ARC Resources Ltd T.ARX

Deprecated Value of ARX's Production

[MyHoneyPot]

Valuations are based on returns, when playing monopoly if you own boardwalk and it has a hotel on the property and someone lands on it you receive $2000 dollars. The land cost more, the hotel cost more, but you are rewarded in the rent you can collect.

Playing in the liquids space, you have higher costs, but instead of getting 100 a boe, you get 50 dollars a boe, you still have a lot of costs and you have given away most of your returns. So, you have compromised the value of your assets, because regardless of their quality you have capped the returns. Even if you did not have to pay royalties, transportation, interest expense, depreciation, management overhead, processing costs, you could not make more than 47 dollars for a 47-dollar hedged boe of Oil.

In Q3 the average cash received from a boe of production was 41.88 (Before Risk Management) and the netback was 25.72.

So, if oil is trading at 87 dollars and hedged at 47 dollars, that 40 dollars U.S. loss to hedging would have been considered FCF. ARX instead of having production returns based on 87 dollars WTI oil you are valuing it 47 dollars, and destroying the value of the resource, because you have destroyed the returns. This is real value destruction.

If you look at CPG hedge book, they will significantly outperform ARX in the way they have hedged production. Other companies have done a much better job than ARX which has compromised the value of its assets, and hurt their returns.  

So Free Funds Flow was 497 million, and the dividend was 47 million so the that leave 450 million (close to) of (Free Funds Flow – Dividend)

Their Funds Flow would have been 138.9 million dollars higher in Q3 if it had not been for the hedges. Or another way to look at is they would have 28% more free funds flow before pay the dividend and 31% more Free Funds flow after paying the dividend.

So the way to look at is you have a organization with a market cap of about 10 billion dollars, enterprise value roughly 12 Billion, they 30% of their Free Funds Flow goes out in the payment of hedges.

138.9/837.1 = 17 % higher netback if it were not for the hedging losses.
This means if ARC keep it production mix the same and produced on 290,000 boe instead of 350,000 boe and had no hedges the would have had the same netbacks.

So why is ARC being punished so much?

• Hedging’s
• Full cycle capital expenditures (625 million Attachie, unaccounted for)
• Billion dollars in Share buyback (Could be higher)
• Debt Paydown Priorities (926 million) 1926 million in Q3
• Compromised the industry view of Kakwa as the most exciting liquids risk ½ cycle opportunity in Canada ( Renewed interest in Kakwa to line growth rather than simply pursue bottom line capital efficiencies would spart life into ARX stock)

IMHO