Capital Reduction Program A Prudent Step: ARX Resources Ltd. (TSX: ARX) is one of the leading oil and gas exploration company with its asset base located in Western Canada.

ARX announced a monthly dividend of CAD 0.02 per share, payable on April 15, 2020. The announced dividend reflects a reduction from CAD 0.05 per share in previous month. The dividend cut follows the company’s capital reduction program for 2020. Investors should note that the capital reduction program is a prudent decision from the company to support its balance sheet as lower commodity prices present significant headwinds. In FY19, the company paid a dividend of CAD 212.4 million, compared to CAD 212.3 million in the previous year.

FY19 Financial Highlights: ARX announced its full-year results, wherein the company reported revenue from commodity sales of CAD 1,214 million, down from CAD 1,389.5 million in FY18. The decline reflected lower crude oil production coupled with lower price realizations. The company’s total operating expense stood at CAD 1,179.7 million, as per with CAD 1,177.4 million in FY18. The period was marked by higher transportation, general & administrative expense and depletion, depreciation, amortization & impairment expenses which was partly offset by lower operating expense and lower interest &financing costs. The company reported a net loss of CAD 27.6 million, as compared to a net profit of CAD 213.8 million. The y-o-y decline reflected lower commodity sales.

Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of ARC is quoting at CAD 4.19 with a market capitalization of 1.48 Billion. At current market price, the stock is trading at the lower band of its 52-week trading range of CAD 9.61 and CAD 2.42. The stock corrected 47.82% and 34.73% in the last three months and nine months, respectively. Despite the sharp correction in ARC stock, we prefer to remain on sidelines as a lower commodity prices are likely to be a significant headwind in the near-term. The company’s fourth-quarter performance was impacted by volatility in crude oil prices. Lower price realization took a toll on the overall profitability of the group resulting in a ROE of -0.80%, as compared to 5.8% in FY18. Further, the company reduced its monthly dividend to CAD 0.02 per share from CAD 0.05 per share. We believe, the above step was taken in order to support its balance sheet in the near-term. Thus, in a nutshell, we believe, the sector is likely to witness turbulence in the short-term due to the volatility in the crude oil prices. Considering the aforesaid facts, price movement and business outlook, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 4.19 as on 02 April 2019.

ARX One-Year Daily Price Chart (Source: Thomson Reuters)

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