|Shares Out. (in M):||756||P/E||0||0|
|Market Cap (in $M):||643||P/FCF||0||0|
|Net Debt (in $M):||756||EBIT||0||0|
|TEV (in $M):||756||TEV/EBIT||0||0|
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This write-up represents the sixth installment in the long, but hardly successful, series of buy recommendations within the carnage known as the Antero complex on the VIC. As some of us here are painfully aware, we can euphemistically agree that these ideas have yet to play out.
Antero Resources stock (“AR”) was first recommended at above $40 per share in 2015, then twice again in 2017 at around $24 and $19, and most recently at $9.61 in 2019. The stock closed at $4.43 on Friday, having rallied tremendously from the March lows near 60 cents.
Similarly, Antero Midstream stock (“AM”) was recommended in 2019 at $12.80, with the hilariously prescient opening line, “I would like to offer VIC members yet another way to lose money on northeast gas.” AM’s most recent close is at $7.31, and it’s quite possible that this idea will be profitable at some point, as the distributions continue to roll in, refuting the many naysayers. I hope my post here receives an even snarkier tag than the “Again, why not just buy V/MA?” that hangs on the AM recommendation.
Despite the performance of the stocks, all of these recommendations were comprehensive, well written, and thoughtfully pitched. Please refer to these for background on the AR and AM entities, and how they have evolved from inception to today. I think this background is valuable, but will not rehash much of it here, except where it pertains to the recommendation for this particular security.
At the current market price of 85% of par, the Antero Resources 5.125% coupon issue maturing on December 1, 2022 (the “2022 Bond”) strikes me as a very compelling risk/reward. It offers a lofty 12.9% yield to maturity, has limited duration, and, as discussed below, has certain dynamics at play that make it very unlikely that the issuer will default prior to this bond’s redemption. These dynamics include the bond’s position in AR’s maturity schedule, the liquidity sources available to AR, AR’s other sources of cash, its hedge position, and its debt management efforts.
AR’s Maturity Schedule
1. $503mm 5.375% Notes Due 11/1/21. Market price 98.25, Yield 6.91%.
2. $926mm outstanding on Credit Facility Due 10/26/22, Interest Rate 3.32%.
3. $756mm 5.125% Notes Due 12/1/22, Market price 85, Yield 12.90%.
4. $714mm 5.625% Notes Due 6/1/23, Market price 76.5, Yield 16.47%.
5. $590mm 5% Notes Due 3/1/25, Market price 70.0, Yield 14.20%.
The credit line technically comes due 91 days before the 2021 bond maturity (that is, August 1, 2021) if any of those 2021 bonds are outstanding on that date. The company is currently tendering for all of its 2021 bonds at $98. In its presentation on 8/11/20, AR makes the assumption that all of the 2021 bonds will be tendered, pro forma leaving none outstanding, and thus places the credit facility’s maturity at 10/26/22, a bit over a month before the 2022 bonds mature.
This, of course, is pure fantasy. The 2021 bonds are already trading above the tender price, and historically even the most generous tenders have failed to get 100% participation. Nonetheless, as I will discuss below, there appears to be enough asset coverage here for the bank consortium to continue rolling the maturity of the facility past the 2022 bond redemption date.
The 2022 Bond therefore is the first security in the maturity structure to offer an “equity like” return. As discussed further below, barring an unforeseen calamity, the 2021 Bond will almost certainly be redeemed with the company’s currently available liquidity. Its yield near 7% makes this an interesting risk-reward for a “cashlike” investment, but given the substantial downside in “unknown” scenarios, it would have to be sized such that the amount to be made might not be worth it. The later maturities might be better plays for those very bullish on natural gas and associated liquids, but perhaps AM and AR stock would offer higher returns for that upside outcome.
Assuming the ability to roll the credit facility, there will be $1.26 billion of Senior Notes outstanding and redeemable through the maturity of the 2022 Bond. This compares to total AR debt of approximately $3.5 billion.
AR’s Liquidity Sources
My quick math on the company’s liquidity sources is as follows:
1. Credit Facility Availability = $973mm.
Antero’s total credit facility commitment is currently $2.64 billion. At 6/30/20, subtracting the $926 million currently drawn and the $730mm of LOCs left $984mm available. Subsequent bond purchases brought this down to $973mm at 8/11/20.
2. August VPP Sale = $220mm.
Antero announced a VPP sale on 8/11/20 to JP Morgan for proceeds of $220mm. This, combined with the sale of $100mm of AM stock, the earlier $402mm ORRI transaction, and $29mm in hedge monetization (available due to the ORRI transaction) means the low end (at $751mm) of AR’s total targeted asset sales announced in November 2019 of $750mm-$1 billion has been achieved.
3. 2H 2020 Free Cash Flow = $175mm.
This is based on the company’s full hedge at $2.85/MMBTU, 3.5 Bcfe/d production expectation, and reduced capital spend of $280mm.
4. 139mm Shares of AM Stock = $1,016mm.
Based on Friday’s closing price of $7.31 per share. Company mentioned $150mm remaining on AM’s repurchase authorization on latest earnings call.
The quantifiable liquidity sources identified above add up to almost $2.4 billion, as compared to the $1.26 billion in maturities to handle through the 2022 bond maturity.
Other Sources of Cash
The following of course have some overlap with the liquidity sources above, but their scale relative to the size of the maturity setup through 2022 suggests that some portions of these could be significant in a downside scenario should addition sources need to be accessed.
531k net acres in Appalachia. 84% NRI. 19 Tcfe Proved Reserves. 3.5Bcfe/d of net production.
2. Mineral Rights.
5k net mineral acres in Appalachia.
1.7 Tcfe of hedges with a current value of $475mm, 5.9mm bbls of oil hedges with a current value of $110mm. Asset sales create hedge monetization opportunities.
4 2021 Free Cash Flow.
We don’t yet have projections from management for 2021. We do know that AR is 98% hedged on dry gas through the end of that year at $2.83/MMBtu, with all-in production costs at $2.35 and falling, and a flexible capex budget set around $600mm in maintenance capex.
As mentioned above, AR is almost fully hedged through the end of 2021. Natural gas futures for 2022 have been rising recently, with the January 2022 not above $3, versus a low below $2.60 in March. The 2022 shoulder months may have bottomed as well, with the May contract at 2.38 (approximately breakeven for AR), up from $2.15 in March. Supply shrinkage and recovering demand suggest a continued recovery, but we all know a lot can happen in 18 months given the nonlinear dynamics currently at play.
Whatever one thinks about this management team, it is undeniable that CEO Paul Rady and CFO Glenn Warren have their eye on the markets and have opportunistically taken advantage of perceived dislocations for the benefit of the company. Indeed, perhaps one of the reasons there are so many skeptical current and former shareholders in this complex may be that they timed the company’s public offering rather impressively. They also locked in hedges at very attractive prices, covering anticipated production much more fully than most of their peers. They had repurchased shares in both the AR and AM entities at prices that seem unattractive today, but got very aggressive recently when most thought these companies weren’t going to make it.
With regard to the company’s debt, to date the company has repurchased approximately $900mm of bonds (some of which were issued ABOVE par) at an 18% average discount, and they just announce a $525mm tender offer for all of its 2021 Notes at $98 and it 2022 and 2023 Notes in a range for a Dutch tender.
Ironically, if this company never drilled a well, but just opportunistically put on and removed gas hedges, and issued and repurchased bonds and stock, it would have been a wildly successful hedge fund!
Additional Thoughts about these Bonds and This Management Team
I think management’s actions have demonstrated that they are long-term believers in the play they have here and they clearly expect this company to thrive. They have maintained the dividend on AM stock far longer than many would have expected, and they bought back stock in both companies when all natural gas producers were being left for dead. I think there is a lot of information in aggressive share repurchases, especially when a company is on the brink. My sense is they see these companies as being very valuable on the other side of the commodity cycle, and they are doing what they can to take advantage of the dislocations in the meantime for the companies’ benefit.
While these actions are obviously not creditor friendly, their actions suggest they strongly believe the company will survive. They have many levers to pull to keep AR alive, including further restructuring the fee arrangement between AR and AM, and I believe they will pull them if they have to. Their recent sales of AM stock suggests that they do not see their bread as buttered solely from AM dividends, as some had suggested and I had previously believed. While they certainly may be wrong about a strong upturn in the commodity cycle, I believe they will do what they can to extend the optionality embedded in these company’s as long as possible. Given the liquidity and asset value here, I think it is very unlikely that they will let the 2022 Bond maturity put AR into bankruptcy.
1. Tender of other notes.
2. Continued recovery in natural gas prices.
3. Additional asset sales.
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