|Shares Out. (in M):||315||P/E|
|Market Cap (in $M):||0||P/FCF|
|Net Debt (in $M):||3,300||EBIT||0||0|
|Subject||Screw it, I'm buying.|
|Entry||01/19/2018 03:05 PM|
The trading price at $18.40 looks dumb to me. They've got one of the biggest and best asset bases in the industry; great recycle ratios and a deep drilling inventory. They control the midstream. The balance sheet is in good shape. Gas is nearly 100% hedged for the next two years at a significant premium to Henry Hub. They have the most exposure of any E&P I am aware of to favorable secular trends for NGL demand. They just got upgraded to investment grade by Fitch. They will compound production on a debt-adjusted per share basis at >20% for years to come. They will be free cash flow positive and probably initiate a dividend and buybacks as soon as upstream debt/EBITDAX arrives in the low 2s. The CEO/CFO sold two E&Ps previously. They own $1.2bn worth of the AR/AMGP and they are frustrated with the valuation of AR. They just held a solid analyst day and are adjusting their financial disclosures to help investors see the value of the upstream business. AM, AMGP and AR's bonds all trading strong. Meanwhile, AR is barely trading above its all time low.
At $18.40 the market cap on 316mm shares = $5.8bn. Upstream debt is $3.4bn so the upstream EV is $9.2bn. The 99mm AM units owned by AR at $31.50 are worth $3.1bn. The hedge book at $3/mcf HH is worth $1.2bn. The PDPs at $2k/flowing mcfe are worth $4.4bn. So you're paying $500mm for the PUDs, or $1.50/sh. Think about that. Only 8% of AR's share price is ascribed to the PUDs. AR's undrilled locations are worth $11-16/sh based on the PUD valuation metrics implied by the EQT/RICE fairness opinion.
In order to come up with a lower value than $18.40 I need to use a price deck of $45 WTI, $2.75 HH, and NGLs at 45% of WTI held flat forever.
|Entry||01/19/2018 03:38 PM|
Sorry, I just saw this comment. I can't provide our models publicly... so I'll have to pass on this request. However, as I mentioned in my response/comment to snarfy, the cash flows should be quite large relative to the current market cap over the next few years. If you take a look at the company's presentation from their analyst day yesterday, I think you'll find all of the info you need to build a simple model. The output seems quite interesting relative to the current share price.
|Subject||Re: Re: Re: Model|
|Entry||01/27/2018 08:02 AM|
Their invest day presentation projects based on current strip price, but how do you get comfortable that as all the producers in the Marcellus and Utica (and for that matter nationally) get more efficient, they don’t just keep ramping production and driving down margin, implying strip is too high. Even if Antero is disciplined, what about the other producers? Is there a structural problem in US gas of there simply being too many producers so it’s impossible to optimize production? Do strip prices already reflect that?
Put another way, isn’t Marcellus and Utica supply growth outpacing demand growth?
|Subject||Re: Re: Re: Re: Model|
|Entry||01/27/2018 09:52 AM|
That is the biggest risk in our view. My only response is that this risk is constantly discussed among investors I talk to about nat gas companies, so perhaps it is in the strip price. But I don't know that for sure. That is the reason we invested in AR (and made it our only nat gas investment) -- they have a huge hedge book, and a relatively conservative balance sheet.
That isn't a great answer, but at the current share price, it seems priced in to a large degree.
|Subject||Re: Re: Re: Re: Re: Model|
|Entry||01/27/2018 02:04 PM|
sadly for stock-pickers, it's all there is -- is the curve right?
bear with me, and forgive me for using RRC, i am only doing that because we have such recent data on them. i think AR is the better risk/reward, because of what amr504 just pointed out (hedge book, balance sheet).
but if we assume these are mature companies, not in the sense of their drilling inventory, but in terms of OpEx and F&D costs - i think we know what these companies are capable of in terms of reserve additions, and what it takes to achieve those reserve additions.
but RRC had 2016 Year-End PV-10 of $9B for their 12.072 Tcfe, with gas priced at $3.14. this translates to PV-10 of $0.75/mcfe. 2017 Year-End PV-10 with gas at $2.94 gas is $9.5B. so their 15.262 Tcfe of reserves are valued at or $0.62/mcfe. i'm not accounting for changes in WTI, so it's not totally accurate.
PV-10 does not move linearly, but to eyeball it: a 20 cent drop in Henry Hub resulted in a $0.13 drop in value per reserve, from 2016-2017. if we use strip of $2.75 for gas, the value per reserve goes to $0.49/mcfe. multiply this by year-end reserves of 15.272 tcfe, you get a PV-10 of $7.5B, which is right where the stock trades. assuming they keep growing reserves at 26% in a cash flow-neutral manner, and gas is at $2.75, the theoretical return is 26% from here.
so it seems to me that RRC prices in $2.75 gas, so the only real question is if the curve is right. i don't know how AR's numbers will work out when their reserve report comes out. it sounds dumb to say these are really just leveraged bets on Henry Hub, but that's not always the case when comparing compan valuations to PV-10. it's very isolated to that in the case of RRC right now.
|Subject||Re: Re: Re: Re: Re: Re: Model|
|Entry||01/27/2018 06:11 PM|
RRC is pricing in low 2s for Henry Hub if you assume $55 WTI and NGLs at 40% of WTI in my model.
|Subject||Price and Safety|
|Entry||01/27/2018 08:52 PM|
I take a simple approach to these gas producers (just modeling cash flows on their existing resources), and I think that there is a reasonable margin of safety built in at the current stock prices. While we only own AR, a couple of these businesses look relatively cheap using our approach. We like AR because of their balance sheet. We think you get significant potential upside given the assets they own, you have less risk given their balance sheet, AND you have a management team that is in their 60's and likely wants to make something happen in the next few years given their equity ownership. If it turns out that we have a massive gas glut over the next few years, I don't think I'll lose much from here (famous last words).
|Subject||Re: Re: Re: Re: Re: Re: Re: Model|
|Entry||01/28/2018 12:31 PM|
it looks like i am underestimating the effect of WTI (via NGLs) on the PV-10. 2017 year-end PV-10 shows a $1.4B increase in value going from $51.19 WTI to $53.44, while at the same time losing 4 cents on gas prices. i can't get there on the arithmetic. but i'm not calling them liars, so if the table in their recent press relase is accurate, then you are right. RRC is pricing in low $2s gas ... that certainly makes this more interesting than i thought.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Model|
|Entry||01/28/2018 05:34 PM|
Not sure what numbers you're looking at. PV-10 increased from $3.7b to $8.1b. Wellhead gas prices using the SEC's methodology rose 26% from $2.07/mcf to $2.60/mcf. NGL prices rose 33% from $13.44/bbl to $17.84/bbl because not only did benchmark oil prices rise 20% from $42.68/bbl to $51.19/bbl, but NGLs as a % of WTI rose from 31.5% to 34.9%. NGLs are the "hidden" leverage to oil prices here, as they represent 30% of RRC's production.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Re: Model|
|Entry||01/28/2018 09:20 PM|
i am looking at 2017 year-end PV-10 under SEC Pricing versus Strip Pricing.
there is a $1.4B difference between the two. SEC pricing is $8.1B at $51.19/2.98 ... Strip pricing is $9.5B at $53.44/2.94
I am aware of the leverage to NGLs. I don't see how lowering gas by 4 cents, and adding $2.25 to WTI, adds $1.4B (or 17%) to PV-10.
I have never seen a 4% increase in WTI, and 1% decrease in natural gas pricing, applied to the same reserve base and result in a 17% increase in PV-10.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Model|
|Entry||01/28/2018 09:46 PM|
I see now. It's not as crazy as it seems. If I move WTI up 4% from my base case of $50 WTI, holding nat gas constant, I get a >$800 million uplift, but that's giving them credit on a full 3P basis. I could see how the uplift could be bigger than $800 million when you are constrained by the SEC's 5 year rule and moving WTI up 4% brings forward reserves that otherwise would not have qualified for inclusion.
|Entry||01/29/2018 12:50 PM|
SailingStone has been a long-term AR owner. They own 11% of the company and have decided to go active. While we do not know the specifics of their proposals, they make sense from a 30,000 foot view of the situation. Less production growth, less debt, share repurchase, etc. This is going to be an interesting year for AR... shares are far too cheap.
|Subject||Re: SailingStone 13D|
|Entry||01/29/2018 12:54 PM|
The wheels are turning. This is good for RRC too. These Tier 1 E&Ps need to turn themselves into FCF machines. And they will.
|Subject||Re: Re: SailingStone 13D|
|Entry||01/29/2018 12:59 PM|
Here is the link to the filing... which I neglected to put in the first message.
|Subject||AR press release|
|Entry||01/29/2018 04:23 PM|
Out with a press release saying they are on the case and addressing the "valuation discount is a high priority within our organization and we intend to pursue it with vigor." With vigor! How do you short this thing here? The short interest is $500 million. If Paul/Glen come forward with a credible plan to address the gap, and why wouldn't they be motivated since they own $525 million worth of stock, they are going to blaze a set of tire tracks through those long/short pods at Citadel and Millennium that look like they're from the DeLorean in Back to the Future.
I think Paul/Glen thought the analyst day would get investors excited and were surprised when it didn't.
|Subject||Re: AR press release|
|Entry||01/29/2018 04:45 PM|
they object to their valuation. no, they strenuously object
|Subject||conflicts of interest|
|Entry||01/30/2018 12:52 PM|
thanks for the nice write up. can you talk about any potential conflicts of interest here between the various entities AR, AM, AMGP. how can one get comfortable around these? doesn't management/sponsors own more of the non AR entities?
|Subject||Re: conflicts of interest|
|Entry||01/30/2018 01:33 PM|
I'll give you my 2 cents and maybe amr504 will have some other thoughts. Management and insiders own $2.8bn of AMGP and $1.7bn of AR so you could argue they are more incentivized to maximize AMGP, but the discrepancy only exists because AR is so depressed. AR is where the upside is. $40/sh is not a crazy valuation and that would give them $1.7bn of upside. In AMGP's analyst day presentation they noted the shares could be worth $30 if valuation followed the relationship between yield and growth exhibited by midstream comps, up from $21. That reconciles with my estimates, but it's somewhat of a blue sky case. That would give them 43% upside on $2.8bn, or $1.2bn. So $1.7bn of upside at AR vs. $1.2bn of upside at AMGP.
In any event it's hard to separate the fates of AMGP and AR. It's not as if the upstream business is getting totally screwed by the midstream. People should also not forget that the AM units held by AR are worth $10 per share of AR, so half the market cap at this point.
|Subject||Re: Re: conflicts of interest|
|Entry||01/30/2018 01:34 PM|
|Subject||Re: AR press release|
|Entry||02/02/2018 02:44 PM|
snarfy - what can they do to address the valuation discount in your mind?
|Subject||Re: Re: AR press release|
|Entry||02/02/2018 03:51 PM|
spike -- I'm going to take a crack at this too, just to add to the discussion.
What I'm about to write will likely never happen... but it shows the level of "distress" in these Marcellus nat gas producers.
AR is currently trading at an equity market cap of $5.9B. They own units of AM worth $2.9B (but let's say $2.4B after tax -- they have a large NOL). So, AR shareholders own a stream of E&P cash flows for $3.5B. (after selling all of AM -- that's the part that never happens).
Now, at 12/31 strip prices (they are higher now, but whatever), operating cash flows look to be ~$1.3B in 2018. Their current drilling plan calls for spending $1.3B in 2018, so breakeven cash flow. They have stated in the past that maintenance capex is around $200M (production stays flat). Let's say they are way off there and it is actually $500M.
If that is true, you could cut the drilling program to $500M and maintain production (and thus operating cash flows at current prices). Eventually you would have to pay tax (after you've burned through the NOL, etc), so let's take operating cash flow less maintenance capex of $800M and tax it at 25% (makes math easier). Thus, you have after-tax cash flows of $600M on an E&P market cap of $3.5 for a 17% FCF yield.
I know that is overly simplistic, and will never happen, but with that type of opportunity, surely a management team dominated by large share owners can find a way to increase the share price.
|Entry||02/06/2018 03:32 PM|
I'm coming up with AR's upstream business at 4.3x LTM EBITDAX and EQT's at 4.6x, although that's not giving EQT credit for any synergies.
How are you getting to 7x for AR? I have the upstream EV at $9.2bn ($18.25/sh * 315.5mm shs + $3.4bn upstream net debt). I back out $3.0bn for the AM units ($30/unit * 98.9mm units) and $1.2bn for the hedge book for an adjusted upstream EV of $5.0bn. LTM EBITDAX is $1.3bn, but I back out $127mm of AM distributions they count for $1.2bn of true EBITDAX.
|Subject||Re: Re: Re: AR press release|
|Entry||02/09/2018 12:05 PM|
lots of assumptions in here - some make sense and others i am not sure about
1) agree on AM - but you are conservative on the after tax proceeds it seems.
2) strip prices - mr. market is telling us that strip prices are not going to happen it appears, so we never actually see those cash flow.
3) i'd like to actually see them do the maintence mode - 1.3b - .3b of 1B cashflow (and assume they use the NOL) Use that to de-lever and buy back shares.
i like the comment on owner operators but perhaps the conflicts of interest are way too great here.
in summary, too much gas available with conflicted (potentially) management and a investor base that's been involved here and massively underwater.
is there anyway they could sell the company?
|Subject||amr504 maintenance cap ex|
|Entry||02/13/2018 01:06 PM|
from the analyst day they say maintenace is 590mm per year. how does that relate to your 200mm number? (is the difference related to land purchases which you assume don't occur?).
|Subject||Re: Re: amr504 maintenance cap ex|
|Entry||02/13/2018 03:14 PM|
thanks, this is what i thought. Just wanted to make sure i wasn't missing anything. i agree with your assessment.
i do wonder what the company would fetch in a sale. do you have any thoughts on that?
|Subject||A couple thoughts|
|Entry||02/14/2018 04:48 PM|
In my mind the big news today is they deducted all of their intangible drilling costs for federal income taxes in 2017. This lifted their NOL from $1.6bn at YE2016 to $3.0bn at YE2017 in spite of taxable gains from selling some AM units and monetizing a portion of their hedge book late in the year. Utilization of the NOLs is not subject to a limitation of 80% of their taxable income in a given year. If I understand this correctly, the impact to people's models is they can stop tax effecting the value of the AM ownership stake. The market cap only went up $275mm today.
The stock is stupid cheap. The implied value/acre after backing out AM, hedge book, and PDPs is approximately $1,000. To put that in perspective, that's how much it cost Range to build their SW Marcellus position way back before anybody knew how big the Marcellus would become. I thought I read somewhere it cost AR $500/acre to build their position, but I can't find the source. Whatever. You might say, well gas prices were higher back then, but F&D costs were 3x what they are now, so recycle ratios are actually not that much different but the resource expansion has been enormous.
Nice year from an F&D standpoint. Recycle ratios were 2.1x drilling only, 2.8x drilling & revisions, and 2.9x all sources. Excellent.
Glen said they like their development plan and are not going to slow down. That is disappointing, but that's the only thing he can say until they have a fully baked plan to roll out with respect to crystallizing value at AR.
I think it's funny that people are so hung up on the potential "conflicts". Okay, yes, Paul and Glen own a ton of the midstream IDRs, but they also own a ton of AR and the upside from AR is greater. As if they are going to screw over AR to benefit AMGP. It's just absurd. These guys are owner/operators and that's that.
|Subject||Re: Re: A couple thoughts|
|Entry||02/14/2018 06:51 PM|
It's ridiculous. I met with management from yet another gassy E&P on Monday where the acreage value implied by the market is way below where M&A or acreage transactions occur. We were talking about the fact that you simply can't do M&A or acreage deals at the same valuations implied by the market because they are too cheap relative to the cash flows. Then it dawned on me that the end game, if all other paths to realize value fail to occur, is the formation of integrated LNG exporters that own the infrastructure and the upstream production, and market the gas around the world. Think about that - connecting a low cost repeatable asset base like AR's or RRC's with end markets that offer pricing in the $8-11/mmbtu range. Crazy, even with the capital costs of the export capacity.
Maybe AR should buy RRC in an equity deal. Both stocks are depressed. Probably have lots of corporate and asset synergies. Lots of extra production that would allow AM to maintain its distribution growth guidance while allowing the upstream business to dial back production growth. RRC doesn't own its midstream, but they're tied up with MPLX who is AM's partner on that JV so there is an incentive for MPLX to help them figure it out. Then AM/MPLX could build an LNG export facility. I need to think this through some more but on the surface it gets me excited.
|Entry||03/07/2018 03:38 PM|
anyone have thoughts on the strategic review process? is the logical first step to combine the various entities?
does this make sense for AR?
|Subject||FERC ruling possibly a net positive for AR?|
|Entry||03/16/2018 10:40 AM|
I assume AM is not impacted because it appears their assets are not FERC regulated, and TPH has a note out this morning saying AR has 1.5 bcf/d of upcoming cost of service capacity so the usptream business may possibly see some benefit.
|Subject||Re: FERC ruling possibly a net positive for AR?|
|Entry||03/16/2018 12:49 PM|
We also came to the conclusion that AM is not impacted. The market is in the "voting machine" part of the cycle right now... so we're waiting for the "weighing machine". Until then, pesky facts like these don't matter much (except to the downside).
|Subject||Re: Re: FERC ruling possibly a net positive for AR?|
|Entry||03/16/2018 01:09 PM|
Speaking of pessimism and the short-term voting machine, did you see this WSJ article about MLPs and the FERC ruling last night? It has to be one of the dumbest articles I have read in the Journal in a long time.
|Subject||Re: Weakness in Antero Midstream|
|Entry||03/20/2018 01:55 PM|
I have no answers, only theories.
1. Gas prices have been slightly weak so perhaps investors are beginning to fear that AR will pull back on production growth after their FT is full in a couple years and pursue a returns over growth strategy. The reckoning with FT that is finally full always seemed like an issue that was way off in the distance. Maybe investors can finally see it on the horizon?
2. The FERC ruling last week has sent MLP investors into a tailspin and they're in the mode of shoot first ask questions later. AMLP -7.2% since the day before the announcement. AM -5.0% and AMGP -5.9% even though AM appears to have no FERC regulated assets or pricing structures that would be affected. AR -6.0% which more than accounts for any loss of value through their AM ownership so who knows.
3. I wonder if investors fear that any recommendations by Antero's special committee will favor AR and AMGP over AM since AR/AMGP is where the insiders' financial interests lie. That said, it's hard to hurt AM without hurting AMGP. AR +2.2% since the formation of the committee. AM -3.0% but AMGP -14% so that doesn't exactly prove this theory.
4. CNXM had a very strong analyst day. Their updated multi year guidance is now as attractive as AM's in terms of EBITDA and DCF growth so perhaps there is some new competition for investor capital that likes high growth Appalachia infrastructure.
|Subject||Any thoughts on quarter?|
|Entry||08/02/2018 12:16 PM|
what is the market unhappy about here, aside from modest EBITDAX miss?
|Subject||Re: Re: Any thoughts on quarter?|
|Entry||08/02/2018 12:44 PM|
The upstream business missed consensus on pretty much all the key metrics. Probably some Pavlovian reaction to that, even though it's not related to the quality/depth of the asset base. Lowered full year NGL realization guidance due to ME2 delays, but again, not indicative of the company's long-term value. Might also be some disappointment that there was no update from the special committees. Back in March Glen was saying the process would take months, not quarters, not now it's been almost five months. But, they did say they will have an update by Q3.
|Subject||Re: Re: Re: Re: Any thoughts on quarter?|
|Entry||08/02/2018 02:01 PM|
I would be shocked if the strategic review didn't result in concrete action steps. I think some combination of AM/AMGP collapse plus a buyback/dividend by AR is the likely outcome. The Street is more focused on the "conflicts" on the midstream side but I am pretty sure Paul and Glen are more focused on the massive disconnect between price and value at AR.
|Subject||Re: Updated Valuation|
|Entry||08/21/2018 11:18 AM|
thanks for this update. just to be clear how do you handle the debt in your DCF? i get the 38 dollars x 317 = 12B. is the real DCF 17B and then you minus the debt? just for clarity sake.
by your valuation numbers this strategic review is going to lead to a massive transfer of wealth to the AM shareholders. (i am just assuming it gets done at .65 exchange ratio).
|Subject||Re: Re: Re: Updated Valuation|
|Entry||08/22/2018 12:02 PM|
thanks. i assumed you were subtracting the debt but just wanted to make sure for complete clarity.
my point on the AM comment - if AR is worth 38, by doing a collapse at current values (or a small premium) this is a huge transfer of wealth to the AM shareholders. if your values are correct, they should sell AM stake and repurchase shares at 20 bucks aggressively - which should drive incremental returns to AR (if your 38 is correct). if they combine, the 38 gets diluted by the amount you have to give to the AM shareholders since in your analysis it's only worth 30. does this make sense?
have you run the numbers at different oil and gas prices? i'd like to understand what the market is implying at 18.50.
|Subject||Re: Re: Re: Re: Re: Updated Valuation|
|Entry||08/23/2018 10:22 AM|
perhaps i am missing something totally obvious (would not be the first time). AR and AM are in discussions to merge/collapse the structure. eventually it's going to be one security. AR in your mind is under-valued by many billions of dollars (6B). AR+AM market cap is 12B. doesn't this mean a multi-billion dollar transfer to AM shareholders if the transaction is done at market (or maybe slight premium)?
Just not sure how you can model this security out for 30 years but not collapse the structure prior to running the model given that's the most likely scenario. but perhaps i am thinking about this incorrectly.
|Subject||Re: Re: Re: Re: Re: Re: Updated Valuation|
|Entry||08/31/2018 01:01 PM|
if the most likely scenario is a combination of AR and AM, what's the most likely outcome for AMGP?
|Subject||Re: Re: Re: Re: Re: Re: Re: Updated Valuation|
|Entry||08/31/2018 01:39 PM|
Wouldn't it make the most sense for AMGP to buy AM?
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Updated Valuation|
|Entry||08/31/2018 03:51 PM|
As a final solution, or as an intermediate step leading to a transaction w AR?
It would fit with the recent MLP mergers of GP/LP, but doesn't really solve the conflict of AR management having large stake in AMGP -
Hard (for me anyway) to see how an AR transaction would get done at current prices without someone being unhappy -
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Re: Updated Valuation|
|Entry||08/31/2018 04:21 PM|
Not sure if it would be an intermediate step or a final step. It seems like AMGP buying AM is an obvious thing to do. AR folding the midstream back in doesn't seem to solve anything as far as I can tell. The midstream assets would maybe at best get a multiple that is a hybrid of E&P and pipeline multiples, so lower than they would get on a standalone basis. Maybe it would bring up the multiple on the E&P business? At worst it would drag down the multiple on everything even further.
Is it really such a conflict for AR management to have a large stake in AMGP? Paul/Glen own $540mm of AMGP but they also own $420mm of AR and you could argue there is more upside to AR. I doubt they would do anything to drain value from AR just for the benefit of AMGP. I am trying to think through whether I am missing something though. How do you see their AMGP stake hurting AR shareholders?