ARC RESOURCES $21.14 (Toronto symbol ARX; Shares outstanding: 340.0 million; Market cap: $7.4 billion; TSINetwork Rating: Speculative; Dividend yield: 5.7%; www.arcresources.com) produces oil and natural gas in Western Canada. Its average daily output of 120,354 barrels of oil equivalent is 64% gas and 36% oil.
In the quarter ended March 31, 2015, ARC’s cash flow per share fell 38.7%, to $0.57 from $0.93 a year earlier. Production gained 13.9%, but its realized oil price fell 49.0% and its gas price declined 45.5%.
Like many oil and gas producers, ARC is cutting back on exploration and development spending. This year, it will devote $550.0 million to this purpose, down sharply from $945.5 million in 2014.
The smaller investment will cut ARC’s average 2015 production to 107,000 barrels a day or less. However, it’s now building a new gas-processing plant that should restore its output to as high as 126,000 barrels a day by the end of this year.
But with oil prices now at just $53 U.S. a barrel—and gas prices at $2.73 U.S. per thousand cubic feet—ARC’s cash flow per share will likely fall 40.7% this year, to $2.10 from $3.54 in 2014.
The stock now trades at 10.2 times this year’s forecast cash flow per share. That’s high, but it’s not unreasonable for a company with ARC’s growth potential when oil and gas prices recover. As well, the $0.10-a-share monthly dividend, which yields 5.7%, appears safe, even at today’s lower prices.
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