TSX Commentary

ARC Energy Trust (AET.UN) – $20.37 – Anticipating Solid Year-End
Outperform, Average Risk, Price Target: $23.00
ARC Energy is set to kick off reporting season for the oil & gas trust sector, with results expected after the close on Tuesday, February 9th. Several factors give RBC CM’s confidence that ARC will report solid year-end reserves and F&D costs: 1. Capital spending in 2009 was concentrated in the NE BC / NW AB core area, where drilling results at Dawson and Ante Creek have been very strong; 2. Based on RBC CM’s review of public data, base declines appear to have been relatively stable, and volumes and capex for the year should be substantially in-line with GLJ’s estimates in last year’s reserve report of 63,350 boe/d and $325MM, respectively; and 3. Though a significant Montney reserves increase was recognized last year, booked recovery factors are low. RBC CM thinks ARC will continue to be conservative in its reserve recognition practices, though given the unbooked potential in the Montney, it would not be surprised to see organic growth in 2P reserves in excess of 10%. RBC CM’s Q4/09 estimates incorporate production of 63,600 boe/d and basic cash flow per unit of $0.54. Consensus cash flow is $0.59 per unit. ARC continues to be one of RBC CM’s best oil & gas trust ideas due to the production and reserves growth potential in the NE BC Montney, its attractive tight oil assets (Pembina, Ante Creek and Goodlands) and its strong management team. RBC CM reiterates its Outperform rating and $23 target.