(Idea) ARC Resources
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ARC Resources (ARX:CA) offers investors a conservative way to benefit from the structurally higher natural gas prices we expect over the coming years.
While natural gas supply has been more than ample over recent years, today's 102 Bcf/d gas market is about to undergo a whopping 11.4 Bcf/d demand boost from the arrival of LNG export terminals in the U.S. and Canada through 2027.
The chart below details the LNG export projects and when they are expected to enter service.
Source: EIA.
The sheer volume of additional gas demand is likely to increase the price of the marginal unit of gas production.
On the supply side, it is likely to accelerate the depletion of natural gas reserves and bring forward the point at which the U.S. shale basins plateau. Consider that natural gas production in the Fayetteville and Barnett shale plays plateaued and then began to decline once they produced half of their reserves. The Haynesville and Marcellus will suffer a similar fate—the only question relates to timing.
Another important demand factor known with less precision stems from increasing power burn. Economic and population growth, the renewables buildout, coal-to-gas switching, and the proliferation of AI data centers will all increase North American natural gas demand above and beyond the demand derived from LNG export facilities.
It is against this backdrop that ARC Resources shines. ARC offers investors a multitude of positives in a single stock. These include one of the lowest-cost production bases among independent North American E&Ps, returns on capital employed sustained in excess of 20%, a 12% free cash flow yield at current commodity prices on next year’s production, a conservative balance sheet, a diversified product mix between liquids and natural gas, a safe 2.8% dividend yield with prospects for significant increases, mid-single-digit percent annual production growth, and superb capital allocation featuring long-term dividend growth and share repurchases.
In light of all these positives, an investor would expect ARC shares to sell at a hefty premium to intrinsic value. But that’s not the case. In fact, we see 18% upside from the stock on next year’s production numbers, as well as significant production growth and share price appreciation over subsequent years. We value ARC shares at C$30.00, implying 25% upside from their current price of C$24.00.