Chapter IV Investors Sends Letter to Board of Antero Resources Corporation

Letter Encourages Antero’s Board to Simplify Its Organizational
Structure From Three Entities to Two Entities

Letter Available at http://www.chapterivinvestors.com

CHARLOTTE, N.C.–(BUSINESS WIRE)–On January 24, 2018, Chapter IV Investors, LLC (“Chapter IV”), an
investment firm, sent a letter to the Board of Directors of Antero
Resources Corporation (“Antero”)(NYSE: AR) encouraging Antero’s Board to
simplify its complex current organizational structure from three
entities, including: (i) Antero, (ii) Antero Midstream Partners, LP
(NYSE: AM) and (iii) Antero Midstream GP LP (NYSE: AMGP) into a
two-entity (upstream and midstream) structure in 2018 with the GP-IDR
(owned by AMGP) being eliminated. Chapter IV’s letter offers
recommendations regarding possible transaction structures to accomplish
such simplification and the process to effect such simplification.
Chapter IV’s goals are to encourage (i) better alignment of various
equity stakeholder interests, (ii) reduced potential for future
conflicts of interest and (iii) “best-in-class” corporate governance
across the Antero family of entities. In addition, Chapter IV hopes that
its suggested organizational simplification will make Antero’s common
stock a more attractive risk/reward proposition for investors and
contribute to the long-term maximization of the value of Antero’s stock.

The letter can be downloaded at http://www.chapterivinvestors.com

Letter to Antero’s Board

The full text of the letter is as follows:

January 24, 2018

Board of Directors
Antero Resources Corporation
1615 Wynkoop
Street
Denver, CO 80202

Gentlemen:

As you are aware, the “Antero family” of entities currently includes
three distinct entities: Antero Resources Corporation (“Antero” or the
“Company” or “AR”), Antero Midstream Partners (“AM”) and Antero
Midstream GP LP (“AMGP”). In my opinion, such organizational
structure is fundamentally too complex, and I believe it should be
simplified into two entities (i.e. – an upstream entity and a midstream
entity) in 2018 with the GP-IDR (owned by AMGP) being eliminated. My
opinion stems in part from my recognition that master limited
partnership (“MLP”) investors are increasingly demanding the elimination
of GP (or GP-related) incentive distribution rights (“IDRs”), and MLP
sponsors are increasingly choosing to pursue these simplifications. My
opinion also stems from a different issue, namely my investment
perspectives of Antero. More specifically, my investment firm, Chapter
IV Investors (“Chapter IV”), previously invested in Antero due to my
perception of the quality of its resource base. Regrettably, I felt
compelled to exit such investment due to my concerns regarding the
potential for conflicts of interest within the “Antero family.” As a
portfolio manager, I decided that an investment in Antero simply
presented an unacceptable risk for my investors.

This letter offers recommendations regarding possible transaction
structures to accomplish an organizational simplification and the
process to effect such simplification. My goals in writing this letter
are to encourage (i) better alignment of various equity stakeholder
interests, (ii) reduced potential for future conflicts of interest and
(iii) “best-in-class” corporate governance across the “Antero family” of
entities. In addition, I hope my efforts will lead to an “Antero family”
simplification that makes Antero’s common stock a more attractive
risk/reward proposition for investors resulting in the long-term
maximization of the Company’s value.

I will begin this letter with a few introductory and well-deserved
compliments regarding the Antero management team. Such team:

1) Has done an outstanding job of acquiring and developing Marcellus
“Core” acreage in West Virginia.

2) Has built an integrated business model, capitalizing on the arbitrage
between midstream market values and midstream build-out costs.

3) Deserves significant additional praise for (i) its foresight in
developing an attractive long-term hedge book and (ii) delivering value
back to Antero’s original private equity sponsors, led by Warburg Pincus
and Yorktown Partners.

4) Recently conducted an outstanding Analyst Day in terms of providing
investors with a detailed look at the Company’s five-year development
plan and its related impact on distributions to AM and AMGP investors
over such time period.

Given the decline in AR’s stock price over the last 3+ years and AR’s
stock price malaise immediately following the Company’s recent Analyst
Day, something feels wrong to me. My hope is that the Company’s Board,
its private equity sponsors (the “PE Sponsors”) and management will do
the right thing to address the problem that I see.

Antero’s Problem (as I See it)

As stated above, the organizational structure of the “Antero family” of
entities is too complex. Over the past few years, many MLPs have
addressed the complexity associated with their GP/LP structures and the
related potential conflicts of interest associated with GP-IDRs. More
MLPs are poised to do such GP/LP simplifications in 2018. I believe AR,
AM and AMGP should simplify from a three-entity structure to a
two-entity (upstream and midstream) structure with the GP-IDR (owned by
AMGP) being eliminated. In writing this letter, I hope that AR
management will offer their views on this issue and their related
willingness to address this issue on the Company’s upcoming Q4, 2017
earnings conference call. Additionally, I hope that the Board and AR
management will take action to address this problem in 2018.

Doing the Right Thing (from My Perspective)

I believe doing the right thing to address the complexity problem
involves more than reducing Antero’s entities from three to two. It
involves:

(i) Choosing the right structure to accomplish such simplification.

(ii) Choosing the right process to effect such simplification.

(iii) The Company’s Board, PE Sponsors and management acting with the
highest standards of integrity in connection with the simplification.
This implies (i) acknowledging and fully embracing the inherent
conflicts of interest in the current “Antero family” structure,
(ii) acting in a manner to better align stakeholder interests and
(iii) otherwise demonstrating “best-in-class” corporate governance.

I explain my views on each of these topics below.

Choosing the Right Structure

Antero can explore various transactions to simplify, but from my
perspective, the right answer involves selecting one of the following
two approaches:

(i) AMGP buying AM in a stock-for-units swap at some fair premium to
AM’s market price, or

(ii) AMGP buying AR in a stock-for-stock merger at some fair premium to
AR’s market price (followed by a drop down of the IDR held by AMGP to AM
in exchange for a fair number of new AM units).

Personally, I think this latter option is the best path because I
believe this would maximize the alignment of AR
“insiders” with all public investors, given that such transaction
would result in (i) Warburg Pincus, Yorktown Partners, Paul Rady and
Glen Warren all increasing their stakes in
AR (on a tax-free basis) and (ii) AR increasing
its stake in AM with no additional cash investment required.

While, in theory, the acquirer and acquiree in the above mentioned
transactions could be reversed, I personally believe that AMGP’s stock
price is fundamentally overvalued relative to the publicly traded equity
securities of AR and AM and, therefore, is the only “Antero family”
entity that could provide a merger premium to another “Antero family”
member. Importantly, any fair value swap among “Antero family”
members needs to focus on the intrinsic value of each entity, which
in my opinion, implies looking at the realistic long-term expected cash
flows of each entity (e.g. – 20 years vs. 5 years).

My personal conclusion is that AM’s cash flows (and distributions to
AM unitholders) will become increasingly challenged in years 6-20 (and
have the potential for significant decline over such longer time frame).
If my conclusion is correct, of course, the cash flows at AMGP (and
the dividends to AMGP stockholders) have far greater vulnerability than
those of AM, given the levered nature of GP-IDR cash flow at AMGP.
This key issue is addressed further in the section entitled Managing
Potential Conflicts That May Arise During the Simplification Process
and in Appendix 1 (a very important component of this letter).

In making these recommendations, it should be noted that Chapter IV and
all affiliates of Chapter IV currently own no securities of AR, AM or
AMGP (i.e. – we are not long or short any of these securities). I came
to these conclusions objectively given my 30+ year investment banking,
private equity and capital markets’ experience and my firm’s acute focus
on the Marcellus/Utica, including the “Antero family” of entities.

Choosing the Right Process

Process is critically important to the resolution of Antero’s
complexity problem; I cannot state this strongly enough. I
believe that a fair process would be particularly important to the
public shareholders of AR (i.e. – investors that own approximately 73%
of AR’s common stock, but also investors that are represented by a Board
still controlled by AR’s PE Sponsors and management).

What does the right process mean to me? It means a process that is not
unduly influenced by Antero’s PE Sponsors or management, who
collectively own approximately 27% of AR’s common stock (per Antero’s
1/18/18 Analyst Day presentation). While this stake is significant (i.e.
– worth about $2 billion), it should not be viewed as a sufficient check
and balance against potential conflicts, in my opinion. The reason for
this is that the economic interests of Antero’s PE Sponsors and
management are different than those of AR’s public shareholders, given
(i) such insiders’ much higher (i.e. – 68%) percentage ownership stake
in AMGP (worth over $2 billion) and AMGP’s ownership of the IDRs
associated with AM and (ii) the fact that AR’s “corporate returns” on
its wells are not a particularly important driver of the quarterly
distributions at AMGP. Given this structure, I recognize that value
could be shifted from AR to AM, and then onto AMGP. It is the differing
percentage ownership stakes of AR’s PE Sponsors and management in AMGP
vs. AR that creates the potential for conflicts of interest.

I encourage the independent directors of the Company to (i) form a
committee (the “Independent Director Committee”) and (ii) engage
independent investment bankers to advise it on the right structure and
right pricing for a simplification of the “Antero family” of entities.
To further ensure process fairness, two other safeguards feel necessary.
The first is – any transaction that involves AR should be subject to the
majority vote of AR’s public shareholders (i.e. – excluding AR’s PE
Sponsors and management) and any transaction that involves AM should be
the subject of a majority vote of AM’s public unitholders (i.e. –
excluding AR). The second is – I would encourage the Independent
Director Committee to reach out to several of AR’s largest unaffiliated
shareholders (and AM’s largest unaffiliated unitholders) to solicit
their views as to (i) an optimal two-entity structure and the (ii) the
possible fair value pricing that they believe may be appropriate for
achieving such structure. I would view such actions as good examples of
“best-in-class” corporate governance.

Managing Potential Conflicts That May Arise
During the Simplification Process

In my opinion, AR has properly disclosed the existence of the potential
for conflicts of interest within the “Antero family” of entities in all
of its various SEC filings. Disclosure of
potential conflicts does not solve
conflicts, however. Accordingly, potential conflicts of interest of AR’s
PE Sponsors and management have to be carefully evaluated and understood
if Antero is going to get its simplification transaction structure and
process right.

Such evaluation may (or may not) include looking at the fairness of the
current gathering and water handling fees that AM charges AR (vs. the
fees paid by other Marcellus producers). In my view, an analysis of
the fair intrinsic value of AR, AM and AMGP should include looking at
how a totally independent AR Board might
want to allocate capital to AR drilling and completion activities over
time (without regard to the potential adverse financial impact on AMGP).
After all, the Board of AR owes no fiduciary duty to the shareholders
of AMGP; rather the AR Board’s duties run to the shareholders of AR. Appendix
1 of this letter provides some important insight into the capital
allocation issues (and related potential conflict of interest issues)
that may lay ahead at AR.

Understanding the “corporate level” returns of AR’s undrilled well
inventory (at various commodity price levels) is critical to
understanding how an independent AR should allocate capital (and is
critical to the projection of all “Antero family” members’ future cash
flow). In addition, a careful review of the “intrinsic value” of each
Antero entity should include looking at the composition
of AM’s cash flows (and, in particular, the fact that
approximately one-third of AM’s current EBITDA is attributable to
one-time water handling fees in connection with well completions vs.
recurring (albeit declining) gathering fees over the life of a well). The
materiality and nature of these one-time water handling fees is one of three
differentiating (and collectively unique) characteristics of AM
that must be understood by all “Antero family” entity directors and
investors (as I believe that AM has no true MLP “comparable” in terms of
its cash flow model). Appendix 1 elaborates further on the
uniqueness of the “Antero family” structure.

Given the cash flow dynamics of water handling services (and, to a
lesser extent, gathering services) to each well, I believe the
independent directors of AR need to understand the potential for AM’s
(and AMGP’s) distribution growth to slow and eventually decline if, and
when, AR’s well completions flatten and eventually decline. I believe
the independent directors of AR should also recognize that this may well
occur (or arguably, should occur) if, and when, (i) AR’s “corporate
level” returns do not possess a reasonable premium over AR’s cost of
capital or (ii) U.S. natural gas supply/demand otherwise implies that AR
should moderate its pace of well completions.

Final Observations

As certain members of AR’s management team know, Chapter IV has focused
on the Marcellus and Utica for many years now. I recognize that the
true “Core” of SW Appalachia is a uniquely valuable economic asset.
At the same time, I recognize that shareholders of various SW Appalachia
producers have suffered as certain producers have chased production
growth for various reasons other than attractive “corporate level”
returns. Rationales for such behavior include (i) HBP-ing acreage,
(ii) creating IPO stories for private equity sponsors, (iii) meeting
large (and, in certain cases, excessive) firm transportation pipeline
takeaway obligations and/or (iv) propping up MLP distributions (and
GP-IDRs). Chapter IV believes that it is time for any/all producers to
put such behavior in the rearview mirror. While I am not suggesting that
any of the above behavior is necessarily wrong or even applies to
Antero, I believe 2018 is a good time for the AR Board to ensure the
long run capital allocation integrity of AR, which could (at least
hypothetically) suffer from the conflicts of interest associated with
the PE Sponsors/AR management ownership stake in AMGP and their
effective control of AR’s drilling and completion capital budget.

A distinctly separate observation I have made relates to AR’s
longer-term maximization of value via a possible future significant
in-basin merger. AR’s management has noted that M&A consolidation in
SW Appalachia makes sense. I agree. Indeed, I believe that 2018-2020 is
a time for various SW Appalachia producers to consider further sensible
consolidation as Chapter IV publicly encouraged EQT Corporation’s Board
of Directors to pursue last January (which was shortly thereafter
followed by EQT’s announcement of its highly synergistic acquisition of
Rice Energy). In my opinion, AR could reasonably look at a 2019-2020
stock-for-stock business combination with either (i) Range Resources
(“Range”) or (ii) EQT Corporation (“EQT”) or EQT’s E&P Division assuming
such Division is split off from EQT’s Midstream operations as expected
later this year.

A combination of Antero and Range would create the dominant producer of
natural gas liquids in the Appalachian Basin. Alternatively, a
combination of Antero and EQT would create the dominant holder of West
Virginia “Core” contiguous Marcellus acreage. As a current shareholder
of both Range and EQT, I believe either merger option could be
attractive, and I would be supportive of either merger if fair terms
were involved. My personal belief, however, is that resolution of the
“Antero family’s” structural problems would be a prerequisite to an AR
negotiated merger with either company. While I can’t speak for Range’s
or EQT’s Board, I doubt that such boards would agree to a merger
transaction with AR if the potential for conflicts of interest within
the “Antero family” had not been satisfactorily addressed. More
specifically, such boards might reach a similar investment conclusion to
mine (i.e. – that Antero’s potential conflicts are simply too risky). At
the same time, I believe a future AR merger with Range or EQT may well
be feasible if Antero simplifies and resolves the potential for
conflicts of interest within its family of entities.

Bottom line – I believe an “Antero family” simplification transaction
in 2018 would make Antero’s common stock a more attractive risk/reward
proposition for investors and contribute to the long-term maximization
of the value of Antero’s common stock (with or without some future
merger). In addition, I believe such simplification would create
a better opportunity for Antero to pursue a sensible, negotiated M&A
transaction that could provide further value for Antero shareholders.

In conclusion, I believe the Board is at a critical juncture where it
can choose (i) better alignment of various equity stakeholders’
interests, (ii) reduced potential for future conflicts of interest and
(iii) “best-in-class” corporate governance across the “Antero family” of
entities. I believe a wise choice will be applauded by Antero
stockholders and maximize the long-term value of Antero’s common stock.
Thank you for your consideration of my ideas.

Sincerely,

W. Barnes Hauptfuhrer
Chief Executive Officer
Chapter IV
Investors, LLC

Appendix 1

Managing Potential Conflicts of Interest That
Could Arise with Respect to Antero Resources’ Capital Allocation

The Organizational Structure of the “Antero
Family”

Note: In general, midstream companies are often thought of as recurring
revenue vehicles. In reality, however, MLP cash flow models differ in
terms of the predictable and recurring nature of their revenues.
MLP-related IDRs have typically been held, directly or indirectly, by a
parent operating company who acts as the
MLP’s GP and not owned by a separate entity, which is then
majority-owned by an operating company’s management and PE Sponsors, as
shown above. Such parent companies have adopted IDR mechanisms to
capture a disproportionate share of the distributable cash flow of
underlying MLPs. Increasingly, the public market has grown weary of the
unaligned and mismatched economic incentives of GPs and LPs.
Accordingly, incentive distribution rights are steadily being eliminated
in the public marketplace.

The three features of the “Antero family” structure noted below are
collectively unique:

1) The GP-IDR is not controlled by an Operating Sponsor (spending
dollars to enhance the value of such GP-IDR); it is separately
controlled (and majority owned) by Antero’s initial private equity
sponsors (“PE Sponsors”) and AR management.

2) Despite AR being a publicly traded entity (~ 73% owned by public
shareholders), AR’s PE Sponsors and AR management constitute a majority
of the AR Board and effectively control AR’s capital allocation.

3) The composition of AM’s cash flow model emanates from (i) gathering
revenue (and emerging processing revenues), which represent a majority
of AM’s EBITDA and reflect recurring (but declining) revenues per well,
(ii) revenue tied to AM’s water handling services (which essentially
reflect short-term, one-time fees per well that account for
approximately one-third of AM’s EBITDA) and (iii) pipeline
transmission-like recurring revenue (backed by long-term “take or pay”
contracts), which accounts for a very small percentage of AM’s EBITDA.

Protection of AR’s D&C Returns

• AR possesses an attractive five-year hedge book with significant
  (~ $1.3 billion) of value. This value exists irrespective of the
  number of wells drilled by AR (and could be monetized at any time).
  The hedge book provides AR with good protection against adverse
  natural gas prices over its life. Given the low F&D and LOE costs
  associated with Antero’s Core acreage, it largely locks in attractive
  AR well returns (on a fully hedged basis) over the next five years.

Focus of this Appendix

The focus of this Appendix is to better understand (i) the possible
“corporate returns” that might prevail at AR once AR’s five-year hedge
book has rolled off and (ii) how potential conflicts of interest could
interfere with optimal capital allocation at AR.

Understanding the Potential Timetable of
Antero’s “Tier 1” Inventory

• Chapter IV’s definition of the “Tier 1” undrilled well inventory life
  of Antero Resources (“Antero”) is:

Undrilled locations that possess a (i) fully midstream burdened
Half-Cycle Wellhead IRR > 50% and (ii) a Corporate-Level IRR with a
reasonable premium above the Company’s cost of capital divided by
expected wells to be completed per year.

• Utilizing this definition, approximately 58% of Antero’s “high-grade”
  inventory reflects Tier 1 inventory based on Antero disclosures from
  its 1/18/18 Analyst Day presentation.
• For purposes of this Appendix, IRRs are based on Antero disclosures
  from its Analyst Day presentation and utilize Antero’s commodity
  pricing assumptions.
• The first page after this introduction is slide 26 from Antero’s
  Analyst Day presentation. It shows that 251 (or approximately 84%) of
  AR’s 300 expected well completions in 2018-2019 will come from Chapter
  IV’s definition of Tier 1 inventory. Based on our definition of Tier 1
  wells, AR currently has 1,382 Tier 1 undrilled well locations (i.e. –
  its Marcellus-focused highly-rich gas condensate and highly-rich gas
  wells). Assuming AR paces its 2020-2022 completions at 160, 165 and
  165 wells per year (per slide 11 of Antero’s presentation) and that
  84% of these completions meet our definition of Tier 1 inventory, AR
  would have 719 undrilled Tier 1 locations remaining at the end of
  2022.

Contacts

Chapter IV Investors, LLC
W. Barnes Hauptfuhrer, 704-644-4070

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