DBRS Morningstar Confirms Ratings on ARC Resources Ltd. at BBB, Stable TrendsEnergy
DBRS Limited (DBRS Morningstar) confirmed ARC Resources Ltd.’s (ARC or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB, both with Stable trends. The ratings are underpinned by ARC's scale in the liquids-rich Montney resource play, competitive cost structure, and conservative financial policy. Constraints on ARC’s ratings include limited geographic diversification and a lower proved developed reserve life index with corresponding higher decline rates. The Stable trends acknowledge the meaningful deleveraging achieved since the close of the strategic combination (the Combination) with Seven Generations Energy Ltd. (7G) and reflect DBRS Morningstar’s expectation that the Company's financial risk profile will remain supportive of the ratings.
Over the last year, ARC has successfully integrated the assets acquired from 7G and realized the benefits from the Combination that DBRS Morningstar factored into the ratings. Realized synergies of $190.0 million exceeded the Company's initial target of $110.0 million with outperformance driven by lower financing costs and improved capital efficiencies because of a reduction in drilling and completion costs at the 7G assets. ARC was also successful in replacing production through organic reserve growth from the 7G acquired assets. ARC has improved market access by entering into a long-term supply agreement with an LNG Canada participant to deliver approximately 150 million cubic feet per day of natural gas once LNG Canada commences scheduled operations in 2025.
DBRS Morningstar notes that there has been a delay in the issuance of new permits in British Columbia following the Supreme Court of British Columbia’s ruling in Blueberry River First Nations (Yahey) v. Province of British Columbia. While the Province of British Columbia (rated AA (high) with a Stable trend by DBRS Morningstar) and Blueberry River First Nations have reached an initial agreement, there has not yet been a final resolution as negotiations continue to progress. DBRS Morningstar does not expect the delay to have an impact on ARC's budgeted production in 2022, and ARC retains the ability to redirect capital to its Alberta assets if required.
Stronger commodity prices have resulted in ARC generating a material free cash flow (FCF; cash flow after capital expenditures and dividends) surplus in 2021. The Company has prioritized deleveraging and has reduced its gross debt by approximately $0.6 billion since the close of the Combination. Consequently, ARC’s key credit metrics at YE2021 (lease-adjusted debt-to-cash flow of 1.18 times (x)) improved ahead of DBRS Morningstar’s expectation at the time the ratings were assigned in March 2021. Based on its base-case commodity price assumptions (see “DBRS Morningstar Updates Oil and Natural Gas Price Forecasts: Stronger Fundamentals Prompt Upward Revisions,” dated November 12, 2021), DBRS Morningstar expects ARC to continue to generate a material FCF surplus in 2022. However, since the Company has achieved its long-term leverage target of net debt-to-cash flow of 1.0x to 1.50x (YE2021: 0.9x), it is likely that ARC will direct FCF surpluses primarily toward shareholder distributions and/or growth initiatives. Nevertheless, DBRS Morningstar expects the Company to maintain its lease-adjusted debt-to-cash flow ratio between 1.0x and 1.50x. DBRS Morningstar notes that the Company's financial risk profile is strong and expects it to continue to support the ratings even if commodity prices trend below DBRS Morningstar's base-case assumptions. ARC has good liquidity with $1.3 billion available under its revolving credit facility.
A rating upgrade is not likely in the medium term absent a material improvement in the Company’s business risk profile. While unlikely, a negative rating action is possible if the Company’s reserve metrics deteriorate and/or the Company’s lease-adjusted debt-to-cash flow ratio deteriorates materially and is consistently above the expected range of 1.0x to 1.50x.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16, 2021; https://www.dbrsmorningstar.com/research/383104) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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- Rating Companies in the Oil and Gas and Oilfield Services Industries (Archived) / August 16, 2021
- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (Archived) / May 31, 2021
- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (Archived) / February 3, 2021