Denver, Colorado-based independent oil and natural gas company Antero Resources Corporation (AR - Get Rating) acquires, explores for, develops, and produces natural gas, natural gas liquids, and oil properties in the United States. AR shares have gained 231.7% in price over the past year and 249.9% year-to-date, driven by the sky-high oil and natural gas prices and investors’ optimism surrounding the energy space.

However, the newly identified coronavirus variant has slowed the sector’s momentum. Oil prices tumbled earlier this month, marking oil’s longest decline since 2018. Oil prices are currently below the $80 per barrel they reached in November and way below the $100 mark that analysts had projected. Natural gas prices also plunged from multi-year highs. The U.S. benchmark for the price of natural gas inched lower early in the last session despite a weather forecast of extreme cold.

The demand uncertainty due to the omicron variant, along with OPEC’s increasing production volumes, are weighing down prices and do not bode well for AR. The stock has gained approximately 4% over the past month to close its last trading session at $18.77. Furthermore, AR’s weak bottom line and negative profit margins are a concern. Its trailing-12-months net loss was $1.02 billion, while its net loss per share was $3.43. And according to analysts’ estimates, the company needs to grow 110% year-on-year, on average, to break even by 2022. Given the demand uncertainties and the volatile oil and natural gas prices, we think it might take AR longer to become profitable.

Here is what could shape AR’s performance in the near term:

Poor Profitability

AR’s 18.34% and 19.51% respective negative net income and EBIT margins are substantially lower than the 1.89% and 7.55% industry averages.

Furthermore, AR’s ROE, ROA, and ROTC of negative 19.37%, 7.56%, and 6.09%, respectively, compare with the 2.79%, 1.04%, and 3.51% industry averages.

Effective Debt Reduction

AR reduced its net debt by $70 million to $2.3 billion during the third quarter ending September 30 and redeemed $175 million of its 108.375% senior notes due 2026 at par in July. The company also announced that it intends to redeem $116 million in 107.625% notes at par. As of September 30, 2021, Antero had $98 million drawn on its credit facility. The company plans to reduce its absolute debt to below $2.0 billion. “We anticipate achieving our debt target in early 2022, with leverage falling below 1.0x during the first quarter of 2022,” said Michael Kennedy, Chief Financial Officer and Senior Vice President of Finance of AR.

In October, Moody’s Investors Service upgraded Antero’s Corporate Family Rating to Ba2 from Ba3, and its senior unsecured notes to Ba3 from B1. The upgrade reflects AR’s material debt reduction. S&P Global Ratings upgraded Antero’s issuer credit rating to BB from BB- and its unsecured notes to BB from BB-.

Mixed Financials

AR’s total revenues increased 40.4% year-over-year to $534.42 million in its fiscal third quarter, ended September 30. However, its operating loss stood at $684.07 million, down 9.3% from the same period last year. Its net loss and comprehensive loss attributable to AR grew 2.6% from the year-ago value to $549.32 million. The company’s adjusted EPS came in at $0.19, versus the $0.31 consensus estimate, reflecting an earnings surprise of negative 38.7%.

POWR Ratings Reflect Uncertain Prospects

AR has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a C grade for Growth, consistent with its mixed financials in its last reported quarter.

AR has a D grade for Stability. Its beta of 4.41 justifies this grade.

Of  13 stocks in the Energy – Drilling industry, AR is ranked #9.

Beyond what I have stated above, one  can also view AR’s grades for Quality, Value, Momentum, and Sentiment here.

View the top-rated stocks in the Energy – Drilling industry here.

Bottom Line

AR has gained significantly over the past year. However, the company’s profit margins worrisome. Also, analysts expect its EPS to decline 29.8% per annum over the next five years. The company’s near-term prospects look uncertain owing to the omicron variant’s threat to energy demand and declining oil and gas prices. Also, considering AR’s negative ROE, we think it could be wise to wait for a better entry point in the stock.

How Does Antero Resources Corporation (AR) Stack Up Against its Peers?

While AR has an overall POWR Rating of C, one might want to consider looking at its industry peers, SandRidge Energy, Inc. (SD - Get Rating) and Whiting Petroleum Corp. (WLL - Get Rating), which have a B (Buy) rating.

Note that SD is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

AR shares rose $0.03 (+0.16%) in premarket trading Wednesday. Year-to-date, AR has gained 244.40%, versus a 29.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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