drill report #1
TRANSCRIPT
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R E S E A R C H
DRILL REPORT #1.0
January 2014
E N E RG Y P OSI TI V E OU TL OOK G OI N G I N TO 2 0 1 4
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EXECUTIVE SUMMARY
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R E S E A R C H
EXECUTIVESUMM
ARY
We believe that capital spending in the energy sector will remain robust in the foreseeable future and that information
inefficiencies in the private space will make for compelling investment opportunities around Greenfield businesses
within plays that are e!pected to receive capital inflows going forward"
1
#rill $eport %1"0 & '!ecutive (ummary
)ur view is that public market investing will continue to be a stock picker*s environment with a bias towards
e!ploration and production +',-. companies that can grow/ on a debt adusted basis/ and that are positioned in the
highest return regions" We believe that on the public side/ ntero $esources +3(' $. screens as a top tier companythat will provide the best leverage in the ',- sector"
5he energy industry has become more in tune with returning or at the very least taking measures to return value to
shareholders 6 we e!pect this trend to continue into 2014"
-roducers are still e!pected to spend more in 2014 than in 2017 barring any material and sustained +multiple 8uarter.drop in oil or gas prices.
5he industry has taken advantage of high oil prices throughout the year to lock in a significant portion of their 2014 oil
weighted production between 9:;&9bbl W5? which bodes well for oil>li8uids activity going into ne!t year"
-ricing in the energy services sector remains relatively soft across the @"(" & -roducers have benefited and continue to
benefit from this trend"
We like the @tica and #uvernay shale plays and recommend e!posure to each"
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THE DRILL PORTFOLIO
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DRILLPORTFOLIO
We e!pect the energy public markets to be characteriAed as a stock pickers environment/
below is a mock portfolio of our favorite names in the space with their respective
weightings relative to the '-B and BC'
2
The Drill Portfolio
___________________________Note: Share prices are as at January 6, 2014.
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TOP PICK ANTERO RESOURCES NYSE!AR" DETAILED ANALYSIS
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R E S E A R C H
(All figures are in US$ mm unless otherwise indicated)
Current Share Price (January 6, 2014) $58.79
Fully Diluted Shares Outstanding (mm) (1) 262
Market Capitalization 15,406
Net Debt (2) 1,975
Total Enterprise Value $17,381
Valuation Statistics:
P/CFPS (3) 2014E 11.8xStatistic 2014E $4.99
2015E 7.8xStatistic 2015E $7.56
TEV / EBITDAX 2014E 13.2xStatistic 2014E $1,396
2015E 8.9xStatistic 2015E $2,112
2014E Production (Mmcfe/d) ( 933
% Gas 81%
% Hedged 66%
TEV / 2014E Production ($/bbl/d) $51,012
2015E Production (Mmcfe/d) ( 1,417
% Gas 77%
% Hedged 44%
TEV / 2014E Production ($/bbl/d) $33,600
OVE
RVIE#
OFANT
ERORESOURCES
Antero Resources Company Overview
Antero Resources (AR:NYSE) is an $17 bn oil and gas
exploration company with operations in the Marcellus and Utica
shale basins located in Pennsylvania, Ohio and West Virginia
The company recently went public in October 2013 with an
offering of 38 mm shares of common stock at a $44/share
Asset portfolio of more than 400,000 acres (across the Marcellus
and Utica plays) with proved reserves of 6.3 Tcf, Net 3P reserves
of 27.7 Tcfe
Midstream and infrastructure assets have allowed for low
processing and transport costs (higher operating margins)
Double digit production growth will be achieved through approx.
1.3 Bcf/d of processing capacity 1.5 Bcf/d of takeaway capacity
made available in 2014 and 2015 respectively
Marcellus
AR owns 366,000 net acres and is the most active driller in the
basin with approx. 15 operated rigs and producing approx. 519
Mmcfe/d (Q3/2013)
Currently testing shorter stage laterals in the drilling program
(expected to see 30% increase initial production tests)
Utica
AR owns 104,000 net acres in the play and is currently operating
5 rigs
Currently has over 50 well pads under construction in anticipation
of ramping up once all necessary gathering and processing
solutions are in place
Financial Snapshot
Antero Resources Share Price Performance Since IPO
___________________________
1. Fully diluted shares outstanding as at September 30, 2013.2. Net debt is as at September 30, 2013 and calculated as long-term debt pluscurrent portion of long-term debt net of cash.
3. Financial estimates are per Drill Research estimates.
ntero $esources Fompany )verview
$40
$48
$55
$63
$70
Oct-13 Oct-13 Nov-13 Dec-13 Jan-14
US$/Share
C99$) P9'+$! B.=J
T/98$)! B=.00
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R E S E A R C H
CASHFLO#
VALU
ATIONSUMM
ARY
At current strip prices Antero Resources shares are valued at approx. $82 / share on a DCF basis
AR is positioned for strong growth going forward. We expect the company to produce 935 Mmcfe/d in 2014 and for that figure togrow to 2.4 Bcfe/d by 2017 a three year 37% CAGR
AR will benefit from high realized (hedged) prices going forward given its tactical hedging program: 2014E = $5.69/Mcfe [Oil @ $89.78/bbl, NGLs @ $44.79 / bbl, Gas @$5.03/Mcf] vs. HHUB at $4.21 66% gas hedged for 2014
2015E = $5.63/Mcfe [Oil @ $82.23/bbl, NGLs @ $45.68/ bbl, Gas @$4.76/Mcf] vs HHUB at $4.19 44% gas hedged for 2015
We have assumed a long run average corporate decline rate of 25% and capital efficiency of $15,000 per flowing bbl. We Expectthe following capex profile: 2014E = $2.35 bn, 2015E = $2.3bn, 2016E = $2.5bn, 2017E = $2.8bn, Maintenance capex = $2.3bn
We dont expect large fluctuations in the companys operating cost structure on a go forward basis:
LOEs: 2014 = $0.05/Mcfe, 2015 = $0.06 / Mcfe Transport: 2014 = $1.12/Mcfe, 2015 = $1.12 / Mcfe
G&A: 2014 = $0.17/Mcfe, 2015 = $0.12 / Mcfe
Production Taxes: 2014 = $0.15/Mcfe, 2015 = $0.21 / Mcfe
DD&A: 2014 = $1.30/Mcfe, 2015 = $1.32 / Mcfe
DCF Summary Strip Pricing
ntero $esources aluation 6 #iscounted Fash Hlow nalysis
(US$ mm) 2013 2014 2015 2016 2017 Terminal
CFO (pre-WC) 205 1,309 1,981 2,684 3,248 5,534
Interest Expense 37 169 230 236 236 236Tax Rate 38.0% 38.0% 38.0% 38.0% 38.0% 38.0%
Capex (797) (2,350) (2,250) (2,500) (2,750) (2,283)
Acquisitions 0 0 0 0 0 0
Sales 0 0 0 0 0 0
Unlevered Cash Flow (568) (936) (126) 330 644 3,397
Discounted Cash Flow (568) (851) (104) 248 440 17,424
2020 Production (mboepd) 608.9
Maitenance Capex $2,283
Terminal Growth 0.0%
Enterprise Value $19,363
Working Capital* -$200
Other PP&E $178
LTD $1,444
Other Liabilities $33
Midstream $3,510
Equity Value $21,375
$/Share $81.57
Current Price $58.79Upside Potential 39%
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R E S E A R C H
CASHFLO#
VALU
ATIONSUMM
ARY
We value ARs assets at $90/share on a NAV basis Development scenario assumptions for both the Marcellus and Utica are conservative
Our valuation estimates are roughly in line with Street with the exception of the midstream assets we think the assets could fetch >$3.5 bn inan MLP structure
ntero $esources aluation 6 nalysis
NAV Summary Strip Prices
=
Asset Reserves (Bcfe) Value ($ mm) Value ($/mcf) Value ($/Share) Street Valuation
Proved Reserves (PV10) 6,282 $3,369 $0.54 $12.86
Total 6,282 $3,369 $0.54 $12.86 $2,909
Upstream Resource Upside
Marcellus
Marcellus (Highly Rich Condensate) 4,012 $2,646 $0.66 $10.10
Marcellus (Highly Rich Gas) 4,616 $2,877 $0.62 $10.98
Marcellus (Rich Gas) 5,837 $3,892 $0.67 $14.85
Marcellus (Dry Gas) 2,866 $654 $0.23 $2.49
Total Marcellus $10,069 $9,841
Utica
Utica (Highly Rich Condensate) 1,927 $1,716 $0.89 $6.55
Utica (Highly Rich Gas) 3,295 $3,233 $0.98 $12.34Utica (Rich Gas /Dry Gas) 51k acres @ 7,500/Acre $383 $1.46
Total Utica $5,332 $5,587
Total Resource Potential 17,331 15,401 $0.89 $58.77 15,428
Midstream @ 13.5x 14' EBITDA 3,510 $13.39 $1,688
Total 23,613 22,280 $85.02 20,025
Enterprise Value 22,280
Working Capital (ex hedges and deferred taxes) -200Other PP&E 178
LTD 1,444
Other Liabilities 33
Equity Value 23,670
$/Share $90.33
Current Price $58.79
Upside Potential 54%
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R E S E A R C H
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