ARC Resources Ltd.

On my other blog I have an interview with Crystal, a young investor...continue..

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.

This first thing I should say about this stock it pays good dividend but it is in the oil and gas business, so its distributions can vary depending on the price of oil and gas. For these sorts of energy companies, people have made good money over the years. Some other energy companies pay low dividends that increase over time. An example of this would be Canadian Natural Resources (TSX-CNQ). I talked about this in a post post that I did last year.

The current dividend yield is 4.95% and the 5 year median dividend yield is 7.73%. When this stock was changing from an income trust to a corporation, its distributions came down a lot. The decrease was 55% and is a big decrease in distributions for this company. It was thought at the time companies were changing from income trusts to corporations that yield would come down to a 4 to 5% range. This is what this company has done.

The 5 and 10 year distribution change for this company is distribution decreases of 13% and 6% per year over these periods. (This has a lot to do with the 55% decrease in 2009.) However, a lot of the total return for this company is in distributions, with total return over the past 5 and 10 years at 10.25% and 20.18% per year, respectively. The distribution portion of this return is 7.86% and 12.28% per year, respectively. The capital gain portion of the total return is 2.39% and 7.89% per year, respectively. Distributions were 77% and 61% of total returns over the past 5 and 10 years.

Because dividend yield is down, you would expect to have lower distributions in your total return going forward. However, you can expect good dividend returns over time. The 5 year median Dividend Payout Ratios for this company is 120% for earnings, 62% for cash flow and 51% for adjusted cash flow. Because it is an oil and gas company, the DPRs for cash flow are more important than those for earnings. Dividends have remained flat for the last 3 years.

The outstanding shares (or units) have been increasing by 7 % and 10% per year over the past 5 and 10 years. When this company was an income trust, shareholders could directly redeem their shares through the company and this accounted for some of the change in units. The company has a DRIP plan whereby shareholders can use their distributions to purchase more shares. The company has issued shares to raise money and has also used shares for acquisitions.

Revenues for this company have increased by 3.2% and 10.8% per year over the past 5 and 10 years. Revenues per Share for this company has decline by 3.7% per year over the past 5 year. Revenues per Shares for this company have increased by 0.7% per year over the past 10 years. The difference between revenue and revenue per share changes are, of course, due to changes in outstanding shares.

Earnings per share have declined by 15% and 3.2% per year over the past 5 and 10 years. Earnings can vary depending on the price of oil and gas. The cash flow has declined by 4.7% per year over the past 5 years and has increased by 2% per year over the past 10 years. Note that this company does not have years of negative earnings or negative cash flow. Earnings and cash flow does vary from year to years. Also the Earnings/Cash Flow ratio is below 1.00.

Book Value per share has increased by 3.4% and 4% per year over the past 5 and 10 years.

The Return on Equity is 9.1% for the financial year ending in 2011. The 5 year median ROE is 9.5%. This is just below the good range of 10% to 15%. The ROE based on comprehensive income is the same as for net income. This is good.

The current Liquidity Ratio is just 0.72, which is low and this Liquidity Ratio has always been low and has a 5 year median ratio of 0.72. However, the company has a strong cash flow and if you include the cash flow less distributions in this ratio it become 1.95, a very good ratio.

The current Debt Ratio is 2.39. This ratio has always been good and has a 5year median ratio of 2.46. The current Leverage and Debt/Equity Ratios are also good at 1.72 and 0.72.

The shareholders of this company get a very good dividend yield at almost 5%, but this is oil and gas and so is risky. The other problem is that actual dividends could vary again, but over the long term you could make a very good return in dividends.

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.