DRILL REPORT #1.0
January 2014
E N E R G Y – P O S I TI VE O U T LOOK G O I NG I N TO 2 0 1 4

R E S E A R C H
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY

Drill Report #1.0 - Executive Summary
We believe that capital spending in the energy sector will remain...
THE “DRILL PORTFOLIO”
The “Drill Portfolio”

___________________________
Note: Share prices are as at January 6, 2014.

2
R E S E A R C H

DRILL...
TOP PICK – ANTERO RESOURCES (“NYSE:AR”) DETAILED ANALYSIS
EXECUTIVE SUMMARY

Antero Resources Investment Thesis
We have an $87/share price target on Antero Resources versus Street ...
Summary of Investment Risks and Catalysts
Investment Risks

Execution and operating results (i.e., infrastructure tie-ins,...
Antero Resources Company Overview

Financial Snapshot
(All figures are in US$ mm unless otherwise indicated)

Antero Resou...
At current strip prices Antero Resources shares are valued at approx. $82 / share on a DCF basis
AR is positioned for stro...
We value AR’s assets at $90/share on a NAV basis
Development scenario assumptions for both the Marcellus and Utica are con...
For access to our models or for more detailed information please contact drill.research@drillcap.com

Disclosure
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Drill Report #1.0

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Drill Report #1.0

  1. 1. DRILL REPORT #1.0 January 2014 E N E R G Y – P O S I TI VE O U T LOOK G O I NG I N TO 2 0 1 4 R E S E A R C H
  2. 2. EXECUTIVE SUMMARY
  3. 3. EXECUTIVE SUMMARY Drill Report #1.0 - Executive Summary We believe that capital spending in the energy sector will remain robust in the foreseeable future and that information inefficiencies in the private space will make for compelling investment opportunities around “Greenfield businesses” within plays that are expected to receive capital inflows going forward. Our view is that public market investing will continue to be a stock picker’s environment with a bias towards exploration and production (“E&P”) companies that can grow, on a debt adjusted basis, and that are positioned in the highest return regions. We believe that on the public side, Antero Resources (NYSE: “AR”) screens as a top tier company that will provide the best leverage in the E&P sector. The energy industry has become more in tune with returning or at the very least taking measures to return value to shareholders – we expect this trend to continue into 2014. Producers are still expected to spend more in 2014 than in 2013 barring any material and sustained (multiple quarter) drop in oil or gas prices. The industry has taken advantage of high oil prices throughout the year to lock in a significant portion of their 2014 oil weighted production between $87-$95/bbl WTI which bodes well for oil/liquids activity going into next year. Pricing in the energy services sector remains relatively soft across the U.S. - Producers have benefited and continue to benefit from this trend. We like the Utica and Duvernay shale plays and recommend exposure to each. 1 R E S E A R C H
  4. 4. THE “DRILL PORTFOLIO”
  5. 5. The “Drill Portfolio” ___________________________ Note: Share prices are as at January 6, 2014. 2 R E S E A R C H DRILL PORTFOLIO We expect the energy public markets to be characterized as a stock pickers environment, below is a mock portfolio of our favorite names in the space with their respective weightings relative to the EPX and XLE
  6. 6. TOP PICK – ANTERO RESOURCES (“NYSE:AR”) DETAILED ANALYSIS
  7. 7. EXECUTIVE SUMMARY Antero Resources Investment Thesis We have an $87/share price target on Antero Resources versus Street estimates at $66/share – the stock currently trades at $58.79/share. We believe risk / reward at current levels is attractive. – Leading debt adjusted growth profile in the industry with ample liquidity. We believe the company’s valuation is justified given it’s ability to grow well above peers >37% 3 year CAGR versus peers in the mid-teens in an environment where disciplined production growth is relatively scarce. With the recent public filing and debt issuances the company is well capitalized to accelerate its development program. – High operating margins and low cost structure. AR operates as one of the lowest cost producers in the industry with development costs sitting at approximately $1.00/Mcfe, we believe the company will have the same operational success of being a low cost producer in the Utica. – Strong, concentrated Utica & Marcellus asset base with multiple catalysts ahead. We believe that AR’s resource portfolio (consisting of Utica and Marcellus development) is worth approx. $15.4 bn ($10bn – Marcellus, $5.3bn Utica). We think that the Utica part of the portfolio has additional upside given our conservative development assumptions (high spacing assumptions, modest IP rates). We also have not attributed any value to any ongoing science programs in the company’s Marcellus portfolio (i.e., Shorter Stage Lengths “SSL”) – Midstream assets undervalued, underappreciated. We believe the Street has a low valuation marker on the company’s midstream assets at approximately $1.7bn. We think the midstream assets (fixed fee business with close to no commodity exposure) could fetch approx. $3.5 bn ($260 mm of 2014 EBITDA at a 13.5x multiple). We think this is an important catalyst for the stock in the near term – Strong hedging profile gives cash flow (and spending) certainty. We believe that Antero will fare relatively better than peers in an environment where commodity price (and basis) volatility will continue to persist. The company has hedged 66% and 44% of its 2014 and 2015 natural gas production. – Experienced Management team. AR’s management team and technical staff have a proven track record of execution in the oil and gas industry. We believe this will dictate the company’s growth trajectory going forward especially in the Utica where managing the balance between basin wide infrastructure build-out and well tie-ins are ever more important to deliver company wide growth. 3 R E S E A R C H
  8. 8. Summary of Investment Risks and Catalysts Investment Risks Execution and operating results (i.e., infrastructure tie-ins, well completions and well results) will be highly scrutinized by the market now that the company is public Third party compression is the real risk in terms of production execution – the field pressures in the Utica are high and despite the Seneca facility coming online there is yet to be any compression installed Antero’s share price performance will be dependent on underlying natural gas and natural gas liquids price dynamics and basis differentials Natural gas and NGL production in the Appalachia region is expected to be robust going forward Given short term bottlenecks in takeaway capacity out to demand centers we could see continued pressure in prices and basis differentials which would impact the company’s bottom line and appetite to accelerate its development program Liquidity risk (given near term cash flow outspend) is also a risk to monitor Catalysts Utica type curve, economics and spacing assumptions likely to be revised upwards Analysts are being conservative around Utica development assumptions – spacing could trend towards 80 acre spacing from the approx. 120-140 acre spacing that is widely being modeled. This will have a material impact on the drilling inventory and reserve life index for the company’s Utica position Well costs in a development scenario will also likely trend down as cycle times decrease ($12mm well costs to $910mm) which will improve well economics Antero’s wells are among some of the highest producing wells in the Utica – however analysts are hesitant to model these curves ahead of more production data – we think the type curve assumptions being used by the Street are relatively conservative and any upward adjustments (in IP rates or decline rates) will likely be seen as positive Transitioning the Marcellus drilling program towards short stage laterals (“SSL”) between 250-150ft will be help drive incremental value for the Marcellus asset base AR plans to drill 70% of their wells using SSL in 2014 versus approx. 50% in 2013, if these results hold up compared to recent SSL well performance we could see more value given to the Marcellus portfolio by the investment community Midstream MLP spinoff will unlock value of infrastructure and gathering assets embedded in AR’s portfolio Fund flows – Antero screens well within the E&P coverage universe. We expect to see positive fund flows from larger institutional public investors as the company delivers production growth 4 R E S E A R C H INVESTMENT RISKS AND CATALYSTS There are a confluence of factors leading to near term share price support and longer term price appreciation for Antero
  9. 9. Antero Resources Company Overview Financial Snapshot (All figures are in US$ mm unless otherwise indicated) Antero Resources (AR:NYSE) is an $17 bn oil and gas Current Share Price (January 6, 2014) Fully Diluted Shares Outstanding (mm) (1) Market Capitalization Net Debt (2) shale basins located in Pennsylvania, Ohio and West Virginia $58.79 Total Enterprise Value exploration company with operations in the Marcellus and Utica $17,381 262 15,406 1,975 The company recently went public in October 2013 with an offering of 38 mm shares of common stock at a $44/share Valuation Statistics: P/CFPS (3) Statistic Asset portfolio of more than 400,000 acres (across the Marcellus and Utica plays) with proved reserves of 6.3 Tcf, Net 3P reserves 2014E 2014E 2015E 2015E 2014E 2014E 2015E 2015E Statistic of 27.7 Tcfe TEV / EBITDAX (3) Statistic Midstream and infrastructure assets have allowed for low processing and transport costs (higher operating margins) Statistic Double digit production growth will be achieved through approx. 11.8x $4.99 7.8x $7.56 13.2x $1,396 8.9x $2,112 2014E Production (Mmcfe/d) (3) % Gas % Hedged TEV / 2014E Production ($/bbl/d) made available in 2014 and 2015 respectively Marcellus AR owns 366,000 net acres and is the most active driller in the basin with approx. 15 operated rigs and producing approx. 519 Mmcfe/d (Q3/2013) 933 81% 66% $51,012 2015E Production (Mmcfe/d) (3) % Gas % Hedged TEV / 2014E Production ($/bbl/d) 1.3 Bcf/d of processing capacity 1.5 Bcf/d of takeaway capacity 1,417 77% 44% $33,600 Antero Resources Share Price Performance – Since IPO Currently testing shorter stage laterals in the drilling program US$/Share (expected to see 30% increase initial production tests) $70 Current Price: $58.79 Target: $87.00 Utica $63 AR owns 104,000 net acres in the play and is currently operating 5 rigs $55 Currently has over 50 well pads under construction in anticipation of ramping up once all necessary gathering and processing $48 solutions are in place ___________________________ 1. Fully diluted shares outstanding as at September 30, 2013. 2. Net debt is as at September 30, 2013 and calculated as long-term debt plus current portion of long-term debt net of cash. 3. Financial estimates are per Drill Research estimates. $40 Oct-13 Oct-13 Nov-13 Dec-13 Jan-14 5 R E S E A R C H OVERVIEW OF ANTERO RESOURCES Antero Resources Company Overview
  10. 10. At current strip prices Antero Resources shares are valued at approx. $82 / share on a DCF basis AR is positioned for strong growth going forward. We expect the company to produce 935 Mmcfe/d in 2014 and for that figure to grow to 2.4 Bcfe/d by 2017 – a three year 37% CAGR AR will benefit from high realized (hedged) prices going forward given its tactical hedging program: – – 2014E = $5.69/Mcfe [Oil @ $89.78/bbl, NGLs @ $44.79 / bbl, Gas @$5.03/Mcf] vs. HHUB at $4.21– 66% gas hedged for 2014 2015E = $5.63/Mcfe [Oil @ $82.23/bbl, NGLs @ $45.68/ bbl, Gas @$4.76/Mcf] vs HHUB at $4.19 – 44% gas hedged for 2015 We have assumed a long run average corporate decline rate of 25% and capital efficiency of $15,000 per flowing bbl. We Expect the following capex profile: – 2014E = $2.35 bn, 2015E = $2.3bn, 2016E = $2.5bn, 2017E = $2.8bn, Maintenance capex = $2.3bn We don’t expect large fluctuations in the company’s operating cost structure on a go forward basis: – – – – – LOEs: 2014 = $0.05/Mcfe, 2015 = $0.06 / Mcfe Transport: 2014 = $1.12/Mcfe, 2015 = $1.12 / Mcfe G&A: 2014 = $0.17/Mcfe, 2015 = $0.12 / Mcfe Production Taxes: 2014 = $0.15/Mcfe, 2015 = $0.21 / Mcfe DD&A: 2014 = $1.30/Mcfe, 2015 = $1.32 / Mcfe DCF Summary – Strip Pricing (US$ mm) 2013 2014 2015 2016 2017 Terminal CFO (pre-WC) Interest Expense Tax Rate Capex Acquisitions Sales Unlevered Cash Flow Discounted Cash Flow 205 37 38.0% (797) 0 0 1,309 169 38.0% (2,350) 0 0 1,981 230 38.0% (2,250) 0 0 2,684 236 38.0% (2,500) 0 0 3,248 236 38.0% (2,750) 0 0 5,534 236 38.0% (2,283) 0 0 (568) (936) (126) 330 644 3,397 (568) (851) (104) 248 440 17,424 2020 Production (mboepd) Maitenance Capex 608.9 $2,283 Terminal Growth 0.0% Enterprise Value Working Capital* Other PP&E LTD Other Liabilities Midstream Equity Value $/Share Current Price Upside Potential $19,363 -$200 $178 $1,444 $33 $3,510 $21,375 $81.57 $58.79 39% 6 R E S E A R C H CASH FLOW VALUATION SUMMARY Antero Resources Valuation – Discounted Cash Flow Analysis
  11. 11. We value AR’s assets at $90/share on a NAV basis Development scenario assumptions for both the Marcellus and Utica are conservative Our valuation estimates are roughly in line with Street with the exception of the midstream assets – we think the assets could fetch >$3.5 bn in an MLP structure NAV Summary – Strip Prices Asset Reserves (Bcfe) Value ($ mm) Value ($/mcf) Value ($/Share) Proved Reserves (PV10) 6,282 $3,369 $0.54 $12.86 Total 6,282 $3,369 $0.54 $12.86 Marcellus (Highly Rich Condensate) 4,012 $2,646 $0.66 $10.10 Marcellus (Highly Rich Gas) 4,616 $2,877 $0.62 $10.98 Marcellus (Rich Gas) 5,837 $3,892 $0.67 $14.85 Marcellus (Dry Gas) 2,866 $654 $0.23 Street Valuation $2.49 $2,909 Upstream Resource Upside Marcellus Total Marcellus $10,069 $9,841 Utica Utica (Highly Rich Condensate) 1,927 $1,716 $0.89 $6.55 Utica (Highly Rich Gas) 3,295 $3,233 $0.98 $12.34 Utica (Rich Gas /Dry Gas) 51k acres @ 7,500/Acre Total Utica Total Resource Potential $383 $1.46 $5,332 17,331 $5,587 Total 23,613 Enterprise Value $58.77 15,428 3,510 Midstream @ 13.5x 14' EBITDA 15,401 $0.89 $13.39 $1,688 22,280 $85.02 20,025 22,280 Working Capital (ex hedges and deferred taxes) Other PP&E LTD Other Liabilities -200 178 1,444 33 Equity Value 23,670 $/Share $90.33 Current Price $58.79 Upside Potential 54% 7 R E S E A R C H CASH FLOW VALUATION SUMMARY Antero Resources Valuation – NAV Analysis
  12. 12. For access to our models or for more detailed information please contact drill.research@drillcap.com Disclosure This document and the information contained herein are strictly confidential and remain the property of Drill Research LLC (“Drill Research”). Neither this document nor its contents may be distributed, published, reproduced, or disclosed, in whole or in part, to any other person nor relied upon by any other person nor used for any other purpose at any time without the prior written consent of Drill Research. This document does not constitute nor does it form part of an offer to sell or purchase, or the solicitation of an offer to sell or purchase, any securities or any of the businesses or assets described herein or an offer or recommendation to enter into any transaction described herein nor does this document constitute an offer or commitment to provide, arrange or underwrite any financing. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation. Drill Research or any of their subsidiaries or affiliates, nor any of their respective officers, directors, employees or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this document or its contents or reliance on the information contained herein. The information in this document has not been independently verified by Drill Research. Drill Research or any of its subsidiaries or affiliates, nor any of their respective directors, officers, employees or agents, makes any warranty or representation, express or implied, as to the accuracy or completeness of the information which is contained in this document whether obtained from or based upon third party or public sources or otherwise. Drill Research does not undertake any obligation to provide any additional information or to update any of the information or the conclusions contained herein or to correct any inaccuracies which may become apparent. Past performance is no guarantee of future returns. R E S E A R C H

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