drill report #1

8/13/2019 Drill Report #1

1/12

R E S E A R C H

DRILL REPORT #1.0

January 2014

E N E RG Y P OSI TI V E OU TL OOK G OI N G I N TO 2 0 1 4


2/12

EXECUTIVE SUMMARY


3/12

R E S E A R C H

EXECUTIVESUMM

ARY

We believe that capital spending in the energy sector will remain robust in the foreseeable future and that information

inefficiencies in the private space will make for compelling investment opportunities around Greenfield businesses

within plays that are e!pected to receive capital inflows going forward"

1

#rill $eport %1"0 & '!ecutive (ummary

)ur view is that public market investing will continue to be a stock picker*s environment with a bias towards

e!ploration and production +',-. companies that can grow/ on a debt adusted basis/ and that are positioned in the

highest return regions" We believe that on the public side/ ntero $esources +3(' $. screens as a top tier companythat will provide the best leverage in the ',- sector"

5he energy industry has become more in tune with returning or at the very least taking measures to return value to

shareholders 6 we e!pect this trend to continue into 2014"

-roducers are still e!pected to spend more in 2014 than in 2017 barring any material and sustained +multiple 8uarter.drop in oil or gas prices.

5he industry has taken advantage of high oil prices throughout the year to lock in a significant portion of their 2014 oil

weighted production between 9:;&9bbl W5? which bodes well for oil>li8uids activity going into ne!t year"

-ricing in the energy services sector remains relatively soft across the @"(" & -roducers have benefited and continue to

benefit from this trend"

We like the @tica and #uvernay shale plays and recommend e!posure to each"


4/12

THE DRILL PORTFOLIO


5/12

R E S E A R C H

DRILLPORTFOLIO

We e!pect the energy public markets to be characteriAed as a stock pickers environment/

below is a mock portfolio of our favorite names in the space with their respective

weightings relative to the '-B and BC'

2

The Drill Portfolio

___________________________Note: Share prices are as at January 6, 2014.


6/12

TOP PICK ANTERO RESOURCES NYSE!AR" DETAILED ANALYSIS


7/12


8/12


9/12

R E S E A R C H

(All figures are in US$ mm unless otherwise indicated)

Current Share Price (January 6, 2014) $58.79

Fully Diluted Shares Outstanding (mm) (1) 262

Market Capitalization 15,406

Net Debt (2) 1,975

Total Enterprise Value $17,381

Valuation Statistics:

P/CFPS (3) 2014E 11.8xStatistic 2014E $4.99

2015E 7.8xStatistic 2015E $7.56

TEV / EBITDAX 2014E 13.2xStatistic 2014E $1,396

2015E 8.9xStatistic 2015E $2,112

2014E Production (Mmcfe/d) ( 933

% Gas 81%

% Hedged 66%

TEV / 2014E Production ($/bbl/d) $51,012

2015E Production (Mmcfe/d) ( 1,417

% Gas 77%

% Hedged 44%

TEV / 2014E Production ($/bbl/d) $33,600

OVE

RVIE#

OFANT

ERORESOURCES

Antero Resources Company Overview

Antero Resources (AR:NYSE) is an $17 bn oil and gas

exploration company with operations in the Marcellus and Utica

shale basins located in Pennsylvania, Ohio and West Virginia

The company recently went public in October 2013 with an

offering of 38 mm shares of common stock at a $44/share

Asset portfolio of more than 400,000 acres (across the Marcellus

and Utica plays) with proved reserves of 6.3 Tcf, Net 3P reserves

of 27.7 Tcfe

Midstream and infrastructure assets have allowed for low

processing and transport costs (higher operating margins)

Double digit production growth will be achieved through approx.

1.3 Bcf/d of processing capacity 1.5 Bcf/d of takeaway capacity

made available in 2014 and 2015 respectively

Marcellus

AR owns 366,000 net acres and is the most active driller in the

basin with approx. 15 operated rigs and producing approx. 519

Mmcfe/d (Q3/2013)

Currently testing shorter stage laterals in the drilling program

(expected to see 30% increase initial production tests)

Utica

AR owns 104,000 net acres in the play and is currently operating

5 rigs

Currently has over 50 well pads under construction in anticipation

of ramping up once all necessary gathering and processing

solutions are in place

Financial Snapshot

Antero Resources Share Price Performance Since IPO

___________________________

1. Fully diluted shares outstanding as at September 30, 2013.2. Net debt is as at September 30, 2013 and calculated as long-term debt pluscurrent portion of long-term debt net of cash.

3. Financial estimates are per Drill Research estimates.

ntero $esources Fompany )verview

$40

$48

$55

$63

$70

Oct-13 Oct-13 Nov-13 Dec-13 Jan-14

US$/Share

C99$) P9'+$! B.=J

T/98$)! B=.00


10/12

R E S E A R C H

CASHFLO#

VALU

ATIONSUMM

ARY

At current strip prices Antero Resources shares are valued at approx. $82 / share on a DCF basis

AR is positioned for strong growth going forward. We expect the company to produce 935 Mmcfe/d in 2014 and for that figure togrow to 2.4 Bcfe/d by 2017 a three year 37% CAGR

AR will benefit from high realized (hedged) prices going forward given its tactical hedging program: 2014E = $5.69/Mcfe [Oil @ $89.78/bbl, NGLs @ $44.79 / bbl, Gas @$5.03/Mcf] vs. HHUB at $4.21 66% gas hedged for 2014

2015E = $5.63/Mcfe [Oil @ $82.23/bbl, NGLs @ $45.68/ bbl, Gas @$4.76/Mcf] vs HHUB at $4.19 44% gas hedged for 2015

We have assumed a long run average corporate decline rate of 25% and capital efficiency of $15,000 per flowing bbl. We Expectthe following capex profile: 2014E = $2.35 bn, 2015E = $2.3bn, 2016E = $2.5bn, 2017E = $2.8bn, Maintenance capex = $2.3bn

We dont expect large fluctuations in the companys operating cost structure on a go forward basis:

LOEs: 2014 = $0.05/Mcfe, 2015 = $0.06 / Mcfe Transport: 2014 = $1.12/Mcfe, 2015 = $1.12 / Mcfe

G&A: 2014 = $0.17/Mcfe, 2015 = $0.12 / Mcfe

Production Taxes: 2014 = $0.15/Mcfe, 2015 = $0.21 / Mcfe

DD&A: 2014 = $1.30/Mcfe, 2015 = $1.32 / Mcfe

DCF Summary Strip Pricing

ntero $esources aluation 6 #iscounted Fash Hlow nalysis

(US$ mm) 2013 2014 2015 2016 2017 Terminal

CFO (pre-WC) 205 1,309 1,981 2,684 3,248 5,534

Interest Expense 37 169 230 236 236 236Tax Rate 38.0% 38.0% 38.0% 38.0% 38.0% 38.0%

Capex (797) (2,350) (2,250) (2,500) (2,750) (2,283)

Acquisitions 0 0 0 0 0 0

Sales 0 0 0 0 0 0

Unlevered Cash Flow (568) (936) (126) 330 644 3,397

Discounted Cash Flow (568) (851) (104) 248 440 17,424

2020 Production (mboepd) 608.9

Maitenance Capex $2,283

Terminal Growth 0.0%

Enterprise Value $19,363

Working Capital* -$200

Other PP&E $178

LTD $1,444

Other Liabilities $33

Midstream $3,510

Equity Value $21,375

$/Share $81.57

Current Price $58.79Upside Potential 39%


11/12

R E S E A R C H

CASHFLO#

VALU

ATIONSUMM

ARY

We value ARs assets at $90/share on a NAV basis Development scenario assumptions for both the Marcellus and Utica are conservative

Our valuation estimates are roughly in line with Street with the exception of the midstream assets we think the assets could fetch >$3.5 bn inan MLP structure

ntero $esources aluation 6 nalysis

NAV Summary Strip Prices

=

Asset Reserves (Bcfe) Value ($ mm) Value ($/mcf) Value ($/Share) Street Valuation

Proved Reserves (PV10) 6,282 $3,369 $0.54 $12.86

Total 6,282 $3,369 $0.54 $12.86 $2,909

Upstream Resource Upside

Marcellus

Marcellus (Highly Rich Condensate) 4,012 $2,646 $0.66 $10.10

Marcellus (Highly Rich Gas) 4,616 $2,877 $0.62 $10.98

Marcellus (Rich Gas) 5,837 $3,892 $0.67 $14.85

Marcellus (Dry Gas) 2,866 $654 $0.23 $2.49

Total Marcellus $10,069 $9,841

Utica

Utica (Highly Rich Condensate) 1,927 $1,716 $0.89 $6.55

Utica (Highly Rich Gas) 3,295 $3,233 $0.98 $12.34Utica (Rich Gas /Dry Gas) 51k acres @ 7,500/Acre $383 $1.46

Total Utica $5,332 $5,587

Total Resource Potential 17,331 15,401 $0.89 $58.77 15,428

Midstream @ 13.5x 14' EBITDA 3,510 $13.39 $1,688

Total 23,613 22,280 $85.02 20,025

Enterprise Value 22,280

Working Capital (ex hedges and deferred taxes) -200Other PP&E 178

LTD 1,444

Other Liabilities 33

Equity Value 23,670

$/Share $90.33

Current Price $58.79

Upside Potential 54%


12/12

R E S E A R C H

#isclosure

T*'3 7,+-$) /7 )*$ '6,9-/)', +,)/'$7 *$9$' /9$ 3)9'+)& +,6'7$)'/& /7 9$-/' )*$ 9,$9) ,6 D9'&& R$3$/9+* LLC D9'&& R$3$/9+*". N$')*$9 )*'3 7,+-$) ,9 ')3 +,)$)3 -/ %$

7'3)9'%)$7 %&'3*$7 9$9,7+$7 ,9 7'3+&,3$7 ' :*,&$ ,9 ' /9) ), / ,)*$9 $93, ,9 9$&'$7 , % / ,)*$9 $93, ,9 3$7 6,9 / ,)*$9 9,3$ /) / )'-$ :')*,) )*$ 9',9

:9'))$ +,3$) ,6 D9'&& R$3$/9+*.

T*'3 7,+-$) 7,$3 ,) +,3)'))$ ,9 7,$3 ') 6,9- /9) ,6 / ,66$9 ), 3$&& ,9 9+*/3$ ,9 )*$ 3,&'+')/)', ,6 / ,66$9 ), 3$&& ,9 9+*/3$ / 3$+9')'$3 ,9 / ,6 )*$ %3'$33$3 ,9 /33$)3

7$3+9'%$7 *$9$' ,9 / ,66$9 ,9 9$+,--$7/)', ), $)$9 '), / )9/3/+)', 7$3+9'%$7 *$9$' ,9 7,$3 )*'3 7,+-$) +,3)'))$ / ,66$9 ,9 +,--')-$) ), 9,('7$ /99/8$ ,9 7$9:9')$/ 6'/+'8.

A&& '6,9-/)', 9,('7$7 '3 6,9 '6,9-/)',/& 9,3$3 ,& /7 3*,&7 ,) %$ 7$$-$7 /3 '($3)-$) /7('+$ ,9 / 9$+,--$7/)',.

D9'&& R$3$/9+* ,9 / ,6 )*$'9 3%3'7'/9'$3 ,9 /66'&'/)$3 ,9 / ,6 )*$'9 9$3$+)'($ ,66'+$93 7'9$+),93 $-&,$$3 ,9 /8$)3 /++$)3 / &'/%'&') :*/)3,$($9 6,9 / 7'9$+) '7'9$+) ,9

+,3$$)'/& &,33$3 ' +,)9/+) ),9) ,9 ,)*$9:'3$" /9'3'8 69,- )*$ 3$ ,6 )*'3 7,+-$) ,9 ')3 +,)$)3 ,9 9$&'/+$ , )*$ '6,9-/)', +,)/'$7 *$9$'.

T*$ '6,9-/)', ' )*'3 7,+-$) */3 ,) %$$ '7$$7$)& ($9'6'$7 % D9'&& R$3$/9+*. D9'&& R$3$/9+* ,9 / ,6 ')3 3%3'7'/9'$3 ,9 /66'&'/)$3 ,9 / ,6 )*$'9 9$3$+)'($ 7'9$+),93 ,66'+$93

$-&,$$3 ,9 /8$)3 -/$3 / :/99/) ,9 9$9$3$)/)', $9$33 ,9 '-&'$7 /3 ), )*$ /++9/+ ,9 +,-&$)$$33 ,6 )*$ '6,9-/)', :*'+* '3 +,)/'$7 ' )*'3 7,+-$) :*$)*$9 ,%)/'$7

69,- ,9 %/3$7 , )*'97 /9) ,9 %&'+ 3,9+$3 ,9 ,)*$9:'3$. D9'&& R$3$/9+* 7,$3 ,) 7$9)/$ / ,%&'8/)', ), 9,('7$ / /77')',/& '6,9-/)', ,9 ), 7/)$ / ,6 )*$ '6,9-/)', ,9 )*$

+,+&3',3 +,)/'$7 *$9$' ,9 ), +,99$+) / '/++9/+'$3 :*'+* -/ %$+,-$ //9$). P/3) $96,9-/+$ '3 , 8/9/)$$ ,6 6)9$ 9$)93.

For access to our models or for more detailed information please contact [email protected]

drill report #1

Documents