Morningstar | Lowering Our Fair Value Estimate on ARC Resources; Stock Remains in 3-Star Territory
After taking a fresh look at no-moat ARC Resources' first-quarter earnings, we are lowering our fair value estimate to CAD 9 from CAD 9.50. The change is driven by our lower forecast for price realizations due to pipeline shortages coupled with our increased forecast for operating costs. The shares are now trading near CAD 8, in 3- star territory. Accordingly, we suggest that potential investors remain on the sidelines. Although the company’s Montney production possesses a low-cash-cost structure, 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, ARC 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.As a reminder, ARC reported first-quarter production volumes of 139,000 barrels of oil equivalent per day compared with 131 mboe/d in the year-ago quarter and 136.5 mboe/d in the prior quarter. First-quarter production was also above our expectations driven by additional production flowing through the Sunrise Phase 2 plant. Despite the outperformance, management expects second-quarter production to decline by 5% from first-quarter levels owing to spring break-up and third-party pipelines outages. Beyond the second quarter, management expects production to ramp-up during the second half of the year and reiterated its annual production guidance range of 135-142 mboe/d, which is consistent with our expectations. However, 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 2.79/bbls. The realization represents a 2% decrease from the fourth quarter despite a 2% increase in AECO gas prices. Despite the solid first-quarter realizations, we continue to expect gas realizations to drop off while Western Canada faces pipeline constraints. Unfortunately for ARC, 70% of its production comes from natural gas, which will drag on the company until TransCanada can expand its NTGL system.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.