BEST IDEAS 2025: ARX AT A FCF INFLECTION POINT; COMPELLING VALUATION
THE TD COWEN INSIGHT
ARX offers North American relevant scale (~390 mBOE/d), is the largest condensate producer in Canada, holds a deep inventory of economic prospects, is poised for material y/ y FCF growth in 2025 (~200%/shr), will be a direct supplier to various LNG projects (here), and trades at an attractive valuation relative to its North American peers (9% 2025E FCF yield after all capex vs. U.S peers at 5%).
Summary Of Our Thesis With the company's recent earlier-than-expected startup of its condensate growth engine at Attachie, we believe 2025 will bring a significant step change in volume growth, FCF/sh, return of capital to shareholders (~10% of current market cap via base dividend and NCIB under strip pricing) and the likely sanctioning of Attachie Phase 2 (currently slated to come online in 2028).
What Is Underappreciated Or Misunderstood? In our view, while the current valuation now suggests a significant portion of Attachie Phase 1 NPV is baked in, we do not believe our estimated value of Phase 2 is being captured at all and potential sanctioning would provide valuation tailwinds. We also believe WCSB fundamentals are supportive of continued strong demand and pricing for condensate. We estimate ARX will provide the highest combination of FCF/sh growth and return of capital in our intermediate coverage group.
Catalysts & Milestones To Watch
Ramp-up of Attachie Phase 1: First volumes have already come online earlier than prior guidance (announced with Q3 results). We expect a strong ramp-up of volumes through early 2025, which should drive incremental value attribution to this asset.
Potential Sanctioning of Phase 2: We do not believe any value is currently being attributed to potential expansions, which we believe are highly likely to proceed.
LNG Canada Tailwinds: Although ARX's revenues have largely been driven by liquids prices, we believe there is undervalued gas optionality.
Recent M&A Underscores Value. Although ARX would be a very large takeout candidate, recent M&A in the liquids-focused window of the Montney suggests acquirers are willing to pay-up for volumes/inventory.
Price Target & How We Value The Stock Our target price combines 1.3x our 2PNAV at a 25% weighting. The other 75% is based on an EV/DACF multiple of 6.25x ARX's 2025E DACF.
What Is The Bear Case & The Risks To Our Call? Higher-than-expected declines (particularly condensate yields) in the company's Kakwa Montney region; lower-than-expected well results from emerging growth assets at Attachie; slowing demand for condensate and a widening of the pricing differential versus oil.