zhengzaishuru
Antero Resources (NYSE:AR) generated slightly negative free cash flow (before changes in working capital) in Q3 2023. I didn’t consider that to be a problem at the time of its Q3 2023 earnings report since Antero’s capital efficiency was improving and the 2024 natural gas strip was around $3.50. This put Antero in a position to produce nearly $800 million in 2024 free cash flow while keeping production at 2H 2023 levels of approximately 3.45 Bcfe per day.
Since then natural gas strip prices have fallen to $2.60 for 2024 and there has been some weakening in the strip prices for oil and NGLs as well. If Antero wants to keep production at 3.45 Bcfe per day, it may end up with slightly negative free cash flow for 2024 now. It could also reduce its capex budget to below maintenance levels in order to produce free cash flow, but capital expenditures actually only account for a relatively modest portion of Antero’s cost structure.
If Antero goes for a 4% to 5% refuse in production from 2H 2023 levels and averages 3.25 Bcfe per day in 2024 instead, I project it would end up with $122 million in free cash flow, a $145 million improvement from the 3.45 Bcfe per day scenario.
Antero’s free cash flow is likely to be pretty minimal in 2024 unless natural gas prices boost. I am still more optimistic about longer-term gas prices though, and have a $27 to $28 per share estimated value for Antero now. This is only slightly lower than my early October valuation for Antero. At that time, Antero hadn’t reported encourage improvements in capital efficiency yet but was also looking at $700+ million in 2024 free cash flow. My updated estimated value reflects Antero’s capital efficiency gains, which are slightly more than offset by reduced near-term free cash flow expectations.
Capital Efficiency
Antero now expects to average 3.4 Bcfe per day in production during 2023, which is 4% above its initial guidance, while spending around $900 million in D&C capex and $150 million in land capex (unchanged from its earlier guidance). Antero’s 2H 2023 production should average around 3.45 Bcfe per day now.
Antero notes that its improved capital efficiency should allow it to keep production at 3.45 Bcfe per day in 2024 with a 10% lower D&C capex, while its typical land capex budget is around $75 million to $100 million per year. Thus Antero may average 3.45 Bcfe per day in 2024 with around $900 million in total capex.
Antero also indicated that a $100 million change in its capex budget would result in a roughly 0.1 Bcfe per day change in its production. So a $700 million capex budget instead would guide to roughly 3.25 Bcfe per day in production.
2024 Outlook At 2H 2023 Production Levels
The following scenario looks at what may happen if Antero decides to keep 2024 production flat at expected 2H 2023 production of approximately 3.45 Bcfe per day. Antero suggests it can do this with around $900 million in total capex.
At current strip (including $2.60 NYMEX gas) for 2024, Antero is projected to produce $4.196 billion in revenues, including the effects of received dividends and distributions to Martica. I’ve assumed that Antero can achieve $0.05 above NYMEX for its natural gas in 2024.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Natural Gas | 828,000,000 | $2.65 | $2,194 |
| Ethane | 24,000,000 | $9.00 | $216 |
| C3+ NGLs | 43,250,000 | $34.00 | $1,471 |
| Oil | 4,750,000 | $61.00 | $290 |
| Distributions To Martica | -$100 | ||
| Antero Midstream Dividends | $125 | ||
| Total | $4,196 |
In this scenario, Antero’s D&C capex budget is reduced by 10% compared to 2023, ending up at $810 million. Antero’s land capex adds another $90 million. Antero previously expected its production costs to go up in 2024 with the impact of higher natural gas prices, but with current 2024 strip slightly below 2023 actuals, that is largely negated.
| Expenses | $ Million |
| Cash Production and Marketing Expense | $3,079 |
| Cash G&A | $160 |
| Cash Interest | $80 |
| Capital Expenditures | $900 |
| Total Expenditures | $4,219 |
Antero is projected to end up with around $23 million in cash burn at current strip if it aims for around 4.45 Bcfe per day in production.
2024 Outlook With Reduced Production
If Antero reduced its capex budget to $700 million, it may end up with 4.25 Bcfe per day in 2024 production, a 4% to 5% refuse from 2H 2023 levels.
At current strip prices, Antero would be projected to produce $4.009 billion in revenues in this scenario, including the effects of received dividends and distributions to Martica.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Natural Gas | 790,800,000 | $2.65 | $2,096 |
| Ethane | 22,925,000 | $9.00 | $206 |
| C3+ NGLs | 41,300,000 | $34.00 | $1,404 |
| Oil | 4,550,000 | $61.00 | $278 |
| Distributions To Martica | -$100 | ||
| Antero Midstream Dividends | $125 | ||
| Total | $4,009 |
With the reduced capex budget and also lowered volumes to transport and process, Antero would end up with $3.887 billion in expenditures in this scenario.
| Expenses | $ Million |
| Cash Production and Marketing Expense | $2,947 |
| Cash G&A | $160 |
| Cash Interest | $80 |
| Capital Expenditures | $700 |
| Total Expenditures | $3,887 |
This is $122 million in positive cash flow, a $145 million improvement from the scenario where Antero spent $900 million in 2024 capex.
In general, though, capital expenditures are a relatively modest proportion of Antero’s cost structure, so reducing capex doesn’t have a huge impact on Antero’s free cash flow. Going from flat production growth to -4% to -5% production growth compared to 2H 2023 levels would boost Antero’s 2024 free cash flow by the same as around a $0.20 improvement in natural gas prices (from $2.60 to $2.80 NYMEX gas).
A reduction in 2024 development activity would probably benefit Antero more for inventory preservation than free cash flow improvement as Antero’s balance sheet is fine.
Notes On Valuation
I now calculate Antero’s value at $27 to $28 per share. I am maintaining a longer-term (after 2024) outlook of $75 WTI oil and $3.75 NYMEX gas for commodity pricing.
Antero’s improved capital efficiency adds a couple of dollars in value compared to my early October look at the company, but its projected free cash flow (in a 3.45 Bcfe production scenario) between Q4 2023 and the end of 2024 has been reduced by close to $3 per share.
Conclusion
Antero Resources expects to be able to maintain production at 3.45 Bcfe per day in 2024 with around $900 million in capex, down from $1.05 billion in 2023 capex. It also may be able to produce around 3.25 Bcfe per day with $700 million in capex.
Whatever it chooses to do though, its free cash flow is likely to be fairly limited at the current strip of $2.60 NYMEX gas in 2024. Antero’s balance sheet is in good shape now, so I don’t see that as being a problem as long as natural gas prices boost in future years.
I am maintaining an outlook for natural gas prices to average $3.75 beyond 2024, and thus have an estimated value of $27 to $28 per share. This reflects its improved capital efficiency and its likely limited free cash flow for 2024.
