ARC Resources Ltd. (TSX: ARX) is an independent energy company engaged in the acquisition, exploration, development, and production of conventional oil and natural gas in Western Canada. 

ARD has lowered its dividend to CAD 0.02 per share from a monthly dividend of CAD 0.05 per share.

Q1FY20 Operational Highlights: For the period ended March 31, 2020, ARC Resources Ltd. reported in-line quarterly numbers coinciding with the industry trend. Revenue took a hit due to falling crude oil prices and deteriorated to CAD 268.5 million, as compared to CAD 329.3 million, in the previous corresponding period. During the quarter, the Company produced Crude oil and condensate of 28,259 bbl/day, higher than 26,461 bbl/day in the previous corresponding quarter. Natural gas and NGLs production stood at 692.2 MMcf/day and 8,152 bbl/day, respectively, as compared to 632.5 MMcf/day and 7,183 bbl/day. During the quarter, the group recorded a gain on risk management contracts amounting to CAD 100.3 million, against a loss of CAD 126.2 million in pcp, resulted in improved total revenue. Total expenses soared to CAD 1,092.1 million, as compared to CAD 285.5 million in the previous corresponding quarter owing to a higher depletion, depreciation, amortization and impairment expenses. Net loss and comprehensive loss stood at CAD 558.4 million, as compared to a loss of CAD 54.6 million in Q1FY19. Funds from operation stood at CAD 160.8 million, as compared to CAD 186.2 million in the previous corresponding period. ARC invested CAD 169.8 million during the first quarter of FY20, which included completing construction and commissioning activities for both the Dawson Phase IV gas processing and liquids-handing facility and the Ante Creek facility expansion.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation: The stock of ARX Corrected ~28% so far this year, due to a major correction in the international crude-oil prices on account of lower demand scenario. The group is planning to make a capital investment of ~ CAD 300 million, which is likely to focus on balance sheet strength. The group is planning to invest in profitable projects through capital discipline and efficient execution. The group believes that Funds from operations in FY 20 would be enough to fund its dividend payment and capital program. At the last traded price, the group’s share was trading above its 50-days and 100-days simple moving average of CAD 5.27 and CAD 5.62, respectively, indicating a medium term bullish- trend. We believe that demand for oil to witness a gradual recovery in the near term as easing lockdown restrictions are likely to result in higher industrial and manufacturing activities. We have valued the stock using Price/CF based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered industry average (Oil & Gas) multiple on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 5.79 on June 8, 2020.

ARX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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