weak while continuing to produce liquids. It also said it entered term sales deals at Clarington in the third quarter.

Growth opportunities

Antero’s development strategy centers on drilling its Appalachian acreage and developing its reserves. At fiscal year-end, the company had potential horizontal well locations classified as proved, probable and possible. Not all potential locations were classified as proved undeveloped reserves.

The HG acquisition closed after the fiscal year-end and added acreage in the core of the Marcellus Shale in West Virginia. Antero said the acquisition and transactions that increased working interests contributed to third-quarter production growth of 23.0% year over year. It also acquired properties in its West Virginia development footprint in July.

Antero is pursuing cost reductions alongside development. It expects transactions already executed to contribute to its margin-enhancement target. The company also expects additional benefits from transportation optimization, more dry gas development and the expiration of liquids transportation commitments.

Antero Midstream’s Eastside Express project is intended to connect eastern dry gas acreage with multiple pipelines. Antero said downstream counterparties had expressed interest in accessing its gas at pipeline interconnections. The company also expects LNG and power projects to increase natural gas demand across the United States and in Appalachia.

Structural risks

• Commodity prices: Prolonged low or volatile natural gas, NGL and oil prices can affect cash flows, economically recoverable reserves and Antero’s ability to meet capital and financial commitments. The company said its NGL production remained unhedged in the third quarter.
• Reserve development: Proved undeveloped reserves may take longer or require more capital to develop than Antero anticipates. Estimates also depend on assumptions about prices and future development.
• Drilling and operations: Projects can be delayed by equipment failures, adverse weather, geological conditions, shortages of personnel or water, and environmental hazards. Accidents and releases can lead to remediation costs and other claims.
• Transportation and local markets: Pipeline availability and local supply and demand affect prices. Antero said downstream issues worsened regional gas price weakness in September and October; its transportation agreements also create costs for excess capacity.
• Regulation and environmental obligations: Drilling, water handling, emissions and transportation are subject to federal, state and local rules. Compliance can increase costs or delay operations, while violations can result in penalties.
• Financing and hedging: Developing reserves depends on operating cash flow and available capital. Hedges can mitigate some price exposure, but rising prices can result in payments to counterparties, and counterparty credit limits can constrain additional hedging.

Bottom line

Our reading

Our reading: Antero is an Appalachian gas and liquids producer whose business rests on developing its acreage and moving output through contracted infrastructure. [item1] Its exposure is to commodity prices, development costs and transportation commitments, even as its liquids mix, midstream relationship and ability to curtail some gas provide operating choices. [item1, item1a, call_qa] The HG acquisition added acreage and production, while the company’s margin targets depend on further execution. [item1, call_prepared]