ARC Resources Ltd T.ARX

TD Notes

[retiredcf]

Q4/21 Reporting Calendar and Estimates Preview

FCF Trend Strengthening; Anticipating More Formal ROC Frameworks Also Looking Towards 2021 Reserves and PDP Efficiency Metrics

Key commodity benchmarks surged once again in Q4/21, a continuation of the recovery we saw during the first three quarters of the year. Average WTI oil prices rose ~US$7/bbl q/q (+10%) to ~US$77/bbl. Heavy oil also rose 11% q/q (~C$79/ bbl), although the WCS-WTI heavy differential widened by 8% q/q. The average U.S. crack spreads were down an average 11%, partially driven by lower RINs prices (-3% q/q). Looking to natural gas, Q4/21 NYMEX and AECO were up 12% and 31% q/q, respectively, with North American storage levels below-average during the quarter and minimal producer volume growth with budgets remaining focused on near-sustaining capital levels. In addition, natural-gas demand remained resilient, further backstopped by significant growth in U.S. LNG exports (recently reaching ~13 bcf/d).

Although spot oil prices are at multi-year highs, we remain optimistic on near-term pricing. Europe and parts of Asia are experiencing energy crises, which is boosting oil demand due to gas-to-liquids switching. This has caused the EIA to boost its 2022 demand forecast by an additional 0.7 mmbbl/d (+2%). We also highlight that OPEC + has indicated that, for now, it does not intend to increase production on higher demand beyond its original plan of 0.4 mmbbl/d per month.

• We estimate a 13% q/q increase in aggregate Q4/21 FFO, and ~150% y/y: Drilling down, we forecast an average 12% and 47% q/q FFO increase for our oil- weighted and gas-weighted coverage, respectively.

• We expect any yet-to-be formalized 2022 capital budgets to continue to show spending restraint and modest volume growth, as expected: Thus far, formalized 2022 budgets have been as expected, with spending largely set at or slightly above sustaining-capital requirements for many producers (with the exception of several smaller producers which continue to pursue growth). This has been largely driven by the continued shift of investor appetite towards more concrete return-of-capital frameworks. In addition, we believe many producers may find it more difficult to efficiently pursue volume growth with an increasingly competitive services sector. In our view, this trend will continue throughout the year as skilled crews remain in high demand, with many producers anticipating ~10-15% cost inflation in the near term.

• With many producers recently outlining formal return-of-capital plans (with a general range of where FCF will be directed), we believe more plans are forthcoming for those without concrete frameworks, especially as industry debt levels trend even lower.

• In our view, YE-2021 reserves will show minimal organic growth due to relatively limited growth capital during the year: That said, we will be closely monitoring efficiency trends, particularly PDP F&D costs. In addition, cost inflation expectations should become clearer with updated FDC disclosures.