ARC Resources Ltd.

ARC Resources Ltd. (TSX: ARX) is an independent energy company operating in Western Canada. The group is engaged in the acquisition, exploration, development, and production of conventional oil and natural gas.  The company produces light, medium, and heavy crude, condensate, NGLs, and natural gas. The company has a diverse portfolio of assets and has low-cost structure and deep inventory of projects, which are supported by a strong track record of execution.

Q1FY20 Financial Highlights: ARC declared its quarterly results, wherein the Group reported revenue from commodity sales at CAD 268.5 million as compared to CAD 329.3 million in the previous corresponding period (pcp). The sharp decline was primarily attributable to lower revenue from Natural gas and Crude oil segments, partially offset by improved income from Condensate segment. The quarter was marked by an increase in the total expense to CAD 1,092.1 million compared to CAD 285.5 million in pcp. The increase was driven by a higher cost from depletion, depreciation, amortization and impairment, amounting to CAD 875.7 million against CAD 139 million in pcp. Net loss and comprehensive loss widened to CAD 558.4 million as compared to CAD 54.6 million in Q1FY20, primarily due to the above-mentioned factors. Funds from operation stood at CAD 160.8 million, lower than CAD 186.2 million in pcp due to lower commodity price realizations.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s revenue is directly related to crude oil prices. Any volatility in oil prices would affect the company’s performance.

Valuation Methodology: EV to EBITDA based Relative Valuation (illustrative)

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

Stock Recommendation: The stock of ARC tumbled in the recent past and corrected ~37% so far this year, underperforming the index by ~33%. The Company hedged ~70% and ~40% of its anticipated crude oil and natural gas production, respectively for rest of FY20 to reduce volatility, which is a prudent approach. Going forward, ARC is planning to invest in profitable projects through capital discipline and efficient execution. The Company has ample liquidity of ~CAD 1.1 billion as undrawn credit facility to weather the current pandemic and expected to support the near-term working capital requirements. The group is targeting to spend CAD 300 million in 2020. The group believes that Funds from operations in FY 20 would be enough to fund its dividend payment and capital program. We expect an improvement in the crude oil and natural gas demand on account of an increase in the manufacturing and industrial activities, which is likely to improve the group’s performance going forward. Further, at the last traded price, the stock is offering a dividend yield of 4.62%, which is lucrative considering the current interest rate environment. The stock closed above its 30-days simple moving average of CAD 4.89. We have valued the stock using the EV/EBITDA based relative valuation approach and arrived at a target price offering lower double-digit upside potential. For the said purpose, we have considered the industry median (Oil & Gas). Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 5.19 on July 21, 2020.

ARX Technical Chart (Source: Refinitiv, Thomson Reuters)

Vermilion Energy Inc.

Vermilion Energy Inc. (TSX: VET) is an integrated oil and gas producing company and operates in full-cycle exploration and production programs, which includes acquisition, exploration, development, and optimization of assets. The Company derives its revenue from the production and sale of petroleum and natural gas. The group has operations across North America, Europe, and Australia. The majority of the group’s revenue is generated from the production and sale of petroleum and natural gas. The Company manages the business through its Calgary head office and through its international business unit offices.  

Q1FY20 Financial Highlights: Vermilion Energy Inc. announced its first-quarter results and posted total revenue of CAD 353.28 million, significantly lower than CAD 467.24 million in the previous corresponding quarter. Average production stood at 97,154 boe/day during Q1FY20, down 6% on y-o-y basis. The Business derived considerably lower income from Canada, France, Netherlands and Germany during the period. The quarter was marked by an increase in the purchased commodities, inclusion of the impairment costs amounting to CAD 1,566.2 million and a higher transportation cost, while lower depletion and depreciation charges and a gain on derivative instruments. VET reported a net loss of CAD 1,318.50 million as compared to a net profit of CAD 39.54 million in the previous corresponding period (pcp). Cash and cash equivalent, at the end of the quarter stood at CAD 16.63 million, while total assets stood at CAD 4,372.34 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Guidance: The Company expects Capital expenditure within the range of CAD 350 million to CAD 370 million for FY20, while production is expected in between 94,000 boe/day to 98,000 boe/day.

Risks: The income of the Company depends on the demand and prices of crude oil and natural gas. Thus, a decline in the demand or volatility in commodity price would weigh on the Company’s performance.

Valuation Methodology: Price to CF Relative Valuation (illustrative)

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

Stock Recommendation: The Stock of VET reacted to the commodity prices and corrected ~68% so far this year. To battle the challenging time, the company issued USD 300 million of senior unsecured notes during the quarter, with a maturity date of March 15, 2025. The above funding would help to meet the near-term requirement. Furthermore, the company made the extension of its CAD 2.1 billion revolving credit facility to May 31, 2024. Further, we expect the demand for crude oil to recover gradually as the states are easing the lockdown restrictions, and industrial and manufacturing activities are resuming. An improving demand is likely to help in stabilizing the commodity prices, which in turn would improve the group’s performance. The stock witnessed a pullback rally and soared ~41% in the last three months as international crude oil prices have shown recovery during this period. We have valued the stock using the price to P/CF-based relative valuation approach and arrived at a target price offering double-digit upside potential. For the said purpose, we have considered Baytex Energy Corp, Enerplus Corp and ARC Resources etc., as a peer group. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 6.7 on July 21, 2020.

VET Technical Chart (Source: Refinitiv, Thomson Reuters)

*Please be aware that dividends are variable and not guaranteed.

Disclaimer

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