ARC resources - Analysis Q2 results

[Petroleum economist]

Introduction
ARC resources in a Canadian midcap (market value US$ 5.0 B). ARC Resources is the 3rd largest Canadian gas producer, producing oil, gas, condensate and NGL from the Montney basin in Alberta and NE British Columbia.
ARC is producing 350 K BoE/d in 2024. Production will grow in 2025 due to the 40K BoE/d from the Attachie phase I project. In 2028 another 40 K BoE/d will be added from the Attachie phase II project.

Summary
Production in 2024 will be constrained, but with the Attachie phase I and II projects can grow with 25% ARC eyes as an expensive share in 2024, but profitability will improve dramatically in the period 2025-2028. Shareholder returns in 2024 are low, but can jump to higher levels in 2025 and beyond.


Production
• Q2 production (330.0 K BoE/d) was in line with company guidance (32t5-330 K BoE/d), but well below Q1 (352 K BoE/d). The reduction was due to planned facilities overhauls at Dawson and Kakwa.
• In Q3 production will remain at lower levels (outlook 330-335 K BoE/d), due to the shut-in of 40 K BoE/d gas production due to low gas prices.
• In Q4 production will increase (outlook 380-382 K BoE/d) due to more gas production and initial production from the Attachie Phase I project.
• 2024 outlook is maintained at 350-360 K BoE/d.
• With Attachie full onstream in Q1 2025, production in 2025 can grow (outlook 375-400 K BoE/d.
• With Attachie phase II project coming onstream in 2028, production can reach 425 K BoE/d.
• Production is mostly gas (65%), but has substantial liquids (oil 23%, NGL 12%)

Balance sheet
• ARC has a sound balance sheet.
• Solvency in Q2 (60.6%) is high and slightly above late 2023 (60.0%).
• Long term debt increased C$ 11 M from C$ 190 M (late 2023 to C$ 191 M), mainly due to extra capex spend on the Attachie phase I project. Debt is still low.
• 2024 debt/EBITDA ratio will be a low 0.6.
• The balance sheet allows generous shareholder returns.

Profitability
• Royalties are an intermediate 12% of revenues.
• Unit costs (corrected for liquids) are a low $ 1.66/MM btu).
• Realized oil prices in Q2 (C$ 100.28/bbl) di not et show an impact from the start of the Trans Mountain pipeline. From Q3 the discount versus WTI (currently US$ 8.50/bbl) should reduce.
• Q2 net profit was C% 240 M (eps C$ 0.40).
• For 2024, with WTI in H2 at $ 75-80/bbl, I expect a net profit (excluding non-cash profits) of C$ 920-985 M (eps=C$ 1.54-1.65, PE=13.9-15.0). ARC is in 2024 not a cheap share.
• Overtime, with rising production and recovering gas prices, the eps in 2028 can rise to C$ 3.12-3.42 (PE=6.7-7.3), thus becoming a cheaper share.

Shareholder returns
• ARC want to return 100% of the free cash flow to shareholders.
• Based on quarterly dividends of C$ 0.17, dividend in 2024 will be C$ 0.68.
• Shareholder buybacks were 0.6 M shares in Q1 and 0.7 M shares in Q2.
• With cash flow constraint b the capex for Attachie phase I, I expect total share buybacks to reach 2.6 M shares in 2024.
• 2024 shareholder returns should be a low 3.4%
• In 2025 with a higher free cash flow returns can go up to. ARC has indicated a 2025 dividend of C$ 0.80.
• Also share buybacks in 2025 should increase.
• Total returns in 2025 can reach 8.5%, and can increase further in 2026 and beyond.

Conclusion
Production in 2024 will be constrained, but with the Attachie phase I and II projects can grow with 25% ARC eyes as an expensive share in 2024, but profitability will improve dramatically in the period 2025-2028. Shareholder returns in 2024 are low, but can jump to higher levels in 2025 and beyond.

ARC resources ranks at 25th (out of 81) just inside the top 25. It can be a good investment if you believe in the recovery of natural gas prices.