ARC Resources is undervalued
The Seven Generations merger creates a rival to Tourmaline
ARC Resources (ARX) reports Q3 2021 after the close today. Look for cash flow of about $500 to $600 million as the company benefits from the contribution of Seven Generations acquired a few weeks ago and absorbs the merger costs. The combined companies have production of about 350,000 Boe/day concentrated in natural gas, gas liquids and condensate. I estimate that in 2022 ARC will have cash flow of approximately $3 billion at today’s commodity prices, sufficient to fund a $1.1 billion capital program; fund the current dividend; and, repay at least $1.5 billion of debt. By year end 2022, I expect debt will be la fraction of annual cash flow, making ARC one of the best financed operators in the Western Canadian Sedimentary Basin.
If the firm natural gas prices prevail through the winter, I ARC could afford to increase its annual dividend from the current $0.26 to somewhere around $0.50, increasing the yield on the shares to about 4% at the current share price of about $12.00. Based on my projection of 2022 cash flows of $3 billion and a multiple of Enterprise value to Earnings before Depreciation, Interest and Taxes (EV/EBITDA) of 4 to 5 times, I foresee a the shares having a value of $15 to $20 a share and believe the shares are undervalued.