As a special Christmas treat to our readers, we have made this month’s Global Energy Alert stock deep dive available to all! Enjoy the read, and if you want more of where this came from, then make sure you sign up!
Gas-focused E&P stocks have been getting a bid in the last few months. It’s normal around this time of year. Storage injection season has come to a close, and across most of North America, people are turning their heat higher to keep out the cold. For the gas drillers, that means it’s finally time to ring the cash register.
This year, we have other drivers that might give the stocks of these companies a boost. Powering AI data centers and LNG exports has opened up new markets and pricing regimes for these companies. LNG exports alone are expected to consume another 14 bn cubic feet per day by 2029. That’s music to the ears of gas company CEO’s, and they are ramping up their operations to make sure they can meet this demand.
In the spirit of that realization, we are going to look at a couple of well-established gas drillers to see which presents the most attractive picture for growth and shareholder returns. First, we will review Canadian E&P, ARC Resources (OTC: AETUF), a leading Montney driller. The stock of ARC has pulled back during the second half of 2025, and we will have a look at the cause to understand if it remains investible. Next, we will look at U.S. driller, Antero Resources (NYSE: AR). Antero has just made a big acquisition that could be a game-changer for this Marcellus-focused company.
As usual, I will remind you that there are no losers here. These are both top-level companies with real earnings and cash flow. But one will likely edge out the other as a long-term investment, and we will try to recommend that one to your attention.
ARC Resources
The last 2.5 years have been kind to the company, with the stock grinding higher from the mid-$14’s into mid-June of this year, and peaking at $22.80. It’s been downhill until recently, as investors were disappointed with reported production from one of their marquee projects that failed to meet expectations. As we’ve noted in other articles on Canadian-gas-focused drillers, ARC shares have suffered by comparison and underperformed American gas giants as well. Now we understand why.
As we’ve noted in the opening paragraph of this piece, gas is hot right now, and even as winter demand is set to spike gas has new drivers that didn’t exist a few years ago. ARC is a major Canadian gas producer with 54% of its daily output of ~360K BOEPD in that commodity.
ARC missed forecasts for EPS and revenue for Q-3 that resulted from some voluntary curtailments at its Sunrise core production area and a problem with wells in its growth area in Attachie. This area has figured prominently in their planning over the last several years, and the market was expecting a robust performance in line with their recent forecast of 30-35K BOEPD. News that Attachie production had fallen short of this forecast by about 8K BOEPD was not well received and helped to put a dent in the stock. Things could be turning around here, as the company noted in the release that things were improving at Attachie, raising expectations for Q-4.
“October production at Attachie was approximately 29,000 boe per day, including approximately 13,000 barrels per day of condensate. ARC successfully drilled and completed its latest pad applying learnings from earlier in the year, which will be placed on production late in the fourth quarter of 2025.”
The company plans significant growth in the next year as demand for gas and condensate-heavy oil diluent is expected to rise. On a capital budget of $1.8-1.9 bn, the company expects to deliver 2026 exit production of 405-420K BOEPD, with free funds flow of $1.5 bn CAD.
Analysts are bullish on the company with a buy rating and with price targets that range from $20-$25.00. The median is $22.00, which would be about a 15% upside from current levels. I think they are being a little timid here as this just gets the company back to second-quarter levels. EPS targets of $0.45 for Q-4 are a boost from Q-3’s $0.36, and may handicap the stock until results are reported on Feb-5th, 2026.
The thesis for ARC Resources
With ARC’s Montney position, there is room to run for at least a couple of decades without any sort of expensive M&A that could damage the balance sheet or result in dilution to shareholders. This provides predictability for increasing shareholder returns as production ramps up. With a peer leading low cost per mcfe that is in part driven by the quality of the assets held and support processing infrastructure, they can produce profitably across the cycle.
ARC has a solid balance sheet with net debt to Funds From Operations (FFO), just below 2X at current WTI, ~$60.00, and $3.5 NYMEX pricing for gas.
The company is set up to grow its dividend at a sustainable rate that could accelerate with a declining share count. ARC’s shares are priced below intrinsic value at present, and the company has been retiring shares as per its Normal Course Issuer Bid-NCIB. In Q-3, they bought back 6.5 mm shares and have reduced the share count by 21% over the last four years.
Analyzing the Attachie under lift
In the Q&A from the Q-3 call, a question was asked specific to the reason for the shortfall from the 30-35K BOEPD forecast to the 25K or so realized. They were a little cagey with the answer being excess water production. There are a few data points that will allow us to make an educated guess as to what happened. It’s important to understand this as Attachie is one of ARC’s growth areas. If the underlift is not fixable with engineering, the overall investment thesis could be compromised.
So here’s what we know-
- Excess water
- Excess clean-up time
- Refined well design
- Well spacing
That’s actually quite a bit of information, if you have some context in which to frame it. Let’s realize that shale strata are often laminated between water-bearing sands. The goal of shale fracking is to position your wellbore for maximum drainage once the frac is installed. The risk for well placement is encouraging water production that can leave oil stranded. If you look at the slide below, you can see that Phase I is drilled on a thinner bench than what is projected for Phase II. This amplifies the risk we’ve discussed.
One of the challenges of a well designer is to keep the borehole in the thickest part of the reservoir- to avoid fracking into the water zone, lying just below the shale-gravity, right? Of course. And of course, doing this while also positioning it for maximum drainage, two competing objectives. I think there’s a decent chance ARC fracked into water on this pad. This could be the result of an aggressive treatment as well as poor well placement. In this scenario, part of the well would see higher water cuts than the sections where it was avoided. This is all fixable on future wells with a refined well design. As they note in the slide presentation, “Use learnings implemented in 2025 and 2026 to drive efficiencies.”
Then there is the issue of spacing. With the wine rack or fish bone well pattern, if you don’t get this right, then there could be field pressure depletion or “cross-talk” between the wells. This could impact both the cleanup and the production rates that are achieved.
The good news is that all of this is fixable with engineering and not an adverse judgment on the quality of the reservoir.
Ok, now let’s look at Antero Resources
The company has just announced a pair of M&A transactions. The $2.8 bn HG Energy-upstream deal bolsters their core-liquids-rich West Virginia Marcellus position, and divests some non-core Utica dry gas assets in Ohio. So the good folks at AR have been busy boys on the M&A front. Not to be outdone, the good folks at Antero Midstream (NYSE: AM) snagged the midstream assets of HG Energy for $1.1 bn. Altogether, the good folks in the upstream and midstream sectors of Antero put up $3.9 bn in transactions focusing on their WV Marcellus business. Slides that discuss the details of the transactions are included below.
Notes on the transaction. The HG acreage will nearly double AR’s Marcellus footprint, and brings 850 mcfe/d of existing production, while lengthening inventory life by 5-years. In 2026, AR is expecting $550 mm in free cash, implying an 18% FC yield and EBITDAX multiples that compare favorably with their corporate EV/EBITDA above 9X. AR also took HG’s hedge book that protects cash flow for 2026-7, between $3.88-4.00 mmcfe. Pro Forma AR will produce about 4.225 BCF/D in 2026, a 17% uplift from 2025.
This was a companion transaction that immediately brought cost optimization and operational synergies to AR. Capital avoidance, not having to construct equivalent assets for their upstream business, and tax savings are estimated at $150 mm over ten years. It is also partially funded by their Utica midstream asset sale and helps to consolidate their focus on the West Virginia Marcellus play.
The company missed forecasts for EPS in Q-3 substantially- $0.15 vs $0.24, while beating on revenue by $30 mm to $1.21 bn. Analysts are upbeat with the company having received an upgrade from Wells Fargo on the robust commercial opportunities in West Virginia, the highest concentration of AI data centers, to no one’s great surprise. Price targets are bullish in my view, with the median at $46.00, representing a near 30% uplift from current prices. EPS projections for Q-4-$0.49, and Q-1, 2026-$0.79 augur well for this outcome.
The thesis for Antero Resources
The company is a leading producer of natural gas, Pro Forma 4.2 BCF/D, with a low cost position, sub $2.00 breakeven, in the Marcellus. This is a mature basin that has plateaued in daily output, so AR’s move to secure an additional 400 new drill sites, cut nearly a billion dollars of Pro Forma costs over the next decade, and reduce breakevens in the field by $0.25 per mcfe, is a solid deal. It’s also worth noting that the rig count has stayed flat this year for the Marcellus. Higher prices could bring a rebound in growth from the basin. Management notes it expects this will boost cash flow by 30% and be accretive to NAV per share. It’s a structured financing, cash, cash flow, and a 3-year term loan paid out through cash flow, a deal that the company expects to have fully paid off by 2028, and doesn’t dilute current shareholders.
AR has a modest LT debt profile with no near-term maturities. It has used free cash primarily for debt reduction, bolt-on acquisitions, and share count reductions. AR doesn’t pay a regular dividend.
Antero noted in their Q-3 call that they were positioned for an uptick in demand for dry gas. Justin Fowler, Sr. VP of Gas Marketing, commented-
“Regional demand is expected to increase by 8 Bcf per day. As Mike has discussed in the past, Antero has 1,000 gross dry gas locations that we could accelerate activity on if there is a regional call for higher supply. Along our firm transportation fairway, there have been more than 3 Bcf of power demand projects announced to date. Additionally, there is an incremental 13 Bcf per day of expected demand between LNG facilities and power projects announced along the LNG Gulf Coast fairway.”
All of these projects will be competing for natural gas supply that could face supply challenges in that short time frame. Antero is uniquely positioned to participate in each of these 3 regions with our ability to increase dry gas activity for local demand or use our firm transportation portfolio to access increasing demand all the way down to the LNG fairway.
Antero has about half of its 2026 production hedged to reduce cash flow volatility. That leaves the other half exposed to higher prices that often prevail in the wintertime. If cold weather meets increased structural demand, as the company points out, there could be a cash flow bonanza.
The Operations Catalyst for AR
The graphic in the slide below tells a compelling story. The bolt-on aspect of the transaction enables the same footage per pad from one half the wells previously required. U-turn wells are becoming commonplace in areas that are footprint-constrained and also facilitate more complete drainage of the rock. The tricky part is that they can be challenging to drill; hole cleaning is a big issue (solids-laden fluid streams hate to turn corners-pressure loss and solids settling, and there are two 90 degree turns in one of these wells), as well as well harmonics with adjacent wells.
Cost-cutting of this type is imperative in an aging basin like the Marcellus. Essentially, these U-turn wells eliminate the capital cost of five new wells and nearly double the IRR.
The company also noted in its Q-3 earnings report a solid record of increased operational efficiency. Company records were set in drill-out feet and frac stages per day during the quarter.
On a separate note, the company sees a bullish scenario for C-3 (LPG/Propane) for both the export and domestic markets. New demand from recently commissioned LPG export facilities was also cited as a potential catalyst in the call by Dave Cannelongo, VP Liquids Marketing and Transportation-
“Going forward, unconstrained dock capacity will allow U.S. barrels to efficiently clear the market and bring Mont Belvieu prices as close as possible to premium international LPG prices.”
Risks
Being a gas-focused E&P, a bullish outlook is hedged on strong winter pricing. We’ve seen that early in December with a peak above $5.50. This evaporated quickly with a mid-December warm-up and a pullback to around $4.00 in the near term contract.
There is some risk associated with a big acquisition. If things don’t turn out as rosy as the company projects, the stock could take a hit.
The stock could be a little ahead of itself even after the post-HG announcement sell off-which I don’t think was in any way related. Still, at nearly 10X EV/EBITDA, it’s trading at a substantial premium to EQT Corp (NYSE: EQT) and Range Resources (NYSE: RRC).
Your takeaway
There is no question that gas drillers are more expensive than they were six months ago. It would be a little silly for them not to be. Gas has doubled in that time, so there is still some underperformance of the related equities on that measure. That said, it certainly bolsters the investment thesis as we head into winter.
ARC is trading at an attractive multiple compared with its peers. If you look at their flowing barrel number of $27K and give them credit for projected growth, they are slightly more expensive than some. At under 6X EV/EBITDA, ARC trades at a ~20% discount on an EV/EBITDA basis to Canadian Natural Resources (NYSE: CNQ), and Birchcliff Energy (NYSE: BIREF); that’s probably induced by the problems we noted earlier. If you gave them a 7.15X multiple, shares would rerate toward that $24.00 level picked by the analysts. I don’t think that’s unreasonable with the growth occurring in this market and ARC’s plans to increase production.
ARC looks pretty solid on that basis at current levels. Now for Antero.
I like Antero for the long term. I think the bull case for increased demand puts a buy target on the stock in spite of its aggressive multiple. It is trading near its 200-day SMA of $34-35.00, so outside influences could drive the stock up or down. The Flowing Barrel price of Pro Forma Antero at $15.7K is also pretty attractive.
The company has positioned itself to respond to 2-bullish scenarios for dry gas and LPG exports as discussed. Those seem to have the wind behind them and could push the company certainly back to last winter’s peak of $40.00, and likely beyond to the analyst’s $46.00 projection.
It’s a bit of a squeaker this time around, but as we balance the performance risk that’s known with ARC in the Attachie area, and the challenges that Antero may have in incorporating its recent HG Energy acquisition into its operations, I think the nod for present-day value goes to Antero. AR has a proven record of success in this section of the Marcellus and a good track record of drilling and completing U-turn wells. Thusly, we proclaim Antero to be the winner of this month’s competition.
I don’t know if I would jump in long right away, as the company has sold down to the $30.00 level twice in the past several months. A call spread (buy one lower, sell one higher) might be the low-risk way to play AR. Conversely, if the stock were to tap $30.00 (or close to it) any time soon, you’d want to land on it like a duck on a June bug.
Intelligent Investor is a monthly deep-dive provided to members of Oilprice.com’s Global Energy Alert service.
More Top Reads From Oilprice.com