Fitch Ratings has affirmed Antero Resources Corporation's (AR) Long-Term Issuer Default Rating at 'BBB-'. The Rating Outlook is Stable.

Fitch has also affirmed AR's senior unsecured notes due 2026, 2029 and 2030 at 'BBB-'.

AR's rating reflects its significant production scale, large reserves and drilling inventory, low production costs, as well as conservative gross debt and leverage level. The company has firm transportation contracts that facilitate its natural gas and natural gas liquids (NGLs) sales from the Appalachian basin to hubs in distant regions, primarily the U.S. Gulf Coast natural gas markets. Although AR's high transportation costs are offset by its higher prices for a gas-focused producer, its profitability is considerably affected by weak natural gas and liquids prices due to significant cost base.

The Stable Outlook assumes that the company will reduce its debt in 2024 after the debt increase in 1H23 driven by muted natural gas prices. Fitch expects that AR's leverage will remain below 1.5x at midcycle prices.

Key Rating Drivers

Liquids-Rich Natural Gas Producer: AR's 2Q23 output was 3.4 billion cubic feet of natural gas equivalent per day (bcfe/d), or 566 thousand barrels of oil equivalent per day (kboe/d), which represents significant scale of production supporting the rating. Natural gas share was 66%, ethane was 12%, liquefied petroleum gas (LPG) and heavier NGLs were 20%, and 2% was oil. AR has higher percentage of NGLs in its product mix than other gas-focused U.S. peers. AR exports roughly half of LPG volume to Europe and Asia and typically receives an export premium to domestic LPG prices.

Conservative Debt Policy: Fitch expects AR to generate around $1 billion of EBITDA in 2023, down from $3.1 billion in 2022, and have around $1.5 billion of debt at end-2023. AR's Fitch-calculated EBITDA leverage is projected to decline to 0.6x in 2024 from 1.3x at end-2023 and then gradually increase to 0.9x by 2027 based on oil and gas price assumptions. AR reduced its gross debt in 2019-2022 but added $0.3 billion of debt in 1H23 to cover negative FCF including the early settlement of natural gas swaption. The company had $638 million available under the reserve-based lending (RBL) facility at June 30, 2023. AR should generate positive FCF in 2024 and start repaying debt.

Gas, Petrochemicals Price Exposure: AR's natural gas and ethane revenues substantially depend on changes in U.S. gas prices, while its heavier NGLs, such as propane, butane and pentane, have substantial correlation with international oil prices. Most of the company's revenue is linked to the U.S. gas prices, which are more volatile than oil prices. U.S. gas prices dwindled in 2023 due to significant production growth and warm weather in 1Q23.

Fitch expects an increase in natural gas prices in 4Q23 as the number of gas-focused drilling rigs has been declining in 2023. Ethane, propane and butane prices are subject to imbalances in the petrochemical markets, among other factors. LPG discount to crude oil was above average in 9M23 due to high inventories.

Strong Asset Base: The rating is supported by AR's 3 billion boe proved reserves with a 15-year proved reserve life, extensive acreage and drilling inventory in the core of the Marcellus and Utica shales. The company has low unit production costs and capex due to high well production rates. AR's 516,000 net acres are located across the Appalachian basin. As calculated by Fitch, AR's cash netbacks reached $1.9/boe, or $0.3/mcfe, in 2Q23 due to very low natural gas prices during the quarter.

Equity Stake in Midstream: AR retains exposure to midstream activities that have relatively stable revenue through the 29% interest in Antero Midstream (AM), its former subsidiary. AM provides a significant share of gathering and water handling services to AR, and also owns stakes in plants that process AR's gas. AM is accounted for as an equity affiliate and pays regular dividends to AR.

Sizeable Midstream Costs: Gathering, processing and transportation expenses constitute by far the main cost item for AR. The company has modest unit lease operating costs, SG&A and taxes and above-average realized prices given the high share of NGLs. However, high midstream costs, which Fitch expects at $2.3 per mcfe in 2023, result in AR's Fitch-calculated unhedged netbacks ($0.3/mcfe in 2Q23) being comparable or lower than peers' such as EQT Corporation (EQT; BBB-/Stable; $0.4/mcfe), Chesapeake Energy Corp. (CHK; BB+/Positive; $0.8/mcfe) or Southwestern Energy Company (SWN; BB+/Positive; $0.5/mcfe).

Fitch estimates that AR's netback would be considerably higher if AM was consolidated. Since the majority of transportation expenditures are firm commitments by AR and AM's tariffs are mainly rigid, AR's EBITDA margins are vulnerable to declining gas and NGL prices.

Marketing Loss to Decrease: AR has secured large transportation capacity to make sure it can ship its gas out of the Appalachian region to main consumption centers, including LNG plants. The company has contracts to sell all of its natural gas volumes out of basin. Currently, it has excess firm ship-or-pay transportation capacity that it provides to third parties. AR's marketing segment, which includes these operations, has been generating losses, eg, a $45 million operating loss in 1H23 and $55 million in 1H22.

Fitch expects these losses to continue shrinking as the company's production volumes grow and some of its excess firm transportation contracts expire. AR should be better positioned than most of its gas-focused peers in a scenario involving gas transportation capacity shortage.

Lack of Hedging: AR does not hedge its sale prices and relies on low debt to navigate a stress scenario when natural gas prices fall substantially. This increases AR's exposure to a natural gas downcycles relative to peers. AR reflects hedges related to overriding royalty interests in its consolidated statements but they affect the results of non-controlling interests rather than AR's standalone cashflows.

Derivation Summary

AR is among the top U.S. natural gas producers at 3.4 bcfe/d in 2Q23. This is ahead of CNX Resources (CNX; BB+/Stable) at 1.5 bcfe/d, but less than CHK with 3.7 bcfe/d, SWN at 4.6 bcfe/d, and EQT (BBB-/Stable) at 5.2 bcfe/d. AR has substantially higher share of NGLs in the production mix than its peers as well as higher average realized prices. However, AR's unhedged netbacks are similar to the peers except Chesapeake and CNX, which have higher netbacks, because AR incurs higher midstream costs. AR has lower EBITDA margins than peers and is more sensitive to the price environment.

Fitch projects substantially lower end-2024 EBITDA leverage for AR than other peers: 0.6x for AR, 1.1x for EQT, 1.2x for SWN and 1.9x for CNX based on Fitch's current price deck. CHK is forecast to have 0.7x leverage, which is similar to AR.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Henry Hub natural gas price of $2.8/mcf in 2023, $3.25/mcf in 2024, $3.0/mcf in 2025 and $2.75/mcf in 2026-2027;

WTI oil price of $75/bbl in 2023, $70/bbl in 2024, $65/bbl in 2025, $60/bbl in 2026 and $57/bbl in 2027;

Production of 3.4 bcfe/d in 2023, increasing by around 2% in 2024 and stagnating thereafter;

Capex of $1,050 million in 2023, $900 million in 2024 and $800 in 2025-2027;

No dividends or M&A transactions; excess FCF is utilized to reduce debt and buy back shares.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Significantly larger EBITDA scale;

Improvement in mid-cycle netbacks;

EBITDA leverage below 1x;

Gross debt reduction at or below $1 billion.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA leverage above 1.5x;

Change in stated financial policy that leads to higher absolute debt levels;

Weakening in differential trends and the unit cost profile;

Reduced availability of the RBL facility leading to weak liquidity.

Liquidity and Debt Structure

Sufficient Liquidity: At end-June 2023, AR did not have maturities until 2026. After this, it needs to repay its 2029 and 2030 bonds. Thus, the company does not have a maturity wall similar to what it faced in 2020 with regards to 2021-2023 repayments. AR has a policy of not holding cash on the balance sheet. Instead it relies on its $1.5 billion RBL facility, $0.6 billion of which was available at June 30, 2023 after the letters of credit drawdowns and $0.4 billion debt draw. Fitch forecasts positive FCF generation in 2023-2027, which supports liquidity and allows to repay debt in the future.

Heavy Reliance on Leases: AR had $1.5 billion of debt at end-June 2023, $39 million of which were convertible senior notes to which we do not assign an equity credit. The company has large lease obligations, primarily related to operating leases of processing plants, gathering lines and compressor stations. Operating lease obligations were $3.3 billion at end-June 2023. Fitch does not treat leases of upstream companies as debt, instead it considers lease costs as standard operating expenses that reduce EBITDA and cash flow from operations. Fitch believes that reliance on leases is among the factors negatively affecting AR's netbacks compared to peers.

Issuer Profile

AR is natural gas, NGLs and oil producer. Company's shale upstream operations are based in the Appalachian basin of the U.S. AR also engages in marketing of its excess firm transportation capacity and has a 29% stake in AM Corporation, the key provider of midstream services to the company.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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