The slump in oil prices is forcing oil and gas producers to take a cautious approach to capital spending in 2019. While many large oil companies are aiming to match spending to 2018's level, gas-focused Antero Resources (NYSE:AR) is taking things a step further by reducing its budget for 2019. That will enable the company to line up its spending level with its anticipated cash flows at lower oil prices this year.
However, despite that spending cut, Antero expects to continue growing at a fast pace. Add that to the company's other strategic efforts to boost value, and it's optimistic about what lies ahead despite weaker oil prices to begin the year.
Drilling down into Antero's plans for 2019
Antero Resources plans to spend between $1.175 billion and $1.35 billion in 2019 on drilling and completing wells and leasing more land. That's a decrease from the $1.35 billion to $1.4 billion it expected to spend last year, which was $50 million to $100 million above the company's initial budget range due to cost inflation. However, the spending reduction will enable it to fund its budget on the cash flow it can produce assuming oil averages $50 a barrel while natural gas is at $3 per MMBtu.
This budget will allow Antero to run five drilling rigs and four well completion crews in 2019, which is down one to two crews from last year's level. That should enable Antero to complete enough new wells to grow its overall production 17% to 20% this year, with higher-margin liquids output rising 18% to 26%. That's a slightly slower pace than the 20% overall production growth rate -- and 23% liquids increase -- it was on pace to deliver last year.
Recent developments support stronger performance in 2019
On top of reducing spending, Antero has taken several other steps geared toward improving its operations and financial profile, which put it in a better position to create value for investors during 2019. Antero has signed several long-term contracts in recent years that will improve the pricing it receives on the natural gas liquids (NGLs) it produces. Those agreements are finally starting to pay off.
For example, the company started delivering ethane to a petrochemical plant in Sweden last quarter, which it's shipping on Energy Transfer's (NYSE:ET) Mariner East 1 pipeline and exporting through that company's Marcus Hook Terminal. Meanwhile, Energy Transfer recently started service on the newly constructed Mariner East 2 pipeline, which will enable Antero to ship propane and butane to Marcus Hook for export. Antero anticipates that this new Energy Transfer pipeline will improve the price it receives for these NGLs by $2 to $4 a barrel on an annual basis.
In addition, those moves to boost its price realizations, Antero also signed a deal last quarter to reduce costs by securing a long-term supply contract for much of the sand it needs to complete new wells. This agreement, along with other similar ones with additional suppliers, will cover 70% of the company's frack sand needs in 2019. That should save the driller about $200,000 per well compared to what it cost last year.
Antero also restructured its natural gas hedge portfolio by replacing existing contracts with newer ones to lock in some of its gains. As a result, the company was able to realize $357 million in value, which it used to repay bank debt, reducing its leverage ratio to less than 2.2 times at the end of last year, down from 3.2 times at the end of 2017. Not only did the company cash in some of its gains, but it was still able to lock in strong prices for 100% of its production in 2019 while providing it with some upside if natural gas prices improve.
Finally, the company used some of the excess cash it produced last year to buy back $129 million in stock. That was enough money to reduce the company's outstanding share count by 3%. Antero expects to continue buying back shares this year given that it anticipates receiving about $300 million when its midstream consolidation transaction closes in the first quarter.
While Antero Resources is cutting spending in 2019, the company still expects to deliver strong production growth, thanks in part to the cost savings from its sand supply deals. In the meantime, it's undertaken a series of strategic moves designed to unlock value for shareholders. Consequently, it could have significant upside in 2019 if the oil market roars back to life.