2 top-10 oil and gas stocks to buy

Canadian petroleum companies are well-positioned for price hikes. Here are two top-10 rated oil and gas stocks from a survey of over 1,000 Canadian companies.

ARC Resources Ltd. (TSX—ARX)

RBC Capital Markets analysts Michael Harvey and Fabian Ledzion say oil and gas stock ARC Resources Ltd. is well positioned after a drama-free fourth-quarter 2021. After viewing the results that were released on Feb. 10, they continue to recommend ARX shares following its modest CFPS (cash flow per share) beat.

ARC Resources remains on the RBC Global Energy Best Ideas List. Messrs. Harvey and Ledzion upped their target price by a loonie at the time to $18 a share. Since then, war has broken out between Russia and Ukraine, which has shot the price of crude oil up to highs we haven’t seen since 2014. This will boost ARC.

Messrs. Harvey and Ledzion noted the company generated $460 million of FCF (free cash flow) (an 18 per cent annualized FCF yield). They continue to forecast two additional dividend increases through 2022 combined with meaningful buybacks.

ARC demonstrated fourth-quarter volumes of 345,831 barrels of oil equivalent per day (BOE/d), funds from operations (FFO) of $1.19 per share, and capital expenditures (capex) of $375 million, compared to Messrs. Harvey and Ledzion estimates of 345,379 boe/d of volume, $1.18 per share of FFO, and $310 million of capex.

ARC also released its adjusted guidance for 2022, which the company estimates will be between $1.2 billion to $1.3 billion, with volumes of between 330,000 BOE/d and 350,000 BOE/d, according to the analysts.

Messrs. Harvey and Ledzion say that the company’s current budget includes around $25 million to advance its Attachie project, a natural gas play in BC, which is currently in production. As for operations, the company reported $190 million captured through its subsidiary, Seven Generations; reported it drilled 47 wells and is in the process of completing 29 wells; and accelerated around $50 million of 2022 capex for the Attachie West Phase 1 to secure long-lead items.

Messrs. Harvey and Ledzion say that ARC’s “per share” reserves were heavily impacted by the Feb. 10, 2021, acquisition of Seven Generations. Seven Generations shareholders will receive 1.108 common shares of ARC for each common share of Seven Generations held.

The company’s proved developed reserves (PDP) dropped by four per cent, its proven reserves (1P) stayed the same, and its proved plus probable reserves (2P) dropped by three per cent when measured using a per share metric, according to the analysts’ calculations.

The analysts reiterate an ‘outperform’ recommendation for the Calgary-based firm, along with seven other analysts who recommend it a ‘buy’. This places ARC Resources in a seven-way tie for fourth place on our top-10 ‘buys’ list.

AltaGas Ltd. (TSX—ALA)

Is there more upside to utilities stock AltaGas Ltd.? Already, AltaGas has been Scotiabank analyst Robert Hope’s favourite utility name for some time. But given recent transaction announcements for gas utility assets, he sees the potential for upside beyond his target valuation.

In the final week of February, AltaGas sent a take-out offer for South Jersey Industries Inc. Since then, the analyst noticed US gas utility companies rallied five per cent with AltaGas also increasing by five per cent (as of March 1).

He adds that AltaGas could look to divest some smaller gas utility assets that would further strengthen its balance sheet. The media has reported that AltaGas’ Enstar and Cingsa Alaskan natural gas utility assets could be for sale. The analyst views these assets as non-core, and they would be the smallest of AltaGas’ utilities with a combined rate base of about US$340 million.

Assuming a 21 times price-to-earnings ratio, this implies an enterprise value of about $600 million or an equity value of $400 million when accounting for the debt. Expect AltaGas to use the proceeds to fund its capital plan and repay debt. Assuming this, the analyst estimates the sale as being roughly $0.04 dilutive (about two per cent) to his 2022 and 2023 EPS (earnings per share) estimates of $1.81 and $1.94 respectively.

Mr. Hope suggests these factors above would offset the continued challenges facing the Mountain Valley Pipeline (MVP). With the recent permitting setbacks, the analyst says he would not be surprised to see AltaGas announce a full or partial impairment of MVP, which it was holding at $700 million at the third quarter.

The analyst reiterates a “sector outperform” recommendation. All eight covering analysts recommend it a “buy”. This places AltaGas in a seven-way tie for fourth place on our top-10 “buys” list.

This is an edited version of an article that was originally published for subscribers in the March 18, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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