Antero Resources: Limited Free Cash Flow in 2024 Despite Capital Efficiency (NYSE:AR)
Jeongjaisuru
Antero Resources (New York Stock Exchange: AR) generated slightly negative free cash flow (before working capital changes) in the third quarter of 2023. Antero’s capital efficiency was improving; The price of a natural gas strip in 2024 was about $3.50. This puts Antero in a position to generate nearly $800 million in free cash flow in 2024 while keeping production in the second half of 2023 at around 3.45 Bcfe per day.
Since then, natural gas strip prices have fallen to $2.60 in 2024, while strip prices for oil and NGLs have also weakened slightly. If Antero wants to maintain production at 3.45 Bcfe per day, it could now have slightly negative free cash flow in 2024. You can also reduce your capital expenditure budget below maintenance levels. Despite efforts to generate free cash flow, capital expenditures actually account for only a relatively small portion of Antero’s cost structure.
If Antero reduces production by 4% to 5% from second-half 2023 levels and produces an average of 3.25 Bcfe per day in 2024, it expects to end up with free cash flow of $122 million. One day scenario.
Unless natural gas prices improve, Antero’s free cash flow will likely be minimal in 2024. However, I am still more optimistic about long-term gas prices and currently have an estimated value of Antero of $27-$28 per share. This is only slightly lower than the early October valuation for Antero. At the time, Antero had not yet reported further improvements in capital efficiency, but was projecting more than $700 million in free cash flow in 2024. The updated valuation estimate reflects Antero’s improved capital efficiency, which is slightly more than offset by lower near-term free cash flow expectations.
capital efficiency
Antero now expects production to average 3.4 Bcfe per day in 2023, 4% higher than initial guidance. At the same time, we expect to spend approximately $900 million on D&C capital expenditures and $150 million on land capital expenditures (consistent with previous guidance). Antero’s production in the second half of 2023 will now average approximately 3.45 Bcfe per day.
Antero notes that improved capital efficiency will enable it to lower D&C capital expenditures by 10% in 2024 and maintain production at 3.45 Bcfe per day, with a typical land capital expenditure budget of approximately $75 million to $100 million per year. Antero could therefore average 3.45 Bcfe per day in 2024, with total capital expenditures of around $900 million.
Antero also stated that a $100 million change in the capital spending budget would result in a change in production of approximately 0.1 Bcfe per day. Therefore, a capital expenditure budget of $700 million would result in production of approximately 3.25 Bcfe per day.
2024 projections for production levels in the second half of 2023
The following scenario looks at what could happen if Antero decides to maintain 2024 production at approximately 3.45 Bcfe per day, which is the projected production for the second half of 2023. Antero suggests it could do this with a total capital expenditure of about $900 million.
In 2024, at the current strip (including NYMEX gas at $2.60), Antero is expected to generate $4.196 billion in revenue, including dividends and distribution effects to Martica. I assumed that Antero could earn $0.05 more than NYMEX on natural gas in 2024.
| category | Barrel/Mcf | $/Mcf per barrel | million dollars |
| 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 |
| With the Martica distribution | -$100 | ||
| Antero Midstream Dividend | $125 | ||
| gun | $4,196 |
In this scenario, Antero’s D&C capex budget would decrease by 10% compared to 2023, reaching $810 million. Antero’s land investment adds $90 million. Antero had previously expected production costs to rise in 2024 due to the impact of rising natural gas prices, but this has been largely refuted as the 2024 strip is now slightly lower than 2023 actual costs.
| guard | million dollars |
| Cash production and marketing costs | $3,079 |
| Cash G&A | $160 |
| cash interest | $80 |
| capital expenditure | $900 |
| total expenditure | $4,219 |
Antero expects to have a cash burn of about $23 million from its current strip if it targets production of about 4.45 Bcfe per day.
Outlook for 2024 due to production decline
If Antero reduces its capital spending budget to $700 million, 2024 production could end at 4.25 Bcfe per day, which could be 4% to 5% below second-half 2023 levels.
At the current strip price, Antero is expected to generate $4.09 billion in revenue in this scenario, including the effects of dividends and distributions to Martica.
| category | Barrel/Mcf | $/Mcf per barrel | million dollars |
| 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 |
| With the Martica distribution | -$100 | ||
| Antero Midstream Dividend | $125 | ||
| gun | $4,009 |
With its capital expenditure budget reduced and transportation and throughput volumes also reduced, Antero would spend $3.887 billion in this scenario.
| guard | million dollars |
| Cash production and marketing costs | $2,947 |
| Cash G&A | $160 |
| cash interest | $80 |
| capital expenditure | $700 |
| total expenditure | $3,887 |
This is a positive cash flow of $122 million, an improvement of $145 million over a scenario in which Antero spent $900 million in 2024 capital expenditures.
However, capital expenditures generally make up a relatively small percentage of Antero’s cost structure, so reducing Capex will not have a significant impact on Antero’s free cash flow. Shifting from flat production growth to -4% to -5% production growth relative to second-half 2023 levels would equate Antero’s 2024 free cash flow to an improvement in natural gas prices of approximately $0.20 (NYMEX gas from $2.60 to $2.80). It improves significantly.
The decline in development activity in 2024 will help Antero more in preserving inventory than improving free cash flow, as Antero’s balance sheet is strong.
Notes on evaluation
I now estimate Antero’s value at $27 to $28 per share. For commodity prices, I maintain a long-term (2024 and beyond) outlook for WTI crude oil at $75 and NYMEX gas at $3.75.
Antero’s improved capital efficiency has added $2 more to its value compared to where we looked at the company in early October, but has reduced its projected free cash flow from the fourth quarter of 2023 to the end of 2024 (under a 3.45 Bcfe production scenario) by nearly $3. . per week.
conclusion
Antero Resources expects to be able to sustain production of 3.45 Bcfe per day in 2024 with Capex of approximately $900 million, up from $1.05 billion in 2023 Capex. It could also produce approximately 3.25 Bcfe per day with a capital expenditure of $700 million.
But whatever you choose, free cash flow is likely to be quite limited at the current NYMEX gas $2.60 level in 2024. Antero’s balance sheet is currently in good shape, so we don’t see that being an issue for long. This is because natural gas prices will improve in the future.
I maintain my outlook for natural gas prices to average $3.75 after 2024, resulting in an estimated value of $27 to $28 per share. This reflects improved capital efficiency and limited free cash flow in 2024.
