ARC Resources Ltd T.ARX

RBC

[retiredcf]

Their upside scenario target is $32.00. GLTA

August 2, 2024

Outperform

TSX: ARX; CAD 23.39

Price Target CAD 28.00

ARC Resources Ltd. Q2/24 - Managing the Margin

Our view: ARX reported a typical solid quarterly result and has elected to temporarily curtail a portion of volumes at Sunrise (~250 mmcf/d curtailed), a move which in our minds is reflective of currently very low margins for dry gas at spot prices. Attachie remains on track for year-end startup. ARX continues to be featured on the RBC Global Energy Best Ideas List.

Key points:

• Q2/24 Results – In Line. ARX's results featured production volumes of 330,046 boe/d (RBCe 330,487 boe/d; Street 328,300 boe/d). Gross capex was in line with our expectations, coming in at $529mm (RBCe $525mm; Street $550mm). The company generated $503mm of cash flow ($0.84 per share (f.d) vs. RBCe/Street: $0.85/$0.84) in the quarter; FCF was slightly negative as Attachie investment continued.

• Return of Capital. ARX distributed $118mm via dividends ($102mm) and share buybacks (0.7mm shares for $16mm) during the quarter.

• 2024 Guidance – Reiterated. ARX reiterated its 2024 capital budget of $1.8bn (mid-point) driving FY24 volumes of 350-360 mboe/d while noting volumes would likely be at the bottom end, reflective of Sunrise. The company also reiterated its 2025 production guidance of 388 mboe/ d (mid-point) on capital of $1.7bn. Cumulative capex in 24/25 equates to roughly 62% of projected AFFO on our RBC deck with the remaining earmarked for shareholder returns. Q4/24 guidance is pegged at 382.5 mboe/d (midpoint) on restored Sunrise volumes and initial production from Attachie.

• Operational Update. Operations remain in good shape with the Attachie project progressing as planned and commissioning volumes expected in late 2024 with full ramp-up to full capacity (40,000 boe/d) in Q1/25. To date, the company has drilled 30/40 wells required to fill the 40 mboe/d plant capacity and stimulated 20 wells. Plant construction is approximately 75% complete and progressing on schedule. ARX enacted well design changes for its Sunrise wells (well cost: +25%) in the Upper Montney for higher intensity completions which the company ultimately expects will decrease sustaining capital by ~10% (see the latest wells here). ARX completed the construction of its 10-10 superpad in Kakwa providing increased takeaway optionality for moving production to market. ARX drilled 39 wells and completed 41 wells during the quarter.

• Government Relations – Attachie. The Government of British Columbia and the Halfway River First Nation announced an agreement that includes a Landscape Planning Pilot which encompasses Attachie's development; as a result ARX is no longer limited by the disturbance cap for oil and gas development outlined in the Blueberry River First Nations Implementation agreement.

• Updates to Estimates. Our 2024 production estimate has been adjusted to the lower end of guidance (-1%) and 2025 remains relatively unchanged. Our 2024/25 CFPS estimates are updated (-2%/+1%), largely related to adjusted margin assumptions