ARC Resources Ltd.

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. 

The Management declared a quarterly dividend of CAD 0.06 per share while trailing 12 months dividend is at CAD 0.52 per share.

Q1FY20 Financial Highlights: ARC Resources Ltd. reported its quarterly numbers and posted revenue of CAD 268.5 million, relatively lower than CAD 329.3 million, a year ago. The slide in the revenue was primarily attributable to falling crude oil prices due to lower industrial and manufacturing activities. Total revenue, interest and other income and gain on risk management contracts stood at CAD 370.5 million, as compared to CAD 207.2 million in pcp, aided by a gain on risk management contracts amounting CAD 100.3 million, against a loss of CAD 126.2 million in pcp. The quarter was marked by a higher depletion, depreciation, amortization and impairment expense of CAD 875.7 million against CAD 139 million in pcp. General and administrative cost, Operating costs and Commodities purchased from third parties stood relatively lower than the previous corresponding quarter, while transportation expense stood marginally higher from the previous corresponding quarter. Net loss and comprehensive loss widened to CAD 558.4 million, as compared to a net loss of CAD 54.6 million in pcp, partially supported by a higher income tax recovery of CAD 163.2 million. The Company ended the quarter with a cash and cash equivalent of CAD 6.0 million, while total assets were recorded at CAD 5,172.6 million.

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: 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 ~44% so far this year, due to a steep decline in oil demand and most of the investors stood away from oil exploring companies. Despite a soft macro outlook, the Company managed to report a higher average daily production of 151,783 boe per day, reflecting an increment of ~9% on y-o-y basis. 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 planning to invest in profitable projects through capital discipline and efficient execution. 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. The stock appreciated ~13% in the last three months, as the crude oil price bottomed out and showed a price improvement.  The stock carries a dividend yield of ~5.252% on an annualized basis, which is lucrative considering the current interest rate environment and likely to appeal income investors. We have valued the stock using Price/CF based relative valuation approach and considered industry (energy) median on NTM basis and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 4.56 as on June 30, 2020.

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

Seabridge Gold Inc

Seabridge Gold Inc (TSX: SEA) is a mining company based out of Canada. It is engaged in the business of exploration of Gold. The Group’s principal properties include the Iskut project in British Columbia, Canada; Kerr-Sulphurets-Mitchell project in Northern British Columbia, Canada; The 3 Aces Project in Northwest Territories, Canada.

Recent News

On 11^th June 2020, Seabridge Gold announced the closing of a private placement deal. The Underwriters have bought 345,000 shares at $32.94/share for $11.36 million total gross proceeds.

Financial Highlights – Q1 of the Financial Year 2020 (31^st March 2020, CAD, thousand)

(Source: Quarterly Report, Company Website)

The Group is in the development stage and do not generate any revenue for the period. Driven by good control over expenses for the period, the Group’s reported LBT (loss before tax) declined to CAD 3,590 thousand in the first quarter for the financial year 2020 from an LBT (loss before tax) of CAD 4,394 million in the first quarter of the financial year 2019. Due to higher tax recovery for the period, the group’s Net loss declined to CAD 3,198 thousand in the first quarter of the financial year 2020 versus a net loss of CAD 4,088 thousand in the first quarter of the financial year 2019. The cash balance as on 31^st March 2020 stood at CAD 6,773 thousand as against a cash balance of CAD 8,793 thousand as on 31^st December 2019. The total assets as on 31^st March 2020 stood at CAD 454,540 thousand as against total assets of CAD 449,372 thousand as on 31^st December 2019.

Share Price Performance

Daily Chart as of 30 June 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Seabridge Gold Inc shares closed at CAD 23.84 at the time of writing after the market close on 30 June 2020. Stock's 52 weeks High is CAD 23.94 and Low is CAD 7.37.

Key Risks

The market conditions in which the Company operates is full of challenges and might impact the operational performance and reduce financial performance as well. Any change in regulations and government policies could affect the overall business of the Company. Liquidity and interest rate risks could affect the operations of the Company.

Conclusion

The Company has shown an increase in financial performance in the first quarter of the financial year 2020. The Group is in the development stage and hence rely on grants and cash balances to carry on all the business activities, and the bottom-line performance has improved, as operating expenses are effectively managed. The recent increase in the gold prices in the global markets will improve financial performance and bring operational stability. The Group operations are impacted by the outbreak of covid-19 pandemic and have been focusing on strengthening the balance sheet and reducing costs to preserve cash. The proceeds from recent private placing deal will help the Group to meet its working capital needs. The Group continues to pursue joint venture agreement with suitable partner related to the KSM project on advantageous terms.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 23.84 (as on 30 June 2020).

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.