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Moody's Upgrades Antero Resources (AR) to 'Ba2'; Expects Strong Production Growth, Increasing Reserves

February 26, 2015 2:54 PM EST

Moody's Investors Service (Moody's) upgraded Antero Resources Corporation's (Antero) (NYSE: AR) Corporate Family Rating (CFR) to Ba2 from Ba3 and upgraded the debt instrument ratings at Antero Resources Corporation and Antero Resources Finance Corporation's to Ba3 from B1. The company's Speculative Grade Liquidity rating (SGL) was changed to SGL-2 from SGL-3. The rating outlook is stable.

"The upgrade reflects Moody's expectation that Antero will continue to report strong production growth and increasing reserves despite challenging market conditions and without a significant increase in leverage," stated Stuart Miller, Moody's Vice President -- Senior Credit Officer. "Antero's low finding and development costs and significant commodity hedge position should allow the company to continue to prosper despite today's low commodity price environment."

Ratings Upgraded:

Antero Resources Corporation

Corporate Family Rating -- upgraded to Ba2 from Ba3

Probability of Default Rating -- upgraded to Ba2-PD from Ba3-PD

Senior unsecured note rating -- upgraded to Ba3, LGD 5 from B1, LGD 5

Rating Outlook -- Stable

Speculative Grade Liquidity Assessment (SGL) -- changed to SGL-2 from SGL-3

Antero Resources Finance Corporation

Senior unsecured note rating -- upgraded to Ba3, LGD 5 from B1, LGD 5

RATINGS RATIONALE

Antero's Ba2 CFR reflects its scale and ability to grow production and reserves in a low commodity price environment thanks to its low cost structure and high capital efficiency. Average daily production in the fourth quarter of 2014 was 211 thousand barrels of oil equivalent (Boe), representing an 87% increase over the same quarter in 2013. Similar to production growth rates, Antero has achieved impressive proved developed reserve growth over the last year, increasing to 633 million Boe at year end 2014 from 338 million Boe at the end of 2013. Capital efficiency, as measured by the leverage full cycle ratio, was in excess of 4x in 2014 as the company benefited from a very low finding and development (F&D) cost of about $2.75 per Boe. While this capital efficiency is exceptional, Moody's recognizes that Antero's aggressiveness in booking proved undeveloped reserves, and the fact that 70% of the company's reserves are proved undeveloped, favorably biases their capital efficiency metric compared to its peers.

The Ba3 rating on Antero's senior notes reflects both Antero's overall probability of default, to which Moody's assigns a PDR of Ba2-PD, and a loss given default of LGD 5. The $2.6 billion of senior notes are unsecured and are subordinated to the $4 billion senior secured credit facility. The contractual subordination of the unsecured notes is reflected by the note rating being one notch below the Ba2 CFR, consistent with the Moody's Loss Given Default Methodology.

Antero uses commodity hedges to protect its cash flow from falling commodity prices. In 2015, essentially all of the company's gas and oil production is hedged at attractive prices. With minimal downside risk to its cash flow, unlike most speculative-grade rated exploration and production companies, Antero intends to continue its practice of outspending cash flow in 2015. Moody's projects a $650 million shortfall which will need to be financed with new debt or the sale of assets. Despite the increase in debt, Moody's expects leverage to remain stable in 2015 as increased production and proved developed reserves should keep pace with the higher debt amount. At year end 2014, the company had debt to average daily production of about $20,000 per Boe and debt to proved developed reserves of $6.50 per Boe. Should the company be successful in dropping additional midstream assets into Antero Midstream Partners LP, and if the drop downs are partially financed with equity, leverage could modestly improve in 2015.

The SGL-2 Speculative Grade Liquidity Rating reflects good liquidity based on Antero's recently upsized $4 billion credit facility, of which $1.7 billion was drawn as of December 31, 2014. After taking into account $400 million of letters of credit, the company had $1.9 billion of liquidity at year end, more than enough to cover Moody's projected free cash flow deficit in 2015 of $650 million. The credit facility matures in 2019 and the next scheduled redetermination of the borrowing base is not until October 2015. The credit facility requires that Antero maintain a minimum current ratio of 1.0x and a minimum interest coverage ratio of 2.5x -- parameters that Antero is expected to meet comfortably. The company could generate additional liquidity in 2015 through the drop down of assets to Antero Midstream Partners, or through the sale of units in the partnership itself.

The stable outlook reflects the expectation that Antero will manage its capital spending in 2015 to keep leverage near the level reported at the end of 2014. An upgrade is unlikely until there is better balance between operating cash flow and capital spending, and leverage, as measured by retained cash flow to debt, improves from its yearend level of about 23% to something approaching 30%. The CFR could be downgraded if debt to average daily production and debt to proved developed reserves exceeds $25,000 per Boe and $10 per Boe, respectively.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.



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