Topic: Energy Stocks

High-yielding Canadian energy stock on track for strong long-term growth

This Canadian energy stock appears on track to meet its 2018 production goals and sustain its long-term growth.

The company benefits from a strong balance sheet that was reinforced by a big sale of assets. It retains productive properties in one of Canada’s largest shale gas and oil regions. While the company reduced its exploration and development spending this year, a focus on its high-return gas properties is due to push output above last year’s levels. The stock pays a monthly dividend that appears secure and yields a high 5.0%.


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ARC RESOURCES (Toronto symbol ARX; www.arcresources.com) was founded in 1996 and operated as one of Canada’s largest oil and gas royalty trusts prior to becoming a conventional corporation after January 1, 2011. The company produces oil and natural gas in Western Canada. Its average output of 127,879 barrels of oil equivalent per day is 70% natural gas and 30% oil.

ARC’s primary assets are in one of Canada’s most extensive shale gas and oil regions, the Montney formation of northeast British Columbia and northern Alberta. The company also has holdings in the Cardium formation in Alberta’s Pembina oil field. ARC estimates that it has proved and probable reserve of approximately million barrels of oil equivalent with a reserve life of more than 17 years.

In the quarter ended June 30, 2018, cash flow per share rose 20.8%, to $0.58 from $0.48 a year earlier. ARC’s output rose 12.8%. Higher oil prices offset lower gas prices.

The company’s long-term debt stands at $815.4 million, or just 17% of its market cap. ARC also holds cash of $168.1 million, or $0.48 a share. The strong balance sheet results from the December 2016 sale of all of the company’s properties in southeastern Saskatchewan for $700 million.

Energy stocks: Natural gas properties should boost overall production by 8%

ARC plans to spend $690 million on exploration and development for 2018. That’s down 16.9% from $830 million in 2017. However, the company’s focus on its high-return Montney gas properties in Northeastern B.C. should raise overall production 8.2% above 2017 levels. ARC appears to be on target to meet those production goals.

The stock trades at 5.0 times ARC’s forecast 2018 cash flow of $2.39 per share. That’s somewhat high but not unreasonable for an oil and gas producer with strong long-term growth potential.

ARC pays a monthly dividend of $0.05 a share. The annualized rate of $0.60 yields a high 5.0%, and the dividend appears safe.

ARC Resources will report its third quarter earnings on November 8, and our discussion of the results will appear in a future issue of Canadian Wealth Advisor.

Recommendation in Canadian Wealth Advisor: ARC Resources is a buy.

 


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