ARC Resources Ltd T.ARX

Scotia target still bullish at $29

[Westcoastenergy]

Q3/22 Results In Line; Attachie West Still On Hold

OUR TAKE: Slight Negative. ARX delivered Q3/22 results in line across the board and announced another dividend increase – this time by 25% to $0.60/share/year. The company also increased its shareholder returns range to 50% to 100% of free cash flow and seems likely to launch a substantial issuer bid in the new year. While we view these as positive takeaways from the release, we believe the company’s 2023 guidance could receive a negative response in the market. ARX’s 2023 program anticipates modestly lower production and higher unit costs versus Street expectations. The Attachie West project also remains on hold (although we are keeping it in our forecasts for now). We expected these factors to lead to some downward estimate revisions (our 2023 and 2024 cash flow forecasts are down ~4%), with further downside likely if the start-up of Attachie West is delayed beyond 2024 (consensus production forecasts are >380 mboe/d for 2024).

KEY RESULTS

Q3/22 results in line. Production of 342 mboe/d, AFF per share of $1.45, and FCF of $580M were in line with Street expectations. G&A and interest expenses came in ahead of consensus, but were offset by stronger-than-expected natural gas realizations, lower royalties and lower cash taxes. See Exhibit 3 for detailed results versus consensus expectations (neutral).

Dividend and shareholder returns range increased. ARX increased its base dividend by 25% to $0.15/share/quarter commencing with the Q1/23 payment. This will be the fourth bump since Q3/21 representing a 150% increase. The company also announced that it has increased its shareholder returns target to 50% to 100% of free cash flow (up from 50% to 80%). ARX continued to actively repurchase stock in Q3/22 and has already retired ~20.9M shares under its new NCIB (~32% of the allotment). We expect the company to fulfill the authorization well ahead of its expiry (August 2023) and potentially launch a substantial issuer bid in 2023 (positive).

2023 guidance: Attachie still on hold. In 2023, ARX plans to spend ~$1.8B and deliver average production of 345 mboe/d to 350 mboe/d. This compares to consensus at $1.97B and 355 mboe/d, respectively. Notably, the 2023 budget does not include sanctioning of the Attachie West project (estimated at ~$700M, likely spread over two years) due to ongoing regulatory issues in BC. Notably, ARX’s guided transportation, opex, and financing expenses are >10% ahead of prevailing consensus expectations – a reflection of the high inflation / high interest rate environment. See Exhibit 4 for ARX’s 2023 guidance details versus consensus expectations. We believe the budget could garner a negative reception on the lower production, higher costs, and continuing uncertainty about time for Attachie.