Morningstar | ARC Resources Now Looks Fairly Valued
No-moat ARC Resources reported third-quarter production volumes of 135.4 thousand barrels of oil equivalent per day compared with 129.5 mboe/d in the year-ago quarter and 127.9 mboe/d in the prior quarter. Third-quarter production was also above our expectations driven by stronger production from Attachie West and recoveries from second-quarter maintenance and turnaround activities. Despite the strong quarter, ARC tightened its full-year production target to the range for 131-133 mboe/d from its previous target of 130-134 mboe/d. The new range is consistent with our expectations. Management also announced its 2019 production target range of 135-142 mboe/d, which is also consistent with our expectations. We caution investors that significant growth beyond the upper end of the guidance may be optimistic as natural gas prices don't support further drilling activities.Natural gas realizations came in at CAD 2.15/bbl, a 13% increase from the second quarter despite only a 3% increase in Henry Hub prices. Increased realizations were driven by the company’s marketing strategy, which offers exposure to markets outside of Western Canada. However, 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 12% on Nov. 9, on the earnings release, and nearly 30% since ARC’s second-quarter earnings release in August. Shares are now trading near CAD 11 and have converged toward our fair value estimate. Accordingly, the stock is trading in 3-star territory, and we suggest that investors remain on the sidelines.
Although the company’s Montney production possesses a low-cash cost structure, we remind investors that full-cycle breakeven 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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