Guidance Above Expectation Our Conclusion
ARC posted a solid quarter, with production, cash flow and capital spending
all beating expectations. Management indicated that its Attachie project
remains on track and on budget for commissioning in Q4/24, reaching full
capacity in Q1/25. The company also guided to a strong H2/24 production
outlook, which in our view offsets some of the production weakness expected
in Q2/24, with turnaround activity at Dawson and Kakwa. We increase our
price target to $31 from $30 on the cash flow increase for 2024E. We
continue to see ARX as a top idea under our coverage list due to an
appealing valuation, visible growth opportunities, and returning 100% of free
cash flow to shareholders. The stock trades at a 2024E EV/DACF of 5.8x
and an FCF yield of 6%, versus gas-weighted peers at 5.5x and 2%,
respectively.
Key Points
Modest beat across all headline metrics for Q1/24. Production of 352
MBoe/d was in line with our estimate of 351 MBoe/d and ahead of
consensus of 345 MBoe/d while cash flow of $1.01/sh topped our estimate of
$0.94/sh and consensus of $0.99/sh. The cash flow beat was supported by
strong realized pricing and lower operating and transportation expenses in
the quarter. Capital spending of $505MM was 9% below consensus of
$557MM and our estimate of $550MM.
Attachie Phase 1 remains on track. ARC has drilled 22 of the 40 wells
required to initially fill the facility. The first pad has also been completed and
the facility will be fully electrified upon startup.
Guidance unchanged; however, Q2/24 production indicated lower and
H2/24 indicated higher. Production guidance for Q2/24 was set at 325 to
330 MBoe/d (CIBC prior: 332 MBoe/d; consensus: 337 MBoe/d), with
turnaround activity scheduled at greater Dawson and Kakwa. Management
guided to 370 MBoe/d of H2/24 production volumes, which we expect will be
mostly concentrated in Q4/24. The H2/24 average sits above consensus at
363.5 MBoe/d. The negative impact on our Q2/24 CFPS estimate is offset by
the Q1 cash flow beat and higher cash flow expectation for H2/24.
Return of capital through share buybacks poised to accelerate in H2/24
and 2025. On our revised estimates, we see the company generating
~$950MM in free cash flow during 2024 and $1.7 billion during 2025. Given
the company has a ~$100MM quarterly dividend commitment, we expect the
pace of share buybacks to remain modest in Q2/24 and Q3/24, but we
expect free cash flow in Q4/24 to be substantial with the completion of major
spending and commissioning at Attachie. We would expect the increase in
profitability for 2025 is likely to spur a dividend increase and further share
buybacks.