TSX Commentary

Veritas Research: ARC Energy Trust (AET.UN) – $20.33 – ARC Still Trading Above Revised Intrinsic Value Estimate
Sell, Intrinsic Value Estimate: $19.50 (Oil at $80.00/bbl)
Ante Creek acquisition highlights decent Q4: Fourth quarter production came in at 62,520 barrels of oil equivalent per day (boe/d), with cash flow per unit of $0.60. The $180 MM Ante Creek acquisition in December comes in at $14.30 per barrel of 2P reserves, but includes many fringe benefits such as an additional 30% interest in a gas plant, 163.5 net sections of undeveloped land and 30 identified horizontal drilling locations, with more to follow. On a corporate basis, ARC expects to produce 70,500 to 72,500 boe/d and spend $610 MM in capex in 2010. For 2010, ARC plans to spend $250 million to complete its 60 mmcf/d Dawson gas plant ($5.8 MM), to drill 35 wells of which 32 are horizontal, and to begin work on a second 60 mmcf/d gas plant. This activity will allow it to reach and maintain Dawson production at 115 mmcf/d to fill its increased capacity. An additional $47 MM will be allocated to its West Montney lands including Sunrise. ARC’s disclosed NAV value of $21.98 should be adjusted: In its reserves release, ARC estimates a year end “produce-out” NAV of $21.98 per unit (10% discounting). Vertias suggests recalculating, adjusting for taxes and the 13 million units issued in January. This results in an adjusted NAV of $17.83 (not excluding G&A). Underlying this number are assumed prices averaging $6.80 for AECO and $91 for Edmonton Light through 2015. ARC is trading at a 14% premium to this adjusted valuation. Following the issuance of 13 million units, ARC’s long term debt is now $606 MM with $710 MM of unused credit lines. Veritas’s valuation has increased, but ARC is still above it: Relative to ARC’s NAV calculations discussed above, Veritas uses lower pricing assumptions to arrive at its intrinsic value of $19.50 per unit, which assumes US$80 oil and mid-cycle gas prices of US$6 Henry Hub. Veritas’s valuation has increased with ARC’s additional tax pools ($2.2B at year end), its Ante Creek acquisitions and its January unit for debt maneuver, however Veritas continues to view ARC as overvalued, and maintains a Sell rating.