ARC Resources Ltd T.ARX

RBC

[retiredcf]

For those with bad eyesight. GLTA

May 5, 2023

Outperform

TSX: ARX; CAD 16.05

Price Target CAD 22.00

ARC Resources Ltd.

Q1/23 Results - Attachie Sanctioned; Model Update

Our View: ARC reported quarterly results that exceeded street expectations on both production volumes and cash flow, and featured the formal sanctioning of Attachie, with this $740 million project set to ramp up in 2025. The company also announced an upcoming investor day, which will be held on June 22nd in Toronto and is set to detail the Attachie project plus the broader long-term plan. ARC remains one of our top picks and continues to be featured on our RBC Global Energy Best Ideas List.

Key points:

• Q1/23 - A Solid Quarter. ARX announced solid Q1/23 financial and operating results that featured production volumes of 338 mboe/d that compared to RBCe of 330 mboe/d (Street: 331 mboe/d), driving AFFO of $1.16 per share that was also ahead of our estimate of $1.10 (Street: $1.11). Capital expenditures came in at $487 mm (RBCe/Street: $550 mm/$580), leaving ARX with ~$230 mm in free funds flow generated during the quarter.

• Return of Capital - The Beat Goes On. ARX distributed ~106% of FCF (or $243mm) via dividends ($92mm) and share buybacks (9.7mm shares at a weighted average price of $15.51/sh during the quarter). ARX has reiterated its 50-100% target return of FCF to shareholders in 2023.

• Attachie - Sanctioned. As expected, ARC announced the formal sanctioning of the Attachie project, which is a $740 million project expected to deliver roughly 40,000 boe/d (60% liquids) and on stream late in 2024. The $740 million price tag includes the drilling of 39 initial wells, an electrified 90 mmcf/d gas plant, 25,000 bbl/d of liquids handling plus associated infrastructure. Roughly $250-300 million of the total investment will be focused on 2023, with the balance in 2024. For more details relating to the Attachie project (see our note - here).

• 2023 Guidance - Revised Upward. ARX updated its 2023 capital budget to $1.85bn at the midpoint (from $1.8bn), which is consistent with our prior estimate and now set to drive overall volumes of 350-355 mboe/ d (39% liquids) from 348 mboe/d (39% liquids) at the midpoint. 2023 guidance now includes $250-300mm at Attachie Phase 1, which has been partially transferred from other projects ($120 million water infra plus select $130 million in Kakwa D&C). Op cost & other guidance items remain unchanged.

• Updating estimates. We've adjusted our 2023 estimates for the company's updated production profile and capital outlook, resulting in our CFPS estimates increasing by ~11%. Our 2024 volume outlook has been revised down slightly to allow for a more conservative volume outlook alongside the Attachie build (with CFPS largely unchanged on better margins).