The dividend is to be the primary mechanism for returning capital to Arc Resources’ shareholders over the long term.
Oil and gas stocks have performed very well this year. In fact, the energy sub-index on the S&P/TSX Composite is up 27.4 per cent year to date, while the composite itself is up just 3.4 per cent. Companies in the industry have benefited from a rise in energy prices over the past year or so. But Russia’s recent invasion of Ukraine has propelled energy prices up even further.
A resolution of the conflict, of course, would probably lead to a decline in commodity prices. But even then, assuming the global economy is not thrown into a recession anytime soon, prices should remain buoyant enough to let oil and gas stocks post healthy growth in revenues and cash flow in the next few years.
One company we like in the sector is Arc Resources Ltd. (TSX—ARX). Following the acquisition of Seven Generations Energy Ltd. in April 2021, Arc has become Canada’s largest producer of condensate and third-largest producer of natural gas. Its properties are located in the Montney formation with operations in northeast BC and northern Alberta.
The company delivered a record performance last year. For the year ended Dec. 31, 2021, Arc’s cash flow was $2.4 billion, or $3.85 a share, compared with $667.6 million, or $1.86 a share, in 2020. The increase was primarily due to higher commodity prices and an increase in production volumes resulting from the Seven Generations combination. Total production was 302,003 barrels of oil equivalent per day, up 87 per cent from 2020.
Arc’s strong financial performance has let it reward shareholders through dividend increases and share buybacks. In July, the company declared a 10-per-cent increase in the dividend. And in December, it raised the dividend even further—by 52 per cent. Management says a growing dividend remains the “primary mechanism of returning capital to shareholders over the long term”. Meanwhile, since the beginning of September, the company has bought back 33.6 million common shares, representing 4.6 per cent of its total shares outstanding.
Arc wants to balance profitable re-investment in its assets with meaningful returns of capital to shareholders. In 2022, the company plans to sustain current levels of production, increase productive capacity at its Sunrise dry natural gas play, and proceed with development at its Attachie condensate and liquids-rich natural gas play once the BC regulatory environment becomes more certain. At the same time, between 50 and 80 per cent of free cash flow generated in 2022 will be delivered to shareholders through the base dividend and share buybacks.
Arc’s shares trade at about 3.7 times the company’s likely 2022 cash flow of $4.65 a share. Its annual dividend of $0.40 a share yields 2.3 per cent.
Arc Resources is a buy for growth and a growing stream of dividend income.
This is an edited version of an article that was originally published for subscribers in the April 8, 2022, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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Money Reporter •6/13/22 •