Arc is still our preferred oil and gas producer

Among the oil and gas stocks included in the Money Reporter’s “Best Income Trusts For You”, we continue to find ARC Resources Ltd. the most attractive if you’re seeking a relatively conservative investment in the oil and gas sector. Despite a recent dividend cut, the shares offer wide recovery potential.

If you own one or more oil and gas stocks, we recommend you continue to hold onto them for the long term. Sell only if you must for portfolio management purposes. We think the downturn in the oil and gas sector has mostly run its course, and that the stronger companies will survive, whether they remain independent or are acquired by others.

Meanwhile, energy prices should eventually stabilize, and rise, as companies reduce investments in new wells, current reservoirs are depleted and demand increases. Though this process may take time, many oil and gas stocks stand to benefit from it over the longer term. In fact, these stocks offer wide recovery potential for risk-tolerant investors who have, say, a five-year time frame.

Among the oil and gas stocks included in our Planning Guide, we continue to find ARC Resources Ltd. (TSX─ARX) the most attractive if you’re seeking a relatively conservative investment in the oil and gas sector.

Arc is one of Canada’s leading conventional oil and gas companies. Its operations are focused in five core areas across western Canada, providing an extensive resource base of high-quality oil and natural gas investment opportunities.

Despite difficult industry conditions, the company ended 2015 on a strong note, delivering cash flow per share that beat the street’s expectations. Cash flow per share for the fourth quarter was $0.58, well above analysts’ estimates, which averaged $0.52. Nonetheless, cash flow was lower than the $0.79 a share the company earned in the same quarter in 2014.

The annual numbers tell a similar story. For the year ended Dec. 31, 2015, Arc’s cash flow was $773.4 million, or $2.27 a share, compared with $1.1 billion, or $3.54 a share, in 2014. Higher production in 2015 was more than offset by significantly lower oil and gas prices compared to 2014.

In view of low commodity prices and the desirability of maintaining a strong balance sheet, management has decided to reduce its 2016 capital budget to $390 million from $550 million. And it has also cut its monthly dividend in half to $0.05 a share.

The reduced budget and dividend should let Arc maintain balance sheet strength while it focuses on maximizing profits from its low-cost, high-value northeast B.C. Montney shale gas basin assets. About 75 per cent of the 2016 capital budget will be directed toward this end.

Cash flow should fall to $1.90 a share in 2016. The stock trades at a reasonable 9.4 times that estimate. The reduced annual dividend of $0.60 a share, meanwhile, still yields a respectable 3.3 per cent.

Arc Resources is a buy for risk-tolerant investors seeking wide recovery potential along with some income.


Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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