ARC RESOURCES $24.16 (Toronto symbol ARX; Shares outstanding: 335.0 million; Market cap: $8.2 billion; TSINetwork Rating: Speculative; Dividend yield: 5.1%; www.arcresources.com) produces oil and natural gas in Western Canada. Its average daily output of 117,986 barrels of oil equivalent is 61% gas and 39% oil.
In the quarter ended December 31, 2014, ARC’s cash flow per share rose 3.9%, to $0.79 from $0.76 a year earlier. Realized oil prices fell 12.5%, to $72.49 a barrel from $82.85, but ARC’s production gained 17.0%, and its realized gas prices rose 15.0%.
Like many oil and gas producers, ARC plans to cut back on exploration and development spending. This year, the company will devote $750.0 million to this purpose, down from $945.5 million in 2014.
Even with the lower spending, ARC’s 2015 production should rise to an average of 120,000 to 125,000 barrels of oil equivalent per day. But with oil prices now just over $50 U.S. a barrel—and gas prices near five-year lows at $2.73 U.S. per thousand cubic feet—ARC’s cash flow per share will likely fall 39.5% this year, to $2.14 from $3.54 in 2014.
The stock now trades at 11.3 times this year’s forecast cash flow per share. That’s high, but not unreasonable for a company with ARC’s growth potential when oil and gas prices recover. As well, the $0.10-a-share monthly dividend, which yields 5.0%, appears safe, even at today’s lower prices.
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