Morningstar | ARC Reports Lower 2Q Production Volumes and Gas Realizations; Stock Still Looks Overvalued. See Updated Analyst Note from 02 Aug 2018
No-moat ARC Resources reported second-quarter production volumes of 127.9 thousand barrels of oil equivalent per day compared with 113.4 mboe/d in the year-ago quarter and 131 mboe/d in the prior quarter. As planned by the company, second-quarter production was lower sequentially, driven by maintenance at Parkland/Tower. Second-quarter production was also lower than our expectations of 129 mboe/d, with maintenance activities lasting longer than we expected. Despite subdued first-half volumes, the company maintained its 2018 average production guidance of 130-134 mboe/d, which is in line with our forecasts. We caution investors that significant growth beyond the upper of the guidance may be optimistic as natural gas prices don't support further drilling activities.Natural gas realizations came in at CAD 1.91/bbl, a 23% decline from the first quarter despite only a 8% decline in Henry Hub prices. We expect gas realizations to remain low, while Western Canada faces pipeline constraints. Unfortunately for ARC, 70% of its production comes from natural gas, which will continue to drag on the company until TransCanada can expand its NTGL system.
We are maintaining our CAD 12 fair value estimate. The stock was down about 1.5% on Thursday, on the earnings release. ARC is currently trading near CAD 15, which still represents a 25% premium to our fair value estimate. Although the company’s Montney production possesses a low-cash cost structure, we remind investors that full cycle break-even prices approximate $4 per thousand cubic feet for Henry Hub. Additionally, current resources can support only about a decade of activity. Consequently, the company will need to increase its capital spending to acquire or develop additional resources to support our forecast levels. We are maintaining our no-moat rating.
ARC Resources is engaged in the exploration for, development and production of crude oil, natural gas and natural gas liquids in western Canada. As of Dec 31 2011, net proven reserves for light and medium oil, heavy oil, natural gas and natural gas liquids were 87,905 thousand barrels, 1,801 thousand barrels, 1,197 billion cubit feet and 15,002 thousand barrels, respectively.
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