Antero Resources: Embrace The Energy Transition With Rising Natural Gas Prices (NYSE:AR)

Investment Thesis

Antero Resources Corporation (NYSE:AR) recent results have been in line with what could be expected. I’m not going to say that I’m happy with this set of results. But I earnestly believe this is as difficult as it’s going to get for Antero.

Not only have natural gas prices bounced back from the lows set in Q2, 2023, but the outlook over the next 12 to 18 months is dramatically better than where Antero finds itself right now.

I believe that Antero will end up being a strong performer in the next 12 months. We’ll look back to Antero at $27 per share in 12 months and see that it looked cheap in hindsight.

What Energy Crisis?

A warm winter. A cold summer. The opposite of what was expected in both instances has led politicians and other stakeholders into complacency.

Presently, with natural gas prices so low, at close to a 30-year low adjusting for inflation, there’s no need to expedite the energy transition. After all, the energy crisis has fully dissipated in the U.S. And been mostly averted in Europe.

Meanwhile, with low natural gas prices in the West, this has led the West to shun coal.

Recall that when natural gas is less than approximately $3.50 MMBtu, natural gas is used in preference to coal. And when natural gas rises above $3.50 MMBtu, coal is used. Depending on the country and the power plant, but as a rule of thumb, this works. So what’s happened here is that with low natural gas prices, coal prices have also fallen. And as a consequence, Asia has been all-too-eager to pick up cheap coal.

Altogether, the energy markets have been tamed. For now. However, I contend that without any need for heroics, in the back end of 2024, we’ll see more LNG cargos being exported once two new LNG terminals come online.

The graphic above is a reminder of LNG capacity that is expected to come online starting late 2024. Plaquemine and Golden Pass LNG terminals are coming online at the back end of 2024.

This will see substantial LNG volumes being carried away from the U.S. And suddenly, within 12 months, we’ll have gone from having an oversupply of natural gas to a very tight natural gas market.

The Energy Transition Is Real

The energy transition is real. But, it takes time.

I’m a full believer in the need to save our planet from high-carbon energy sources. And I believe it’s more important to understand facts rather than get caught up in hyperbole. Narratives that are misguided and unrealistic only delay our energy transition.

At its core, the energy transition is a story of electrification. Electrifying our transportation, AI servers, our household heating. These 3 electrical demand drivers are enormous.

And the problem with renewables is that they still only supply 10% of the electrical supply. Think about this!

The EIA projects this figure will grow over the coming decades, but there are problems with these projections. In the first instance, renewable energy is intermittent and variable.

That means you need to build a grid with the infrastructure that can work with this variable energy input. It’s not impossible, but it takes time to plan and build the infrastructure that allows variable energy to be added to the electrical grid.

Further, when it comes to powering AI servers, which are incredibly energy-intensive, and they can’t operate with intermittent energy.

With this framework in mind, let’s dig down to Antero Resource’s financials.

Revenue Growth Rates Were Always to Be Challenged

Last year, natural gas prices were soaring on the back of the Russian invasion. This year was always going to be challenging compared with 2022. But I was surprised by how low natural gas prices reached in Q2, 2023.

Looking back, natural gas reached less than $2.0 MMBtu in Q2. Meaningfully below Antero’s cash costs of $2.50 MMBtu. In fact, outside of the Appalachian region in the U.S., where natural gas production is particularly cheap, I suspect many of Antero’s peers have cash production costs of around $2.70 or even higher.

However, I fully believe that natural gas prices will rebound. Not only driven by excess supply being deployed by LNG towards Europe and Asia but also in the US through the US’s IRA act.

More specifically, President Biden appears to be gaining traction with the “Bidenomics” agenda of Building More in America. This means more rebuilding and reshoring to the U.S. This will lead to an increase in energy demand.

In essence, I believe Antero Resources’ quarterly results are as bad as they are likely to get. This marks the low point for Antero Resources, and without much of an optimistic scenario, the next 12 to 18 months are likely to look dramatically better.

Free Cash Flow Turned Negative

In line with what we’ve discussed already, Antero’s free cash flow was negative $159 million, compared with $634 million in the same period a year ago.

Given the strength of Antero’s free cash flow last year, Antero was able to enter this challenging period with a very strong balance sheet.

This allowed Antero to draw down on its credit facility without too many issues.

Antero’s guidance points to its cash production cost in 2023 to be approximately $2.40 MMBtu. This means that with natural gas prices now at approximately $2.8 MMBtu and slowly rising, this means that next quarter Antero will be free cash flow positive.

And I believe that we’ll see at least $3.5 MMBtu prices in natural gas in 2024, if not higher. This would translate into at least $700 million of free cash flow in 2024.

However, I suspect that this will be the worst-case scenario. If I’m right that natural gas prices will be in high demand in 2024 and beyond, we could easily see $4 MMBtu natural gas prices or more.

Given that Antero’s production costs are fixed, the higher the natural gas prices are beyond $3.5 MMBtu, the more that drops down to its free cash flows.

The Bottom Line

Antero Resources’ recent results are challenging, but I believe they will get better in the next 12 to 18 months.

The recent natural gas price rebound and the upcoming LNG terminal openings are positive indicators for the company.

While the energy transition is real and essential, it will take time, and renewables’ intermittent nature poses challenges. Despite revenue growth rates being impacted by low natural gas prices, I expect a rebound in prices, driven by increased demand and Biden’s economic agenda.

Antero’s free cash flow turned negative, but with rising natural gas prices, positive free cash flows are expected in the next quarter. I foresee a brighter outlook for Antero Resources Corporation, and its cash flow could significantly improve if natural gas prices rise as anticipated.