Antero Resources (AR 0.79%) reported solid first-quarter results earlier this week. While the natural gas driller's $0.35 per share of adjusted earnings only matched analysts' expectations, the company made some notable progress on its strategic plan. Here are three numbers from the quarter that investors won't want to miss.
44%: Year-over-year increase in liquids production
In addition to being a top-five gas producer, Antero Resources is the largest natural gas liquids (NGLs) producer in the country. It extended that lead during the first quarter by growing its liquids output 44% compared with the year-ago period to an average of 148,003 barrels per day (BPD), including 11,305 BPD of oil. The reason Antero focuses on producing liquids is that they generate higher margins than natural gas. That was evident again last quarter, as liquids supplied 35% of the company's revenue even though they only made up 29% of its volumes.
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Antero has worked hard over the past few years to maximize the value of its liquids production. One way it has done this is by taking greater advantage of midstream giant Energy Transfer's (ET +0.52%) infrastructure. Antero locked up one-third of the capacity on Energy Transfer's recently completed Mariner East 2 pipeline, which moves NGLs from the Marcellus region to Energy Transfer's Marcus Hook Terminal near Philadelphia. From there, Antero can export its NGLs to world markets, where it's now able to capture premium prices. That strategy helped Antero generate $68 million of free cash flow during the quarter.
$360 million: Net debt reduction during the quarter
One of Antero's aims over the last year was to improve its balance sheet, which has been weighing on the stock price. The company took a significant step forward on that goal during the first quarter by completing the consolidation of its midstream entities to create Antero Midstream Partners (AM 0.81%). That transaction removed Antero Midstream's debt from Antero Resources' balance sheet. The company also received $300 million in cash in the deal.
Antero used that money, along with $60 million of its free cash flow, to pay off $360 million in debt during the quarter. Those factors helped reduce Antero's leverage ratio from 2.8 times to 2.1 times. The company aims to continue pushing that number lower as it grows earnings in the coming years.
$37.5 million: Reduction in capital spending at the midpoint
Another of Antero's goals was to increase its free cash flow so that it can push leverage lower and buy back more of its beaten-down stock. One way it's doing that is by keeping a tight lid on capital spending. The company initially expected to spend between $1.3 billion and $1.45 billion on drilling and completing new wells this year, which was down from last year's $1.7 billion level. However, as part of its efforts to maximize cash flow, the company is reducing that range to $1.3 billion to $1.375 billion, or about $37.5 million lower at the midpoint. That will give the company a bit more money to pay down debt or repurchase shares this year.
Despite that spending reduction, Antero continues to anticipate growing its output 17% to 20% this year. Antero's high-margin liquids business sets it up to keep expanding at a healthy pace while living within the cash flows it can produce at lower oil and natural gas prices over the next several years. At $50 oil and $2.85 gas, for example, the company can expand production at a 10% compound annual rate (CAGR) from 2020 through 2023. While it wouldn't generate much free cash flow at that pricing level, the earnings growth alone would push leverage below 2.0 times by 2022. Meanwhile, at $65 oil and $3.15 gas -- which is around the current pricing level -- the company could grow at a faster 15% CAGR over that time frame. Further, leverage would fall below 1.0 times by 2021 while the company could produce $2.5 billion to $3 billion in free cash that it could use to buy back stock. For perspective, that's enough money to retire all its outstanding shares given the company's current $2.3 billion market cap.
An intriguing natural gas stock to watch
Antero Resources' strategy to convert its high-margin liquids business into a cash-flow-generating machine is starting to pay dividends. The company produced significant free cash flow during the first quarter, which it used to pay down debt. Meanwhile, it's on track to generate an even larger gusher in the coming years if oil and gas prices cooperate. That makes it a compelling natural gas stock to keep an eye on since Antero could have substantial upside if its strategy continues delivering results.
