Leonid Ikan
Near-term benchmark natural gas prices have not been helped by the continued delays in restarting Freeport LNG. The current 2023 strip for Henry Hub natural gas has now declined to $4.30, although Antero Resources (NYSE:AR) at least realizes a decent premium to Henry Hub for its natural gas.
Antero still looks capable of generating over $1.6 billion in positive cash flow in 2023 at current strip prices, and lower commodity prices should push out the timeline for Antero to start paying cash taxes until 2024. Antero’s estimated value has been trimmed a bit since I looked at it in October due to the reduction in 2023 free cash flow estimates. However, it should still have some upside in a $4+ long-term (after 2023) Henry Hub natural gas environment. The futures curve for natural gas has become a lot flatter now, and the 2024 futures are currently at $4.25, only marginally lower than 2023.
Freeport LNG Delays
The delays in getting Freeport LNG restarted have had a significant negative effect on near-term natural gas prices. Freeport LNG now expects to restart in the second half of January 2023, although given the multiple past revisions to the restart dates, I wouldn’t be surprised if the restart date got pushed back to February 2023.
By the time all is said and done, the Freeport LNG outage may have reduced natural gas demand by close to 500 Bcf, which is a very large amount given the average natural gas storage level in February is around 2,000 Bcf.
Realized Pricing Premium
Some natural gas producers are generally dealing with a double whammy of softer benchmark Henry Hub prices combined with expectations for relatively wide (compared to recent historical levels) basis differentials. Antero is protected from the latter due to its firm transportation portfolio. Antero has highlighted that it owns 2.3 Bcf per day of firm transportation to the LNG fairway, covering approximately 75% of its natural gas production. This allowed Antero to realize an excellent $0.49 premium to Henry Hub for its natural gas in Q3 2022. While Antero believes that regional basis differentials will remain fairly wide in 2023, it expects to realize a similar premium to Henry Hub as in 2022. Antero’s guidance for 2022 is for a $0.35 premium to Henry Hub at guidance midpoint.
Share Repurchase Program
Antero is continuing to repurchase a large amount of shares. It repurchased 10.5 million shares for $382 million in Q3 2022, for a weighted average price of $36.56 per share. It is now also authorized to spend $2 billion on repurchasing shares, and has spent $740 million so far, leaving $1.26 billion in remaining capacity under its current program. Spending this full remaining amount could allow Antero to repurchase around 13% of its outstanding shares at its current share price.
Updated 2023 Outlook
The current strip for 2023 is now nearly $80 for WTI oil along with $4.30 NYMEX gas. At those commodity prices, Antero is projected to generate $5.936 billion in revenues after hedges. Antero remains mostly unhedged for 2023. For the purposes of these calculations, I’ve subtracted the projected distributions to Martica from Antero’s projected revenues, while the dividends from Antero Midstream are listed as an addition to revenues.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Natural Gas | 784,750,000 | $4.65 | $3,649 |
| Ethane | 27,010,000 | $12.50 | $338 |
| C3+ NGLs | 41,975,000 | $40.00 | $1,679 |
| Oil | 4,015,000 | $71.00 | $285 |
| Distributions To Martica | -$110 | ||
| Antero Midstream Dividends | $125 | ||
| Hedge Value | -$30 | ||
| Total | $5,936 |
Antero may now end up with around $975 million in total capex during 2023. It revised its 2022 guidance to increase its capex expectations to approximately $925 million for 2022. Antero expects roughly 10% inflation for D&C capex in 2023, while its land capex may be lower in 2023 compared to 2022 if there are fewer opportunities with its organic leasing program.
Antero notes that its variable costs change by approximately $0.10 per Mcfe for every $1 change in natural gas prices. Thus Antero’s 2023 cash production costs should be noticeably lower than the $2.84 it reported for Q3 2022 given that NYMEX gas prices were $8.20 in that quarter.
| Expenses | $ Million |
| Cash Production and Marketing Expense | $3,118 |
| Cash G&A | $137 |
| Cash Interest | $73 |
| Capital Expenditures | $975 |
| Total Expenditures | $4,303 |
This results in a projection that Antero could generate $1.633 billion in positive cash flow at current strip prices (including $4.30 NYMEX gas). Antero doesn’t expect to pay cash taxes in 2023, but does expect to pay cash taxes in 2024. Antero was previously looking at paying some cash taxes in 2023, but the decline in natural gas strip now has likely pushed that back until 2024.
Notes On Valuation
I’ve trimmed Antero’s estimated value slightly to $34 to $35 at long-term (after 2023) $70 oil and $4 Henry Hub natural gas. This slight reduction is primarily due to lowered free cash flow expectations for 2023. At long-term $75 WTI oil and $4.50 Henry Hub gas, I now estimate Antero’s value at around $43 to $44 per share.
While 2023 natural gas strip prices have been hit hard by the delays in restarting Freeport LNG and the forecasts around warmer weather, the natural gas strip further out has been much less affected. For example, the natural gas strip for 2024 is now around $4.25, nearly the same as 2023 strip.
Conclusion
Antero’s projected 2023 free cash flow has been reduced to $1.633 billion at current strip, based on $4.30 NYMEX gas for 2023. The delays in getting Freeport LNG restarted have not been helpful for near-term natural gas prices, although longer-term futures have been less affected.
Antero’s estimated value is still around $34 to $35 at long-term $4.00 NYMEX gas and around $43 to $44 at long-term $4.50 NYMEX gas. Current longer-term (after 2023) natural gas strip prices are between those two numbers.
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