What: Shares of Antero Resources (NYSE:AR) slumped last month, dropping 15% after investors reacted negatively to its 2016 growth plan and its fourth-quarter financial results.
So what: Investors didn't like Antero's rather aggressive 2016 plan. While the company cut its capex budget by 23%, to $1.4 billion, that capital will fund enough new wells to grow its production by 15% over last year's average. That peer-leading growth is coming to a market that's already oversupplied, making it unwarranted in the eyes of investors. In other words, they see the company growing for the sake of growth. Further, it's being much more aggressive than rivals like Cabot Oil & Gas (NYSE:COG), which is slashing its capex budget by 47% over what it spent last year. That's expected to lead to much more moderate growth of 2%-7%, which is less than the up-to-10% growth that Cabot Oil & Gas had been projecting.
Production growth in the current environment just isn't paying off, and that was clear by looking at Antero Resources' fourth-quarter report. While production was up 18% over the fourth-quarter of last year, adjusted earnings slumped 30%, while cash flow from operations dropped 14%. That's because higher production and lower costs were not able to fully offset a 42% decline in natural gas prices. We saw a similar trend at Cabot Oil & Gas, with its production increasing by 13% last year, while its cash flow from operations slumped 39%.
Now what: With persistent oversupply keeping a lid on commodity prices, investors just aren't buying into Antero's plans to deliver peer-leading production growth in 2016. Instead, the company should have aimed to keep production flat, and saved its growth for when the market needs more production, thus rewarding those companies that are growing.