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Antero Leaning Forward in Appalachia

Antero Resources Corp. in one year has more than doubled daily production from its Appalachian operations, but management remains in forward-thinking mode to prevent takeaway constraints from impacting output well into the future, CEO Paul Rady said Thursday.

The Denver-based operator in October became a publicly traded company, and in its first official quarterly earnings report, it said output averaged 566 MMcfe/d net in 3Q2013, 128% more than a year earlier and 25% higher than in the second quarter. Output included 7,900 b/d net of liquids, almost 90% higher sequentially.

Antero has barely broken the surface of what's to come, Rady and President Glen Warren told analysts during a conference call to discuss quarterly results. Antero had 19 rigs running in the basin between July and September, and it drilled and completed 44 wells using about four hydraulic fracturing (fracking) crews.

"This firmly places us as the most active operator in the Marcellus as we have the highest drilling trajectory with a triple-digit continuous annual growth rate for the last four years," Rady said. Antero executives have been asked why they continue to pursue this rapid pace of development.

"The answer is pretty simple. We're generating the types of returns that the Appalachian Basin...yields and we want to bring that value forward. Our rates of returns in the Marcellus range from about 40% from the rich-gas area to 90% in the highly rich condensate area."

The rates of return (ROR) in the Marcellus don't factor in Antero's efforts on shorter stage-length completions, also known as SSLs, "and those appear to enhance returns by approximately 25-35%..." Utica RORs range from about 100% in the rich-gas area to more than 200% in the highly rich condensate area.

"Obviously, those are rates of returns we wanted to develop as quickly as possible."

Those returns might be at a disadvantage considering that the Northeast has had some pipeline takeaway problems, but Antero was never in the logjam to begin with, Rady explained. While other operators in the southwestern part of the Marcellus suffered big basis blowouts earlier this year, Antero's operations primarily are in the southern end of the play, an area that over time has had the "mildest discount" to the New York Mercantile Exchange (Nymex), he said.

Average gas prices fetched before derivatives rose 30% year/year to $3.82/Mcf, a 22 cent premium to Nymex. About two-thirds of the revenues were realized at the Columbia Gas Transmission index price of 7 cents/Mcf negative differential to Nymex, but at a net 34 cents/Mcf positive to Nymex after a Btu upgrade. Remaining gas revenues were realized at other index points at 21 cents/Mcf negative differential to Nymex, but a net 1 cent/Mcf negative differential after a Btu upgrade.

Other areas, such as around Transcontinental Gas Pipe Line's Leidy hub, "have widened quite a bit more," Rady said.

Antero also is attempting to remain ahead of the curve through its hedging book, years in the making, which helped give the company $5.00/Mcf-plus prices recently. In addition, management has ongoing conversations with "a lot of the long-haul pipe builders to support new projects…" Firm transportation agreements are the icing on the cake.

Antero has firm transportation that goes to Henry Hub where it can hedge Nymex, and it has firm to Chicago where it can hedge a "healthier" basis, said Rady. "That's where our effort is going to be…If we get out ahead of it, then we intend to stay out ahead of it and avoid basis risk selling locally."

To keep its takeaway options available, the team is "forward thinking," the CEO told analysts. "We've jumped out, we have secured the rigs, secured the frack fleets, and just as important, we want to make sure we can get our product to market at the economic levels that we planned."

Antero has made some big commitments financially to ensure there's enough processing, compression and takeaway for its growing output. "Today, we have about 1.3 Bcfe/d of firm transport that will be all effective in our region by the end of 2014," Rady said. "We continue to build out this firm transport to accommodate the significant growth we see coming in the future..."

Some of the pipeline constraints may be gone for now, but Antero sees hurdles ahead, said Warren.

"We continue to have at least 100 MMcf/d constrained" combined in the Marcellus and Utica, "but those are quite methodical fixes" that include start-up of compression services in the Utica by the end of this month. In the Marcellus, a third 200 MMcf/d processing plant at the Sherwood processing complex in Doddridge County, WV, is scheduled to be up and running by year's end; the fourth by the end of June.

MarkWest Energy Partners LP, which owns and operates Sherwood, and Antero on Thursday completed agreements to develop a fifth 200 MMcf/d compressor for ramp-up later in 2014. Once completed, Sherwood would have 1 Bcf/d of total capacity.

Net production in 3Q2013 was comprised of 519 MMcf/d of natural gas (92%), 6,929 b/d of natural gas liquids (7%) and 948 b/d of crude oil (1%). The increases in output primarily were driven by 34 new Marcellus wells and 10 new Utica wells brought online between July and September.

Net income was $118 million (45 cents/share) in the quarter versus a loss of $114,887 million on gas reserves writedowns a year ago. Revenue totaled $384,522 in 3Q2013, compared with a loss in the year-ago period of $92,038.

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