From RBCNovember 5, 2021
ARC Resources Ltd.
Q3/21 – Asset Performance Underpins Return of
Capital
Our view: Q3 results were ahead of Street and featured a 52% dividend
increase (now 3.3% yield) as return-of-capital initiatives gather steam. FCF
of $500 million generated in Q3 showcases strong performance of the
combined asset base. Focus shifts to balancing of shareholder returns and
capital spending as we await Attachie sanctioning (on hold until resolution
of BRFN file). ARX remains on the Global Energy Best Ideas List.
Key points:
• Q3/21 results well ahead. Volumes of 353,657 boe/d (39% liquids)
were ahead of our estimate of 342,799 boe/d (Street: 343,319 boe/d),
generating FFO of $1.06/sh vs. our estimate of $0.95/sh (Street: $0.96/
sh). Variances were attributed to higher volumes, lower royalties, and op
cost. Capital expenditures for the quarter were $293 mm, in line with our
estimate of $300 mm.
• 2021 guidance largely unchanged, 2022 unveiled. ARC largely reiterated
2021 formal guidance $0.95–1 bn (will be at top end) and 287,000–
302,000 boe/d. On 2022, as expected the Attachie project was not
sanctioned—reflective of continued BRFN negotiations—with capex of
$1.2–1.3 bn set to drive 335–350 boe/d. We expect a sanctioning
decision very soon assuming the BRFN issue is resolved in due course.
Our 2022 estimates increase (+5%) on higher volumes and margins.
• Dividend boosted by 52%. ARC increased its base dividend (January)
by 52%, now set to $0.10/sh quarterly (was $0.066), which maps to a
yield of 3.3% and a gross annual payout of $275 mm, well within its FCF
generation potential. We anticipate ARX to continue making measured
dividend increases alongside potential share buybacks, reflective of
higher volumes of FCF, with the company indicating that 50–80% of FCF
will be paid out in this fashion (but not via M&A). We forecast two
additional dividend increases through 2022.
• Ops highlighted by cost reductions and an LNG takeaway deal. A
full operational summary is detailed within Exhibit 1, with highlights
including: (1) a takeaway deal which will supply 150 mmcf/d to an LNG
participant by 2026; (2) average drilling and completions costs at Kakwa
have been reduced by 12% since 2020; and (3) positioned to expand
Sunrise, a region home to some of the most prolific Montney gas wells in
the WCSB. ARC’s near-term focus will be on keeping existing facilities full,
generating and returning free cash, and preparing for the sanctioning of
Attachie Weest Phase 1 (90 mmcf/d + 27 mbbl/d).
• Outperform; raising price target to $17 from $16. At current levels,
ARC trades at 2.5x 2022E EV/DACF, a discount to peers at 3.3x. Our $17
PT maps to 3.6x 2022E EV/DACF; we argue that the trading multiple
should expand as the company executes alongside realized synergies,
puts the power of the FCF model on display, and investors further buy
into management’s vision for Canada’s now-largest Montney company.
• Conference call Friday, 11/5. 8AM MT (10AM ET); dial-in
1-888-664-6392; ID 31080