Antero keeps its options open on bright US LNG supply outlook

Appalachia operator Antero Resources plans to maximize its flexibility over the next several years, betting that its strong portfolio of firm transportation to the LNG export corridor will provide enough upside to make its unhedged strategy a winner, executives said in an April 28 earnings call.

Antero has long touted its extensive firm transportation portfolio as protection against the kind of basis blow-outs that befall Appalachia gas benchmarks when regional production exceeds takeaway capacity.

Now, the producer sees this pipeline capacity as a powerful tool to garner pricing premiums from exporters in a world eager to buy US LNG cargos, and where additional transportation capacity is difficult to build, and substantial US gas production growth is seen as unlikely.

LNG premiums

Antero holds 2.3 Bcf/d of firm transportation to LNG export areas, including Cove Point in Maryland and the Gulf Coast, an asset that makes the company "uniquely positioned to supply the increase in international demand," CEO Paul Rady told analysts.

"Today, we are already selling nearly 1 Bcf a day of natural gas to LNG facilities on a mix of long-term and short-term contracts, and as additional LNG export capacity is built out, we think our premium to NYMEX [Henry Hub] will increase and will become more closely linked to international prices," Rady said.

Approximately 75% of Antero's first-quarter 2022 gas volumes were sold into hubs that serve LNG export terminals, Justin Fowler, senior vice president of gas marketing and transportation, said.

Being able to deliver gas to premium hubs allowed Antero to realize a 6-cent premium to NYMEX Henry Hub in the most recent quarter, according to the company's Q1 2022 Financial and Operational Results report.

Cash Texas, Eastern M-2's averaged a nearly 50-cent discount to NYMEX Henry Hub in Q1 2022, in contrast.

Antero executives anticipated greater increases ahead, with 2022 guidance showing a premium of 15-25 cents for the full year. In the longer-term, keeping Antero's options open is seen as the key to reaping even higher premiums. This philosophy has translated into holding off on signing major longer-term supply deals.

"We're happy where we are right now on shorter-term deals, whether it's selling on the day or on the month," Rady said. "We deliver to premium locations in the LNG fairway, such as ANR Southeast Head Station, where as many as three LNG liquefiers are bidding for our gas. But we're not interested in longer-term supply deals unless we receive significantly higher premiums, there's too much optionality today to get locked in prematurely."

CFO Michael Kennedy similarly emphasized that the crowded field of proposed LNG projects makes it difficult to commit.

"We see the optionality around that as being substantial for Antero because you just don't know where that's going to go with the next wave of LNG being built and there's going to be a lot of competition for that gas, and we're the ones with transport," CFO Michael Kennedy said.

While Antero has avoided structuring its LNG supply deals with a profit sharing or direct investment mechanism, Rady said, the company continues to monitor opportunities to capture some of the wide premiums observed over the last year between international benchmarks TTF or JKM and Henry Hub.

Exposure to prices

In addition to higher demand for gas, Antero executives projected that supply-side issues will provide support to natural gas prices for the foreseeable future.

Rady attributed these supply concerns to the industry's "limited access to capital, limits on infrastructure build-out and also supply chain constraints that limit production growth."

Higher prices have not brought about higher production so far in 2022, with production averaging 92.6 Bcf/d for Q1. This was down from averaging around 94 Bcf/d in Q4 2021.

With this bullish view of future natural gas prices in mind, Antero has remained committed to a reduced hedging program. The company has not layered on any additional hedges during Q1 2022, executives said.

As of March 31, Antero had hedging positions in place for just over 50% of expected volumes for the remainder of 2022. For 2023, the company has 16 Bcf, or around 2%, hedged, with plans to keep the wider exposure to prices in place.

Rady said the company had not been tempted to layer on collars, which have grown in popularity among producers as commodity prices have risen.

"I know we used to be the kings of hedging in a contango environment, but now we're on the opposite end, just reaping the benefits of staying on the front and remaining unhedged," Rady said. "And with that, our de-levering will occur that much quicker."

For the quarter ended March 31, Antero Resources reported a net loss of $156 million, or $0.50 per share, compared with a net loss of $15 million, or $0.05 per share, for the corresponding quarter a year ago.