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Longer laterals, liquids growth are key for free cash flow at Antero Resources

Antero Resources Corp. will stick to a strategy of drilling long laterals and focused capital spending to achieve its production targets and deliver $1.6 billion in free cash flow through 2022, executives said Feb. 14.

The Appalachian producer in the fourth quarter of 2017 reported an average net daily production of 2,347 MMcfe/d, 27% of which was liquids, showing an 18% growth over the year-ago period, according to a Feb. 13 earnings release. For the full year, Antero grew its production 22% year over year.

"Our contiguous acreage position has allowed us to drill, on average, longer laterals than anyone in the Marcellus to date and gives us the deepest inventory of long laterals in the basin," CEO Paul Rady said during the company's earnings call. "Second, our peer-leading, liquids-rich inventory, we control more than 40% of the undrilled locations in Appalachia ... This combination gives a significant running room to drill high rate-of-return wells for many years to come and plays a significant role in our ability to generate meaningful free cash flow."

The company guided toward 2.7 Bcfe/d of net production for full year 2018 with a $1.3 billion capital spending budget, even as it expects its first-quarter 2018 net production to remain flat quarter over quarter due to the timing of completions, severe winter weather affecting operations in the Marcellus and other issues.

Antero reduced its drilling and completion capital plan through 2022 by $2.9 billion primarily through its focus on longer laterals, a shift that cut almost $1 billion from the five-year budget. Also, by focusing its capital allocation on the liquids-rich Marcellus over the Utica Shale, Antero took another $1.1 billion out of its budget.

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For the fourth quarter of 2017, nine out of the 27 horizontals Antero drilled in the Marcellus had laterals measuring longer than 12,000 feet. According to a 2017 report by the U.S. Energy Information Administration, the average lateral length per well in West Virginia was about 7,000 feet in 2016. Antero's largest pad to-date in the Marcellus has 12 wells with about 120,000 feet of drilled lateral expected to yield about 300 Bcfe of pad reserves, which Rady called "remarkable." Another nine-well pad now being drilled would have average lateral lengths of 13,200 feet and is anticipated to deliver similar reserves.

In terms of gas pricing, Antero realized $2.80/Mcf before hedges in the fourth quarter, representing a negative differential to NYMEX Henry Hub prices of 13 cents/Mcf and exceeding a guidance of 15 cents to 20 cents differential per Mcf. The improved pricing demonstrated "the strategic advantage of firm transportation portfolio that allows us to move virtually all of our gas away from unfavorable local indices," President and CFO Glen Warren said.

In addition, Antero hedged its production by 100% at an average price of $3.50/MMBtu for 2018 and 2019, a 70-cent premium per MMBtu over the current strip pricing. "Moving forward, we believe that our firm transportation and hedge book will continue to be competitive advantages for Antero, as uncertainty around both overall gas pricing in Northeast bases is likely to continue," Warren said.

Antero reported total adjusted earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses, or EBITDAX, of $437.1 million in the fourth quarter, down from $475.9 million in the year-ago quarter. GAAP net income surged to $486.9 million, or $1.54 per share, from a loss of $485.8 million, or $1.55 per share, in the prior-year period. For full year 2017, net income rose to $615.1 million, from a loss of $848.8 million a year ago. Total adjusted EBITDAX decreased to $1.46 billion, from $1.54 billion in 2016.

Antero's stock was up about 5.4% in late afternoon trading.