ARC Resources Ltd.

Sound bite for Twitter and StockTwits is: Obviously a risky buy. The company seems to be handling the current oil price crisis well. Personally, I do not have much invested in resources because they have historically been quite volatile and not great for long term investment. Insider buying is a plus. See my spreadsheet on ARC Resources Ltd.

I do not own this stock of ARC Resources Ltd. (TSX-ARX, OTC-AETUF). When TFSA first came out, this stock was recommended for this account as it was an income trust at that point and most of the distributions were taxable. This stock is no longer an income trust and the distributions are now dividends and taxed as normal Canadian dividends.

The first thing I noticed for this company is the amount of insider buying. Insider buying is at 0.07% of market cap. This is relatively high.

This company cut their dividends by around 60% in 2009 and they have been flat until now. Currently the company cannot afford to pay their current dividend. They could just cover the dividends with earnings in 2014. Lots of analysts feel that the dividend is at risk of another cut and the company has just announced a 50% cut in dividends effective from the March 2016 dividend payment. It is expected that the company can cover their new dividend starting in 2018.

The coverage of dividends by cash flow is better. The Dividend Payout Ratio for CFPS was 69% in 2015. It is expected to decrease this year to 44% with the cut in dividends. The 5 year median DPR for CFPS is 43%.

Last year was not a good year for this company. Revenues, earnings and cash flow all dropped. Revenue in 2015 was down by 43%, earnings by 184% to a negative amount and cash flow down by 46%. This year, 2016, is expected to be better than last year.

Considering this is company is in the oil and gas industry, shareholders have not done that badly. The total return over the past 5 and 10 years is at a loss of 1.46% and a gain of 5.18% per year. The capital losses are at 6.44% and 2.12% per year. Dividends are at 4.98% and 7.30% per year. With the dividend cuts, dividend yield has decline from 6.7% to 3.3%.

The Liquidity Ratio on this stock is very good currently at 2.04. It is much higher than it usually is. The 5 year median value is just 0.75. The Debt Ratio has always been good and the one for 2015 was 2.33. The Leverage and Debt/Equity Ratios has also always been quite good and the ones for 2015 are 1.75 and 0.75.

Since the P/E Ratios are very high currently, we cannot do any analysis of a stock price based on this criterion. There is also a problem with the Graham Price because lack of or very low EPS. There is also a problem using the dividend yield because of the recent dividend cut.

The 10 year Price/Book Value per Share Ratio is 2.31. The current P/B Ratio is 1.84 based on BVPS of $9.76 and a stock price of $17.99. This stock price testing suggests that the stock price is cheap as the current P/B Ratio is some 20.1% lower than the 10 year median P/B Ratio. This may be the best test as it is not based on estimates. However a problem is that the Book Value is treading down on this stock. It is down by 12% in 2015.

The 10 year median Price/Cash Flow per Share Ratio is 8.00. The current P/CF Ratio is 9.37 and some 17.2% higher. The P/CF Ratio is based on a CFPS estimate for 2016 of $1.92 and a stock price of $17.99. This stock price testing suggests that the stock price is still reasonable but above the median.

The 10 year median P/S Ratio is 4.56. The current P/S Ratio is 4.84 based on 2016 Revenue estimate of $1,289M. This stock price testing also suggests that the stock price is reasonable but above the median.

When I look at analysts' recommendations, I find Strong Buy, Buy and Hold recommendations. The vast majority of the recommendations are a Buy and the consensus recommendation is a Buy. The 12 month stock price is $21.31. This implies a total return of 21.79% with 18.45% from capital gain and 3.34% from dividends. Of course no one really knows how the price of oil is going to go in the next while. There is not going to be a run up in the price, but there is the possibility that the price could moderate.

An article in the Calgary Herald by Dan Healing talks about investors biding up the stock price despite the dividend cut. However, the dividend cut was the right thing for this company to do. There is an interesting analysis of this company by the Investment Doctor at Seeking Alpha. An article on The Vista Voice talks about analysts giving this company a Buy recommendation.

I will have only one entry for this stock this year. However, I did a more complete report on this company in 2015 and you can see those reports here and here .

On my other blog I wrote yesterday about Stocks Stocks for the Long Run Part 2 . The next stock I will write about will be Mullen Group Ltd. (TSX-MTL, OTC- MLLGF)... learn more on Monday, February 29, 2016.

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 Ltd.

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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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