Bullboard - Stock Discussion Forum ARC Resources Ltd T.ARX

Alternate Symbol(s): AETUF

Energy Oil & Gas E&P

ARC Resources Ltd. is a Canadian energy company. It is focused on the exploration, development, and production of unconventional natural gas, condensate, natural gas liquids (NGLs), and crude oil in western Canada. Its operations are focused in the Montney region in Alberta and northeast British Columbia. Its operations in Alberta are located near Grande Prairie and the region includes Kakwa... see more

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TSX:ARX - Post Discussion

ARC Resources Ltd > RBC Upgrade

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Post by retiredcf on Mar 03, 2021 12:21pm

RBC Upgrade

And their upside scenario target is also raised to a whopping $15.00. GLTA

March 2, 2021

ARC Resources Ltd. Building a Basin Leader

Our view: ARC's all-stock merger with Seven Generations creates an $8B EV player with a production base of circa 340,000 boe/d and 2022E FCF yield of 19%, building a Montney Champion with top decile supply costs and deep project inventory. We are constructive on the combined entity with our estimates increasing on the deal - and price target bumped up to $12/share (from $10).

Key points:

Transaction summary - building an $8B Montney leader. Seven Generations shareholders will receive 1.108 ARC shares for each VII common share as consideration, with ARC assuming $2 billion of VII debt. The resulting $8 billion entity features a production and reserve base of 340,000 boe/d (~41% liquids) and 2.5 billion boe respectively, making it the largest Montney producer, 3rd largest outright gas producer and 6th largest E&P by volume amid the WCSB producer landscape.
Strategic rationale - larger and more sustainable. ARC adds critical mass and now holds many of the key lowest cost Montney plays in Western Canada, with $110 million per year in targeted synergies also set to backstop larger FCF generation and future $700 million Attachie investment. The resulting entity also offers more flexible exposure to both commodities at 41% liquids; ARC is also now Canada's top condensate producer (78,000 bbl/d) -- a strategic position in our minds given continued strong oil sands demand.
Financial impact - FCF accretion in 2022E. The transaction accretes to our CFPS and FCF estimates - reflective of $110 million per year in anticipated synergies (which could be conservative). Synergies include corporate savings, marketing alignment, better leverage with service providers, and applicability of VII's tax pools. With a provisional BBB rating (DBRS) in hand, we also forecast the issuance of roughly $1B in new ARC notes at current market rates (2-3%) to replace Seven Generations' existing paper (5-7%), which should result in $30 - $50 million per year in savings.
The path forward - more levers to pull. While the near term focus remains on debt repayment and maintenance, we believe the company's enhanced FCF profile ($1B/year in 2022E on RBC deck) allows for more flexibility as it relates to future investment, bolt- ons, dividend increases and buybacks. A large owned/operated facility portfolio (Exhibit 3) also leaves the door open for optimizations - or potentially more creative infrastructure deals in the future.
Attractive valuation, multiple likely to expand. ARX trades amongst the most attractive multiples in the group - currently 2.5x EV/DACF (2022E) vs peers at 3.5x EV/DACF at the RBC price deck. Our expectation and target multiple are reflective of our view that (1) the combined entity should be able to achieve synergies and better organic metrics; and (2) a larger potential investor base - and more investible entity - will help to drive multiple expansion.