ARC Resources Ltd T.ARX

RBC Raise Target

[retiredcf]

Raise their current target by a buck and their upside scenario target is $32.00. GLTA

September 21, 2022
ARC Resources Ltd.
RBC ElementsTM: Building a Bridge to LNG

Our view: This note reiterates our constructive outlook for ARC Resources shares, while in tandem partnering with RBC ElementsTM, our in-house data science team, to assess ARC’s Montney drilling inventory. We think an inventory figure of about 6,000 wells is reasonable (but could ultimately prove conservative), which positions ARC with a multi-decade portfolio of projects and on a short list of heavyweights for strategic LNG supply.

Key points:

• ARC's reserve book - depth of inventory. ARC's 2P reserve book currently features ~7 tcf of natural gas (+~600 mmbbl liquids) which equates to a roughly 14 year RLI and incorporates 937 future well locations. With roughly 5,000 additional un-booked locations ARC has significant depth to convert resource to reserves, particularly in context of the company's very large undeveloped acreage position at Attachie.

• RBC Elements' proprietary geospatial analysis indicates gas recoveries which could be higher than ARC’s last comparable disclosure. The RBC Elements team built an algorithm to visually map individual near- field drilling locations, focusing on areas within a 3-mile radius of existing production and incorporating varying lateral lengths, spacing and geospatial well orientation. Total recoverable gas from these 'near field' wells (plus PDP) maps to about 15 tcf (+liquids), all while including only one layer. Augmenting with additional step-out locations beyond 3 miles (+ a second layer), recoveries could be as high as 33 tcf (+liquids). ARC's last comparable figure (YE'18) points to 21 tcf of gas (2P+ECR, incl. 7G).

• LNG - The key to long term value creation. ARC’s existing 2P reserve book contains sufficient resource to sustain an entire 2-train LNG project (1.8 bcf/d) for 10+ years, and when adding future drilling could increase to 40-50 years. Accordingly, the company should be viewed as a key supplier, or alternatively as a strategic asset for operators looking for vertical integration. The owners of LNG Canada now collectively hold enough product to support Phase 1 of the development (~1.8 bcf/d), but any expansion (Phase 2, +1.8 bcf/d) would need to be augmented.

• Running the numbers - strong organic FCF. ARC’s project economics remain strong, with typical break-evens (15% IRR) of sub US$40/bbl and C$2/mcf. These project economics drive an enhanced FCF profile ($2.4 bn in 2023E on RBC deck) which allows for our outlook of dividend increases (to $0.96/sh annualized by YE23), buybacks ($610 mm) and modest growth. A large owned/operated facility portfolio also helps to maintain a low-cost advantage - or potentially more creative infrastructure deals in the future.

• Price target to $27, reiterate Outperform. Supported by the advanced geospatial model developed by RBC Elements, we raise our target to $27 (from $26) reflective of an increased level of confidence in ARC’s longer- term project portfolio and NAV creation. While investors remain near- term focused, we expect ARC’s resource base to ultimately underpin long term value creation – either organically or from a strategic viewpoint