Denver-based natural gas company Antero Resources is letting all of its hedging contracts expire due to its confidence that higher oil and gas prices are here to stay.
CREDIT: Story by Greg Avery, Denver Business Journal.
A Denver-based natural gas company is confident enough higher prices are here to stay that it plans to work without a financial safety net.
Antero Resources Corp. (NYSE: AR) said last week it expects elevated natural gas and propane prices for at least two years, so it’s letting all of its financial hedging contracts expire for the first time in company history.
“We’re looking forward to being completely unhedged to take advantage of the high prices,” said Paul Rady, president, and CEO of Antero Resources. “We really feel there’s a shortage across the world and more and more exports.”
The nine-year-old company has no hedges in place for its propane sales and has only half of its natural gas sales hedged in 2022, its lowest level ever. Those natural gas hedges will expire for 2023, leaving all of the company’s products to fetch market prices.
Antero Resources, formed in 2002, is the fourth-largest U.S. natural gas producer and the second-ranked domestic producer of propane. It operates wells in Appalachia, where West Virginia, Pennsylvania, and Ohio meet.
Antero Resources has typically contracted a major portion of its future sales of natural gas, liquids, and propane to lock in predictable prices and hedge against the risk of losses, but foregoing added revenue from price spikes.
It’s a strategy most natural gas producers use, given years of glutted natural gas markets and low prices.
But natural gas prices are double what they were a year ago, and propane is up as well.
Stores of both natural gas and propane, domestically and internationally, are now heading into winter, with demand for it surging.
For consumers who rely on natural gas heating, the conditions promise higher energy bills this winter and into 2022.
For producers, long-term price trends for natural gas and propane look likely to keep production reliably profitable, something hasn’t been true in more than a decade.
Antero Resources on Thursday reported third-quarter sales surging to nearly $1.8 billion worth of natural gas and propane, 99% more than its sales a year ago.
But, because of existing price hedging contracts covering 90% of its natural gas sales, it booked third-quarter revenue of just $534.4 million, meaning Antero Resources missed out on $1.2 billion in revenue it would have received had the company’s gas and propane sold entirely at market prices.
The company lost $549 million, or $1.75 per share, in the third quarter, a slightly larger loss than in the third quarter of 2020, despite the large jump in natural gas and propane prices.
Antero Resources doesn’t see prices falling back below what it needs to predictably generate cash from its operations, which is why it’s doing away with hedges.
Protecting against downswings in prices is a hard habit to break for natural gas companies, having grown accustomed to low prices after years of a supply glut in the United States.
The Covid-19 pandemic collapsed demand for fuel globally in early 2020. U.S. oil and natural gas producers cut production and mostly stopped drilling new wells for months.
Many U.S. companies declared bankruptcy. Stung by years of losses and large debts, U.S. companies changed their business models to generate cash from their existing operations and pledged to stop adding debt to chase production growth.
Prices have risen and fuel and energy markets recovered over the past year.
Antero Resources is using the recovery to reduce its debt. The company expects its long-term debt load to be below $2 billion by early 2022, meaning it can start directing cash to other things, such as paying more dividends to shareholders and buying back its own stock to strengthen share prices, the company says.
With the gas and propane prices it models for the foreseeable future, Antero Resources believes its overall sales will generate at least $6 billion in free cash flow by 2025, the company said.
It plans to maintain current levels of production, drilling about 65 wells a year, 90% of them in the Marcellus Shale formations and less in the Utica area of Ohio, where drilling is more expensive.
It has focused on selling natural gas and propane outside of Appalachia to the Gulf Coast region and the Midwest, where prices are higher, and to export liquified natural gas and propane to Europe and Asia.
Antero Resources is benefitting from having wells in parts of Appalachia that produce high amounts of liquids, such as propane.
Demand for propane is growing even faster than natural gas this winter as some energy and industrial users internationally seek liquid propane as a cheaper, more available replacement for liquid natural gas, the company said.
That raises the question of whether Antero Resources would buy more drilling locations with the goal of increasing its output after 2022, something other natural gas companies predict doing.
Antero Resources isn’t planning to invest in expansion and is focused on generating cash from the wells and drilling inventory it has, Rady said.
“We feel good about just sticking to our knitting after what we and the industry, especially other independents, have gone through with too much debt,” Rady said. “It just feels really good to de-lever dramatically.”