Banque NationaleARC Resources Ltd. Capitalizing on Kakwa ARX (TSX) STOCK RATING TARGET EST. TOTAL RETURN C$18.87 Outperform (Unchanged) C$24.00 (Unchanged) 29.6%
Q1/22 Financial & Operating Results Results — Slight Miss
Average production of 344 mboe/d (38% liquids) was in line with NBF and consensus forecasts of 342 mboe/d, each, while CFPS of $1.08 (-9% Q/ Q; +40% Y/Y) was in line with NBF at $1.12, but a slight miss relative to consensus at $1.16. Price realizations were strong for the quarter, notably $5.98/mcf for natural gas, however cash flow was dragged down by a $254 mln hedging loss (NBF $238 mln). Opex, royalties and cash taxes were largely in line with our estimates.
Return of Capital Update; 20% Dividend Increase ARC announced a 20% increase to its quarterly dividend to $0.12/sh (from $0.10/sh), payable on July 15th, which represents an annualized yield of 2.5% (2023 dividend payout 10%). ARC remains committed to returning 50-80% of 2022 FCF to shareholder returns, with the balance allocated towards further debt reduction. Base dividend growth and share repurchases remain the preferred mechanism, returning a combined $265 mln during the quarter.
Guidance Update Production and capex 2022 guidance remain unchanged at 335-350 mboe/d and $1.15-1.25 bln, respectively. Transportation expenses have been revised higher to $5.35-5.75/boe (from $4.50-5.00/boe) to reflect higher toll fees on natural gas pipelines, while share-based G&A has been bumped modestly higher to $0.60-0.70/boe (from $0.30-0.40/boe). Lastly, and unsurprisingly, cash tax guidance (as % of CF) has increased to 3-8% (from 1-6%), in line with our pre-Q2 forecast (LINK).
Of note, ARC is seeing inflationary impacts of ~5-10% on capex but is mitigating it through D&C efficiencies. Capital for the balance of the year will be redirected to Kakwa, moving two rigs from B.C., given it has excess processing capacity and can capitalize on strong C5+ pricing (and also relates to BC OGC permitting holdups). ARC remains execution-ready on the Attachie Phase 1 and Sunrise expansions should the regulatory environment dictate. ARC has entered into a long-term natural gas supply agreement with Cheniere Energy to supply 140,000 MMBtu/d for 15 years commencing in 2027.
We reiterate our Outperform rating and target price of $24.00.