Antero Is Back With Some Financial Engineering

Posted on January 7, 2021 by Florian Buschek

Antero Resources AR (disclosure: long) is in the markets again with some value creating financial engineering.

They refinance 2022 senior notes with senior unsecured notes due 2026. So they extend the maturity considerably. While the previous rate was 5.125%, the new rate will be 8.375% but that is perfectly acceptable. They can easily afford the 3.25% more with all the cash coming in. Most of all, the perpetual fear with any gas company is that it trips covenants or can’t roll over the debt.
By refinancing early AR eliminates these risks at a small cost.
Could they have refinanced later at a better price? Perhaps. That would have been a tiny gain compared to the risk of gas and NGL prices deteriorating until then, thus facing substantial roll over risk or potentially an even higher rate than the longer maturity now.

Second, they registrate the shares for the convertibles offered in August 2020. Those are “in the money” now and can be redeemed.

which represents an initial conversion price of approximately $4.34 per share of common stock. The initial conversion price represents a premium of approximately 20% over the last reported sale price of the Company’s common stock on the New York Stock Exchange of $3.62 per share on August 18, 2020. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events.
The Notes will be redeemable, in whole or in part, for cash at the Company’s option at any time, and from time to time, on or after March 1, 2024 and before the maturity date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price then in effect for at least 20 trading days

The last part has happened in recent days with the stock above $5.7 for quite some time now. So is that dilutive? Yes, it is.
However, one has to look at the whole picture. Those same shares that they are offering now at the current market price with no discount, they had bought back when the stock was below $3.
They did this masterfully. Buying back stock around the lows and stretching the balance sheet as far as possible. Then once the stock more than doubled and the outlook was much better they refinanced pretty much all their debt and issued convertibles at a much higher conversion price and now they repurchase them with the stock that has more than doubled. Great capital allocation, nobody could have planned this better. The bonds are also trading at par again, which AR bought back at a big discount prior. Excellent. The maturities and outstanding debts are shown below. The 2021 notes are refinanced, as are half the 2022 ones and half the 2026 convertibles. I have a hunch that the 2022s will be gone quite soon and then there is runway of 2 years until the next maturity. The CFO didn’t make empty promises when he said in a recent conference that they would be very active in the markets.

Propane keeps going higher, in fact prices have now almost doubled in 2 months, all going straight to AR’s cash flow and bottom line. International LNG prices are also doing well affecting domestic prices, because Japan for example is running low on inventory and needs to urgently activate more capacity for gas-fired power plants. The reason should be obvious from the massive spike in electricity prices. Japan is unique in that it is very dependant on primary and secondary energy imports and cannot just import electricity from its neighbours.

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