How two oil and gas producers aim to maintain their high dividends

The long-term outlook for oil and natural gas is positive, although in the short term, shale oil and gas discoveries continue to rapidly increase supply. That’s keeping prices low—and pushing down the shares of producers. We advise against overindulging in any one sector. However, we do think most safety-conscious investors should stick with the energy stocks we rate as buys in Canadian Wealth Advisor. Here is our latest advice on two of them. ARC RESOURCES (Toronto symbol ARX; www.arcresources.com) produces oil and gas in western Canada. Its average daily production of 95,725 barrels of oil equivalent is weighted 61% to gas and 39% to oil. In the three months ended December 31, 2012, ARC’s cash flow per share fell 13.9%, to $0.68 from $0.79. Production rose 4.0%, but that was offset by a 3.2% decline in gas prices. The company’s long-term debt is $747.7 million, or a low 9.5% of its market cap. ARC trades at 11.1 times its forecast 2012 cash flow of $2.32 a share. The shares yield 4.5%. The company aims to end 2013 with production of 100,000 barrels per day. [ofie_ad] ENERPLUS CORP. (Toronto symbol ERF; www.enerplus.com) produces an average of 85,490 barrels of oil equivalent per day (weighted 51% to gas and 49% to oil). Its properties are mainly in Alberta, Saskatchewan, B.C., North Dakota and Montana, as well as the Marcellus Shale, which passes through Pennsylvania, New York, Ohio and West Virginia. In the three months ended December 31, 2012, Enerplus’s cash flow per share rose 16.1%, to $1.01 from $0.87 a year earlier. Gas prices fell 11.7%, but that was offset by a 10.7% production increase and lower operating costs. The company’s shares now yield a very high 7.9%. Enerplus’s debt is $1.0 billion, or a manageable 37.0% of its market cap. The stock trades at 4.3 times its 2013 cash flow of $3.15 a share. In the latest issue of Canadian Wealth Advisor, we look at the outlook for both companies. We examine the added risk of ARC’s plan to increase its exploration and development budget by almost 30% this year, and Enerplus’s plan to cut exploration and development in order to maintain its high dividend. We conclude with our clear buy-hold-sell advice on both of these stocks. COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members Do you think energy stocks should meet certain minimum qualifications for a solid conservative portfolio, such as a sustained record of production, or the payment of a dividend? Or do you think it’s OK to set aside a portion of your portfolio for more speculative energy stocks that may have a spectacular growth spurt, even though the risk of failure is greater? Let us know what you think.