Morningstar DBRS Comments on ARC Resources Ltd.'s Announced Acquisition of Montney Assets From Strathcona Resources Ltd.; Credit Ratings Unchanged at BBB

DBRS Limited (Morningstar DBRS) notes that ARC Resources Ltd. (ARC or the Company) announced on May 14, 2025, that it entered into an agreement to acquire Montney assets in Alberta's Kakwa region from Strathcona Resources Ltd. for a cash consideration of $1.60 billion. The acquisition adds approximately 40,000 barrels of oil equivalent per day of production (50% liquids) and increases ARC's inventory duration at its largest asset, Kakwa, to over 15 years from 12 years. Morningstar DBRS expects the acquisition to be accretive to the Company's free cash flow (cash flow after capital expenditures) under its base-case commodity price assumptions. ARC plans to fund the acquisition with a new $1.0 billion committed two-year term loan and a draw on its revolving credit facility. The acquisition is expected to close in early July 2025.

Morningstar DBRS notes that the acquisition adds significant incremental scale at the Company's Kakwa assets in Alberta. The acquired assets are adjacent to ARC's existing assets in this area and provide the Company with an opportunity to realize cost synergies. Morningstar DBRS notes that ARC has a successful track record of integrating acquired assets. The purchase is expected to be primarily funded with debt. At the close of the acquisition, Morningstar DBRS estimates that the pro forma lease-adjusted debt at March 31, 2025, will increase to $3.65 billion from $2.05 billion. However, ARC's financial risk profile is strong for the current credit ratings, and the Company has an adequate buffer to absorb the increase in debt. ARC's pro forma lease-adjusted cash flow-to-debt ratio at March 31, 2025, weakens to approximately 84% after incorporating the additional acquisition-related debt and cash flow compared with 133% in Q1 2025. However, this metric remains sufficiently strong to continue to support the credit ratings. During the next 12 months, Morningstar DBRS expects the Company to use part of its free cash flow surplus to reduce debt and maintain a lease-adjusted cash flow-to-debt ratio of at least 100%.

Overall, Morningstar DBRS' Issuer Rating and Senior Unsecured Notes credit rating on ARC remain unchanged at BBB with Stable trends.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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