ARC Resources Ltd T.ARX

TD

[retiredcf]

Have a $31.00 target. GLTA

COMPANY UPDATE

HOW MUCH ATTACHIE VALUE IS CURRENTLY IN ARC'S SHARE PRICE?

THE TD COWEN INSIGHT

We first highlighted and quantified the equity valuation potential associated with ARC's condensate-rich Attachie project in NE British Columbia two years ago (~7 months before the project was formally sanctioned) in The Case For Attachie Following Negotiated Treaty 8 Agreement - Oct 6, 2022. We believe ~2/3rds of Phase 1 is now baked into the valuation; however, Phase 2 could bring more upside.

Attachie Phase 1 Has Driven Share Price Outperformance: Attachie has, in our view, been a key driver of ARC's 34% share price outperformance since October 6, 2022 (Figure 1). That said, we acknowledge other factors have also contributed, including: broader operational execution; future global gas market exposure through LNG supply contracts; and a favorable resolution to development uncertainty in NEBC.

How Much Attachie Value Is Reflected in ARC's Share Price: To calculate this, we estimate flat y/y commodity prices in 2025 (i.e., 2024E and 2025E WTI of US$75/bbl and HH$2.60/mcf). With Attachie contributing virtually no CF to 2024, but on stream nearly the entire year in 2025, we assume the valuation contraction (on flat commodity pricing) from 6.1x 2024E EV/DACF to 5.0x 2025E EV/DACF can be attributed to i) 5% TVM and ii) the remainder attributed to Attachie. This ~0.85x EV/DACF multiple contraction equates to ~$2.1 bln in EV or ~$3.50/share associated with Attachie.

What's the Go-Forward NPV of Attachie Phase 1? With nearly all capital now sunk for Attachie Phase 1, the go-forward valuation of Phase 1 (90 mmcf/d + 25 mbbls/d of primarily C5+ liquids) of the project is the NPV of CF (minus maintenance capex). We calculate Phase 1 to have a go-forward NPV10% of ~$3.0 bln at US$70/bbl WTI and $2.50/mcf HHUB. We provide sensitivities to this estimate across various commodity price scenarios in Figure 2.

Sanctioning of Attachie Phase 2 Could Result in Further Value Recognition: Attachie is more than a single phase. ARC holds >300 sections at Attachie, with a company- estimated ~1,650 locations (only 116 undeveloped locations booked in the reserve report). Over the medium term, we anticipate value recognition of Phase 2 will drive incremental share price upside. Phase 2 is contemplated in the current 5-year plan as coming on stream in 2028; however, it is possible (depending on commodity prices) that this is accelerated into 2027. We estimate the NPV10% value of Phase 2 to be $1.6- $1.8 bln at US$70 WTi and US$2.50/mcf HH (depending on timing). See Figure 3 for sensitivities.