ARC Resources Earnings: Few Insights Into Shell Acquisition

Key Morningstar Metrics for ARC Resources

• Fair Value Estimate
  : C$35.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : High

What We Thought of ARC Resources’ Earnings

ARC Resources’ ARX first-quarter earnings call was brief, with the most major development—the firm’s acquisition by Shell—essentially off-limits for questions. Even so, ARC’s performance was solid, driven by its exposure to US natural gas indexes and improved condensate and oil pricing.

Why it matters: ARC will trade in line with the purchase price and Shell’s shares, rather than any developments in the business. The rationale for the proposed deal makes sense. Shell is the largest offtaker from LNG Canada and acquires ARC’s portfolio of marketing and transport agreements.

• Phase 2 of LNG Canada has been the subject of intense speculation, heightened after the Iran war and the acquisition announcement. ARC’s gassier acreage in the Montney has more than enough runway to serve Shell’s offtake obligations.
• However, this limits the benefits for other producers, which popped higher on the announcement. If Shell scales production to meet its own growing LNG demand, it captures the benefits of greater takeaway capacity for the basin.

The bottom line: Our C$35 fair value estimate for ARC is unchanged, and it would likely only move due to changes to our fair value estimate for Shell and/or the Canadian dollar/British pound exchange rate. Our Narrow Economic Moat, Standard Capital Allocation, and High Uncertainty Ratings are unchanged.

• We view the likelihood of the deal closing at 100%, with few regulatory barriers given Shell’s limited existing upstream footprint in Canada.
• A desire to encourage LNG Canada Phase 2 will also clear a pathway, with the government focused on getting more energy projects moving.