Intrinsic value of ARC Resources Ltd. - ARX

Previous Close

$15.67

  Intrinsic Value

$2.29

stock screener

  Rating & Target

str. sell

-85%

Previous close

$15.67

 
Intrinsic value

$2.29

 
Up/down potential

-85%

 
Rating

str. sell

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ARX stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 5.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -10.55
  25.70
  23.63
  21.77
  20.09
  18.58
  17.22
  16.00
  14.90
  13.91
  13.02
  12.22
  11.50
  10.85
  10.26
  9.74
  9.26
  8.84
  8.45
  8.11
  7.80
  7.52
  7.26
  7.04
  6.83
  6.65
  6.49
  6.34
  6.20
  6.08
  5.97
Revenue, $m
  975
  1,226
  1,515
  1,845
  2,216
  2,627
  3,080
  3,573
  4,105
  4,676
  5,285
  5,931
  6,612
  7,329
  8,082
  8,868
  9,690
  10,546
  11,437
  12,365
  13,329
  14,330
  15,371
  16,453
  17,578
  18,747
  19,963
  21,228
  22,545
  23,917
  25,346
Variable operating expenses, $m
 
  1,766
  2,177
  2,646
  3,172
  3,757
  4,400
  5,100
  5,856
  6,667
  7,532
  8,425
  9,393
  10,412
  11,480
  12,598
  13,765
  14,981
  16,247
  17,565
  18,934
  20,357
  21,836
  23,373
  24,971
  26,631
  28,359
  30,156
  32,027
  33,975
  36,005
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  863
  1,766
  2,177
  2,646
  3,172
  3,757
  4,400
  5,100
  5,856
  6,667
  7,532
  8,425
  9,393
  10,412
  11,480
  12,598
  13,765
  14,981
  16,247
  17,565
  18,934
  20,357
  21,836
  23,373
  24,971
  26,631
  28,359
  30,156
  32,027
  33,975
  36,005
Operating income, $m
  112
  -540
  -662
  -801
  -957
  -1,130
  -1,320
  -1,527
  -1,751
  -1,991
  -2,247
  -2,494
  -2,781
  -3,083
  -3,399
  -3,730
  -4,075
  -4,435
  -4,810
  -5,200
  -5,605
  -6,027
  -6,465
  -6,920
  -7,393
  -7,884
  -8,396
  -8,928
  -9,482
  -10,058
  -10,659
EBITDA, $m
  544
  1
  1
  2
  2
  2
  3
  3
  3
  4
  4
  5
  6
  6
  7
  7
  8
  9
  10
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
Interest expense (income), $m
  51
  47
  77
  112
  152
  197
  247
  301
  361
  425
  494
  568
  646
  729
  815
  906
  1,001
  1,101
  1,204
  1,312
  1,424
  1,541
  1,662
  1,788
  1,918
  2,054
  2,196
  2,343
  2,496
  2,655
  2,821
Earnings before tax, $m
  243
  -587
  -739
  -913
  -1,109
  -1,327
  -1,567
  -1,829
  -2,112
  -2,417
  -2,742
  -3,062
  -3,427
  -3,811
  -4,214
  -4,636
  -5,076
  -5,536
  -6,014
  -6,512
  -7,030
  -7,567
  -8,126
  -8,707
  -9,311
  -9,939
  -10,592
  -11,271
  -11,977
  -12,714
  -13,480
Tax expense, $m
  42
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  201
  -587
  -739
  -913
  -1,109
  -1,327
  -1,567
  -1,829
  -2,112
  -2,417
  -2,742
  -3,062
  -3,427
  -3,811
  -4,214
  -4,636
  -5,076
  -5,536
  -6,014
  -6,512
  -7,030
  -7,567
  -8,126
  -8,707
  -9,311
  -9,939
  -10,592
  -11,271
  -11,977
  -12,714
  -13,480

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  672
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  5,991
  6,697
  8,280
  10,082
  12,107
  14,357
  16,830
  19,523
  22,432
  25,552
  28,879
  32,407
  36,133
  40,052
  44,162
  48,461
  52,950
  57,628
  62,499
  67,566
  72,833
  78,308
  83,997
  89,909
  96,054
  102,443
  109,087
  116,001
  123,197
  130,692
  138,500
Adjusted assets (=assets-cash), $m
  5,319
  6,697
  8,280
  10,082
  12,107
  14,357
  16,830
  19,523
  22,432
  25,552
  28,879
  32,407
  36,133
  40,052
  44,162
  48,461
  52,950
  57,628
  62,499
  67,566
  72,833
  78,308
  83,997
  89,909
  96,054
  102,443
  109,087
  116,001
  123,197
  130,692
  138,500
Revenue / Adjusted assets
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
  0.183
Average production assets, $m
  4,684
  5,888
  7,279
  8,863
  10,644
  12,622
  14,796
  17,163
  19,720
  22,464
  25,388
  28,490
  31,766
  35,211
  38,824
  42,604
  46,550
  50,663
  54,945
  59,399
  64,030
  68,843
  73,845
  79,042
  84,444
  90,061
  95,902
  101,980
  108,307
  114,895
  121,760
Working capital, $m
  703
  104
  129
  157
  188
  223
  262
  304
  349
  397
  449
  504
  562
  623
  687
  754
  824
  896
  972
  1,051
  1,133
  1,218
  1,307
  1,399
  1,494
  1,593
  1,697
  1,804
  1,916
  2,033
  2,154
Total debt, $m
  1,026
  1,607
  2,337
  3,168
  4,102
  5,139
  6,279
  7,520
  8,861
  10,300
  11,833
  13,460
  15,177
  16,984
  18,879
  20,861
  22,930
  25,087
  27,332
  29,668
  32,096
  34,620
  37,243
  39,968
  42,801
  45,746
  48,809
  51,996
  55,314
  58,769
  62,369
Total liabilities, $m
  2,506
  3,087
  3,817
  4,648
  5,582
  6,619
  7,759
  9,000
  10,341
  11,780
  13,313
  14,940
  16,657
  18,464
  20,359
  22,341
  24,410
  26,567
  28,812
  31,148
  33,576
  36,100
  38,723
  41,448
  44,281
  47,226
  50,289
  53,476
  56,794
  60,249
  63,849
Total equity, $m
  3,485
  3,610
  4,463
  5,434
  6,526
  7,738
  9,071
  10,523
  12,091
  13,773
  15,566
  17,468
  19,476
  21,588
  23,803
  26,121
  28,540
  31,062
  33,687
  36,418
  39,257
  42,208
  45,274
  48,461
  51,773
  55,217
  58,798
  62,524
  66,403
  70,443
  74,652
Total liabilities and equity, $m
  5,991
  6,697
  8,280
  10,082
  12,108
  14,357
  16,830
  19,523
  22,432
  25,553
  28,879
  32,408
  36,133
  40,052
  44,162
  48,462
  52,950
  57,629
  62,499
  67,566
  72,833
  78,308
  83,997
  89,909
  96,054
  102,443
  109,087
  116,000
  123,197
  130,692
  138,501
Debt-to-equity ratio
  0.294
  0.450
  0.520
  0.580
  0.630
  0.660
  0.690
  0.710
  0.730
  0.750
  0.760
  0.770
  0.780
  0.790
  0.790
  0.800
  0.800
  0.810
  0.810
  0.810
  0.820
  0.820
  0.820
  0.820
  0.830
  0.830
  0.830
  0.830
  0.830
  0.830
  0.840
Adjusted equity ratio
  0.529
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  201
  -587
  -739
  -913
  -1,109
  -1,327
  -1,567
  -1,829
  -2,112
  -2,417
  -2,742
  -3,062
  -3,427
  -3,811
  -4,214
  -4,636
  -5,076
  -5,536
  -6,014
  -6,512
  -7,030
  -7,567
  -8,126
  -8,707
  -9,311
  -9,939
  -10,592
  -11,271
  -11,977
  -12,714
  -13,480
Depreciation, amort., depletion, $m
  432
  541
  663
  802
  958
  1,132
  1,323
  1,530
  1,755
  1,995
  2,252
  2,499
  2,786
  3,089
  3,406
  3,737
  4,083
  4,444
  4,820
  5,210
  5,617
  6,039
  6,478
  6,934
  7,407
  7,900
  8,412
  8,946
  9,501
  10,079
  10,681
Funds from operations, $m
  628
  -46
  -76
  -111
  -150
  -195
  -244
  -298
  -358
  -421
  -490
  -563
  -641
  -722
  -808
  -899
  -993
  -1,092
  -1,195
  -1,302
  -1,413
  -1,529
  -1,649
  -1,774
  -1,904
  -2,039
  -2,179
  -2,325
  -2,477
  -2,635
  -2,800
Change in working capital, $m
  -3
  21
  25
  28
  32
  35
  38
  42
  45
  49
  52
  55
  58
  61
  64
  67
  70
  73
  76
  79
  82
  85
  88
  92
  96
  99
  103
  108
  112
  117
  121
Cash from operations, $m
  631
  -67
  -100
  -139
  -182
  -230
  -283
  -340
  -403
  -470
  -542
  -618
  -698
  -783
  -872
  -966
  -1,063
  -1,165
  -1,270
  -1,380
  -1,495
  -1,614
  -1,737
  -1,866
  -1,999
  -2,138
  -2,282
  -2,433
  -2,589
  -2,752
  -2,921
Maintenance CAPEX, $m
  0
  -411
  -516
  -639
  -777
  -934
  -1,107
  -1,298
  -1,506
  -1,730
  -1,971
  -2,227
  -2,499
  -2,786
  -3,089
  -3,406
  -3,737
  -4,083
  -4,444
  -4,820
  -5,210
  -5,617
  -6,039
  -6,478
  -6,934
  -7,407
  -7,900
  -8,412
  -8,946
  -9,501
  -10,079
New CAPEX, $m
  -629
  -1,204
  -1,391
  -1,584
  -1,781
  -1,978
  -2,174
  -2,367
  -2,557
  -2,743
  -2,925
  -3,102
  -3,275
  -3,445
  -3,613
  -3,780
  -3,946
  -4,113
  -4,282
  -4,454
  -4,631
  -4,813
  -5,001
  -5,198
  -5,402
  -5,617
  -5,841
  -6,078
  -6,327
  -6,589
  -6,865
Cash from investing activities, $m
  -393
  -1,615
  -1,907
  -2,223
  -2,558
  -2,912
  -3,281
  -3,665
  -4,063
  -4,473
  -4,896
  -5,329
  -5,774
  -6,231
  -6,702
  -7,186
  -7,683
  -8,196
  -8,726
  -9,274
  -9,841
  -10,430
  -11,040
  -11,676
  -12,336
  -13,024
  -13,741
  -14,490
  -15,273
  -16,090
  -16,944
Free cash flow, $m
  238
  -1,682
  -2,008
  -2,362
  -2,740
  -3,141
  -3,564
  -4,006
  -4,466
  -4,943
  -5,437
  -5,947
  -6,473
  -7,015
  -7,574
  -8,151
  -8,746
  -9,361
  -9,997
  -10,654
  -11,336
  -12,043
  -12,778
  -13,541
  -14,335
  -15,162
  -16,024
  -16,923
  -17,861
  -18,841
  -19,865
Issuance/(repayment) of debt, $m
  -55
  633
  730
  831
  934
  1,037
  1,140
  1,241
  1,341
  1,439
  1,534
  1,627
  1,717
  1,807
  1,895
  1,982
  2,069
  2,157
  2,245
  2,336
  2,428
  2,524
  2,623
  2,725
  2,833
  2,945
  3,063
  3,187
  3,318
  3,455
  3,600
Issuance/(repurchase) of shares, $m
  1
  1,332
  1,592
  1,884
  2,200
  2,539
  2,900
  3,280
  3,680
  4,099
  4,535
  4,964
  5,435
  5,923
  6,429
  6,953
  7,496
  8,058
  8,640
  9,243
  9,869
  10,518
  11,193
  11,894
  12,623
  13,382
  14,173
  14,997
  15,856
  16,753
  17,689
Cash from financing (excl. dividends), $m  
  -55
  1,965
  2,322
  2,715
  3,134
  3,576
  4,040
  4,521
  5,021
  5,538
  6,069
  6,591
  7,152
  7,730
  8,324
  8,935
  9,565
  10,215
  10,885
  11,579
  12,297
  13,042
  13,816
  14,619
  15,456
  16,327
  17,236
  18,184
  19,174
  20,208
  21,289
Total cash flow (excl. dividends), $m
  183
  284
  314
  354
  394
  435
  476
  516
  555
  594
  632
  644
  680
  715
  750
  784
  819
  853
  889
  924
  961
  999
  1,038
  1,079
  1,121
  1,165
  1,212
  1,261
  1,313
  1,367
  1,425
Retained Cash Flow (-), $m
  -96
  -1,332
  -1,592
  -1,884
  -2,200
  -2,539
  -2,900
  -3,280
  -3,680
  -4,099
  -4,535
  -4,964
  -5,435
  -5,923
  -6,429
  -6,953
  -7,496
  -8,058
  -8,640
  -9,243
  -9,869
  -10,518
  -11,193
  -11,894
  -12,623
  -13,382
  -14,173
  -14,997
  -15,856
  -16,753
  -17,689
Prev. year cash balance distribution, $m
 
  620
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -428
  -1,279
  -1,531
  -1,806
  -2,104
  -2,424
  -2,764
  -3,125
  -3,505
  -3,903
  -4,320
  -4,755
  -5,208
  -5,680
  -6,169
  -6,677
  -7,204
  -7,751
  -8,319
  -8,908
  -9,520
  -10,155
  -10,815
  -11,502
  -12,217
  -12,961
  -13,736
  -14,543
  -15,386
  -16,265
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  -411
  -1,171
  -1,332
  -1,487
  -1,631
  -1,759
  -1,867
  -1,953
  -2,013
  -2,046
  -2,052
  -2,029
  -1,980
  -1,907
  -1,811
  -1,697
  -1,567
  -1,427
  -1,281
  -1,132
  -985
  -843
  -709
  -586
  -475
  -378
  -295
  -225
  -168
  -122
Current shareholders' claim on cash, %
  100
  77.4
  60.6
  47.9
  38.1
  30.6
  24.8
  20.2
  16.6
  13.6
  11.3
  9.4
  7.9
  6.6
  5.6
  4.7
  4.0
  3.4
  2.9
  2.5
  2.1
  1.8
  1.5
  1.3
  1.1
  1.0
  0.8
  0.7
  0.6
  0.5
  0.5

ARC Resources Ltd is a crude oil and natural gas company. It is engaged in the exploration, development and production of crude oil and natural gas in Canada with an emphasis on the development of properties with hydrocarbons in place, commonly referred to as resource plays. Its properties, North Pembina Cardium Unit No. 1 (NPCU 1), Berrymoor Cardium Unit and Lindale Cardium Unit, are located in the Pembina Cardium field. Its Ante Creek property is located within the oil prone Montney trend, and produces a mixture of gas, oil and liquids. The Swan Hills property provides exposure to the Slave Point carbonate reef, which produces oil. Its South Central Alberta area includes a range of assets from southern and central Alberta. The Redwater field, located in central Alberta, produces light crude oil. The Company's Dawson Phase III facility is designed for processing capacity of approximately 90 million cubic feet (MMcf) per day and over 7,500 barrels per day of liquids-handling capacity.

FINANCIAL RATIOS  of  ARC Resources Ltd. (ARX)

Valuation Ratios
P/E Ratio 27.5
Price to Sales 5.7
Price to Book 1.6
Price to Tangible Book
Price to Cash Flow 8.8
Price to Free Cash Flow 2768
Growth Rates
Sales Growth Rate -10.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 11.9%
Cap. Spend. - 3 Yr. Gr. Rate -7.1%
Financial Strength
Quick Ratio 13
Current Ratio 0.7
LT Debt to Equity 27.9%
Total Debt to Equity 29.4%
Interest Coverage 6
Management Effectiveness
Return On Assets 4.1%
Ret/ On Assets - 3 Yr. Avg. 2.1%
Return On Total Capital 4.5%
Ret/ On T. Cap. - 3 Yr. Avg. 1.8%
Return On Equity 5.8%
Return On Equity - 3 Yr. Avg. 2.3%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 70.4%
Gross Margin - 3 Yr. Avg. 74.3%
EBITDA Margin 74.5%
EBITDA Margin - 3 Yr. Avg. 72.2%
Operating Margin 11.5%
Oper. Margin - 3 Yr. Avg. -2.3%
Pre-Tax Margin 24.9%
Pre-Tax Margin - 3 Yr. Avg. 6.7%
Net Profit Margin 20.6%
Net Profit Margin - 3 Yr. Avg. 3.4%
Effective Tax Rate 17.3%
Eff/ Tax Rate - 3 Yr. Avg. 15.7%
Payout Ratio 63.7%

ARX stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ARX stock intrinsic value calculation we used $975 million for the last fiscal year's total revenue generated by ARC Resources Ltd.. The default revenue input number comes from 2016 income statement of ARC Resources Ltd.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ARX stock valuation model: a) initial revenue growth rate of 25.7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ARX is calculated based on our internal credit rating of ARC Resources Ltd., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of ARC Resources Ltd..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ARX stock the variable cost ratio is equal to 144.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for ARX stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.8% for ARC Resources Ltd..

Corporate tax rate of 27% is the nominal tax rate for ARC Resources Ltd.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ARX stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ARX are equal to 480.4%.

Life of production assets of 11.4 years is the average useful life of capital assets used in ARC Resources Ltd. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ARX is equal to 8.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $3485 million for ARC Resources Ltd. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 353.454 million for ARC Resources Ltd. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of ARC Resources Ltd. at the current share price and the inputted number of shares is $5.5 billion.

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Financial statements of ARX
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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