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Penn West Petroleum Ltd (USA) (PWE), Pengrowth Energy Corp (USA) (PGH): Should You Jump Aboard This Canadian Oil and Gas Producer?

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If you are looking for a lesser-known stock, you have come to the right place. You can bet your farm that you can hardly find an article about ARC Resources in the online financial publications. This is why you might be missing something.

Cracking ARC’s code

ARC is one of Canada’s largest energy producers and considers the Montney formation to be its major growth engine. The company owns significant Montney acreage which is complemented by liquids-rich Cardium properties in the mature field of Pembina area.

ARC has a 17-year history of consistently growing its production and reserves, and is well into the execution of an $830 million capital program for 2013, focused primarily on oil and liquids-rich gas development and infrastructure spending to facilitate future growth.

In Q1 2013, ARC had proved and probable (2P) reserves of 607 MMboe (31% oil and liquids), and produced 95,472 boepd (39% oil and liquids) without hurting its financial flexibility. It had net debt of $855 million with unused credit facilities of $1.1 billion, and the debt-to-cash-flow (D/CF) annualized ratio remained quite low at about 1.0 times.

Looking ahead

The company will continue its transition to pad drilling to minimize environmental footprint and optimize operational efficiency. The pad drilling programs decrease overall per well costs to drill, complete and tie-in, but result in longer lead times from the start of drilling until the wells commence production as all drilling and completion activities must be completed on all wells before they are brought on-stream at one time.

ARC expects Q2 and Q3 production to decrease relative to Q1 levels due to planned downtime for spring breakup and maintenance activities. Heavy snowfall in southeast Saskatchewan and Manitoba during Q1 2013 will likely result in restricted access to properties and potential delayed development activities in Q2 2013 due to wet conditions and the potential for flooding.

However, ARC expects Q4 production to increase as new wells are brought in production by year end. The company expects 2013 full year production to average between 93,000 and 97,000 boepd.

Is ARC truly cheap?

With enterprise value at $9 billion, ARC Resources trades at $94,300/boepd and $14.83/boe of 2P reserves. Where does ARC stand among the industry peers with a relatively balanced commodity mix? Well, let’s check out some of them below:

Company EV ($ million) Production

(boepd)

2P Reserves

(MMBoe)

Per Boepd Per Boe
Penn West Petroleum 9,000 142,800

(63% oil/liquids)

676

(71% oil/liquids)

$63,000 $13.31
Pengrowth Energy 4,300 78,100

(54% oil/liquids)

462

(63% oil/liquids)

$55,100 $9.31
Enerplus 4,550 87,183

(48% oil/liquids)

346

(60% oil/liquids)

$52,200 $13.15
Bonavista Energy 3,400 72,500

(37% oil/liquids)

372

(38% oil/liquids)

$46,900 $9.14

Penn West Petroleum LtdPenn West Petroleum Ltd (USA) (NYSE:PWE) has exposure to a diversity of formations in the U.S. and Canada (Spearfish, Slave Point, Cardium, Viking, Duvernay). Actually, with over 600,000 net acres across the trend, Penn West Petroleum Ltd (USA) (NYSE:PWE) is the largest landholder in the Cardium and has also a 700,000 net acre position in the Viking.

Penn West Petroleum Ltd (USA) (NYSE:PWE) is also progressing on the three-well thermal pilot at Harmon Valley South, which is expected to commence steam injection in the second half of 2013. The regulatory applications for the 10,000 bbl/d Seal Main Commercial Project were submitted in late 2012.

Pengrowth Energy Corp (USA) (NYSE:PGH) produces oil and gas from the Cardium formation and the Swan Hills Trend in Canada. To diversify its production, Pengrowth Energy Corp (USA) (NYSE:PGH) also owns the Lindbergh thermal bitumen project which is going to be commercially operational (first phase) by year end. The development of the first phase of the Lindbergh thermal project is proceeding on time and on budget, and Alberta’s Environmental Protection and Enhancement Act approval was received a few days ago.

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