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Morningstar | Low Gas Prices Limit ARC's Potential

ARC Resources is an independent energy company engaged in the acquisition, exploration, development, and production of conventional oil and natural gas in Western Canada. The majority of the firm’s production comes from the Montney resource play. ARC is continuing to shift its production mix toward the Montney, which provides growth opportunities with favorable economics.Cash break-even prices on ARC’s Montney natural gas production are generally less than $2 per thousand cubic feet Henry Hub, which allows the company to compete with production from the fast-growing U.S. Marcellus and Utica regions. However, full-cycle break-even prices approximate $4/mcf Henry Hub, compared with our midcycle forecast of $3/mcf. Furthermore, ARC’s growth is focused on its Montney resource plays, which possess similar break-even prices to ARC’s current production. However, with the current resources in place, we expect ARC’s acreage to support approximately a decade of production, including the impact of natural production declines. The company has been successful in replacing production with additional resources. ARC’s proven and probable reserve replacement ratio averaged 109% over the past three years, indicating that the company is modestly increasing its reserve levels. Nevertheless, the company will need to increase its capital spending to acquire and/or develop new resources to sustain our forecast activity levels. The company added to its resource base from the Cardium formation, by acquiring an additional 3,000 barrels of oil equivalent per day of light-oil production. Even after the impact of the acquisition, the balance sheet remains strong. However, ARC will need to increase its capital spending to develop or acquire additional resources to supplant its production levels. After the recent sell-off, we believe that the stock looks fairly valued and suggest that investors remain on the sidelines.