Antero Resources (AR 1.49%) has done an abysmal job at turning its prime position in the Marcellus Shale into a value creator for investors. Despite management spending billions of dollars on drilling wells and expanding its output over the years, the natural gas company's stock has cratered 90% since its IPO in 2013. That poor performance is forcing the company to change its ways from growing production as fast as it can toward an aim of creating shareholder value.
The company's new approach is starting to pay dividends, which was evident during the second quarter. Three numbers from that report stand out, which suggest that better days could be ahead for Antero's long-suffering shareholders.
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$303 million: Lowest capital spending level since its IPO
Like many shale-focused drillers, Antero Resources has allocated virtually all its available capital toward drilling new wells over the years. While that spending helped fuel high-octane production growth, it hasn't boosted shareholder value. That underperformance forced Antero and its peers to shift their approach in recent years toward a focus on investing to earn high returns.
One aspect of this strategy has been to allocate its capital toward its best opportunities, so the company hasn't been investing as much money in new wells. That was clear during the second quarter when capital spending was at its lowest level since its IPO in 2013. However, because the company focused on its best opportunities, it was still able to deliver significant production growth during the quarter. Output surged 28% year over year, including a 38% jump in higher-margin liquids. Antero's ability to deliver strong growth while investing less money is a crucial part of its strategy to maximize the value of its position in the heart of the Marcellus.
10% to 14% well cost reductions for 2020
Another area of focus for Antero has been reducing its costs. The company's results during the first half of 2019 "showcased these efforts," according to CEO Paul Rady. He noted that the company's "technical and operational initiatives...resulted in our ability to reach our previously announced full year well cost reduction targets by midyear, significantly ahead of schedule."
Meanwhile, the company expects costs to be 10% to 14% lower per foot next year. Driving that view will be the company's water-saving initiatives as well as continued operational efficiencies. Antero's ability to deliver these cost savings will help boost its drilling returns by enabling the company to produce more while spending less.
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2.3 times debt-to-adjusted EBITDAX
Antero's lack of discipline in previous years resulted in it outspending cash flow by a wide margin. It bridged that gap by selling stock and borrowing money. That approach, however, has weighed on the company's shares -- especially as weaker natural gas prices caused its leverage ratio to rise to an uncomfortably high level of 3.9 times in 2014 due to all the debt it took on to grow production.
The company has been working to address this problem. It recently completed a transaction to consolidate its midstream operations into Antero Midstream. That deal not only removed Antero Midstream's debt from Antero's balance sheet but also brought in some cash. As a result of this and other moves, Antero's leverage ratio was down to a more comfortable 2.3 times at the end of the second quarter. Now the company has more financial flexibility to execute its strategy aimed at creating value for investors. That sets the company up to potentially return cash to shareholders -- through either a dividend or additional share repurchases -- if commodity prices improve in the future.
Better days appear to be ahead
Antero Resources' former approach of growth at all costs didn't pay off, since all that production from the company and its peers flooded the market and weighed on pricing. That's forcing the company to shift its approach. It's working to improve its drilling returns by cutting costs so that it can create value instead of destroying it. This new strategy is starting to deliver results, which suggests that Antero has a bright future, especially if commodity prices improve.
