Tuesday, November 6, 2012

ARC Resources Ltd. 2

I do not own this stock of ARC Resources Ltd (TSX-ARX). I originally started to follow this stock in 2009 because it was suggested that this stock, which was then an income trust, was a good one for your new Tax Free Saving Accounts (TFSA) The Company was converted from an Income Trust ARC Energy Trust (TSX-AET.UN) to ARC Resources Ltd. (TSX-ARX) in January 2011.

The insider trading report shows insider selling at $1.1M and a bit of insider buying. Net insider selling is at $1.08M. Insider selling is by CEO, officers and directors. Insiders not only have options, but also have Performance Share Units (PSU) and Restricted Share Units (RSU). There is a lot of options and option like vehicles outstanding. Insiders also own shares worth in the millions. For example, the CEO has $9M of shares and $7.7M of options. One Director owns shares worth almost $20M.

Reuters says that 125 institutions own 26% of the outstanding shares and that over the past 3 month they have decreased their holdings by 8%.

The 5 year low, median and high median Price/Earnings Ratios are 12.22, 17.51 and 22.80. The current P/E Ratio is 67.36. This is because the company is not expected to earnings much this year. Using earnings for 2013 does not help much as that P/E ratio is 47.55. Looking at this ratio, the stock price is relatively high.

I get a current Graham Price of $9.31. The Price/Graham Price Ratio is 2.60. The 10 year low, median and high median P/GP Ratios are 0.89, 1.14 and 1.39. By this ratio, the stock price is relatively high. Part of the problems is also that the Graham Price formula includes the current EPS.

The 10 year median Price/Book Value per Share Ratio is 2.17. The current P/B Ratio is some 5% higher at 2.26. This P/B Ratio shows that the stock price is reasonable.

The dividend yield test will not be much good as the dividends have come down because of the change from an income trust to a corporation. However, what I can say is that dividends on these sorts of companies were expected to fall into a 4% to 5% range and the current dividend at 4.95% is at the top of the range.

Looking at Price/Cash Flow per Share, I get a 5 year median P/CF Ratio of 7.59 and a current P/CF Ratio of 10.10 a value that is 33% higher. This current high P/CF Ratio suggests that the stock is relatively expensive.

Looking at all the price check, it would appear that at this time, the stock price is not cheap and might be a bit higher, relatively speaking.

When I look at analysts' recommendations, I find Buy and Hold recommendations. There are a lot of Hold recommendations and the consensus recommendation would be a Hold. The 12 month stock price is $25.50. This implies a 10.1% total return with 5.15% from capital gain and $4.95% from dividends.

One analysts thought that ratios (like P/S, P/CF and P/B) was higher other companies in the same industry. One mentioned that others in industry were growing revenue, but this company was not. Others mentioned that the company was heavily into natural gas its problem is the weakness in natural gas prices. Another analyst mentioned that he thought that the company had good managers. Another mentioned that the yield is 5% and therefore quite good.

The National Post has a recent article called "Winter of Discontent Seen Ahead for Canada's Natural Gas Producers" and mentions ARC Resources. The author thought that gas prices will remain weak for some time. In August 2012, Jeff Young of NexGen Financial Corp. issued a Sell recommendation on this stock.

It is hard to pin down how reasonable the stock price is on this company. It would seem relatively high by a number of ratios, like P/CF and P/S. I looked at Price/Sales Ratios and the 5 year P/S Ratio is 4.07 and the current P/S Ratio is 5.26 a values some 30% higher. So comments on relatively current high ratios would seem to be valid.

ARC Resources Ltd. is one of Canada's leading conventional oil and gas companies. Its focus is on acquiring and developing long-life oil and gas properties across western Canada. Industry: Oil and Gas (Oil and Gas Producers) Its web site is here ARC Resources. See my spreadsheet at arx.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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