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ARC Resources: Buying On The Cheap

Mar. 05, 2021 7:12 AM ETARC Resources Ltd. (AETUF), SVRGF, ARX:CA25 Comments


  • The combination will increase the percentage of liquids produced by ARC Resources.
  • Both companies are Montney producers.
  • The all-stock deal means that debt will remain low.
  • The dividend will likely continue to vary with business conditions.
  • Both companies own their midstream operations.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »

ARC Resources (OTCPK:AETUF) (ARX.TO) and Seven Generations Energy (OTC:SVRGF) (Vll.TO) have announced a business combination that will leave ARC as the surviving entity. Both are considered Montney producers. The majority of the business will be in Alberta with a significant amount in British Columbia. This combination will produce a very significant competitor and it jump starts the ARC Resources transition to more liquids production.

(Canadian Dollars Unless Otherwise Stated)

Source: Business Combination Presentation On Both Company Websites and Filed With SEDAR February 2021.

This all-stock transaction will keep the debt at very conservative levels for the combined company as shown above. There is some hope that economies of scale and continuing technology improvements will provide some immediate benefits to the merger.

The other goal of the combined entity achieving an investment grade rating is very attainable given the low debt shown above.

The dividend is a little more suspect because Canadian companies will not hesitate to cut the dividend if industry conditions head South. Therefore this entity is best reviewed as a variable distribution entity. So the dividend cannot be relied upon as it could be elsewhere. Income investors need to note that the balance sheet will come first.

Source: Business Combination Presentation On Both Company Websites and Filed With SEDAR February 2021.

These two companies, like many in Canada, own their own midstream operations. That can be a very valuable asset in an age where there is considerable opposition to new pipelines in many areas. The area shown on the map is generally supportive of the oil & gas industry. However, there are significant chunks of Canada that oppose oil & gas interests.

For a long time, the goal of the infrastructure was to avoid exposure to AECO pricing of natural gas. That appears to be no longer true at the

I analyze oil and gas companies like ARC Resources and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

This article was written by

Long Player profile picture
I am a high school teacher for a decade. I am now retired.  Before that I was an analyst (operations and financial) and for a short time a Controller I have a B.S. with an emphasis in Accounting and an MBA (for which I studied Finance, Economics, and Management) I passed the CPA exam on the first try and am a retired CPA in the state of Maryland. I have a high school teaching credential and an MA in Math Education

Occassionally write articles for Rida Morwa''s High Dividend Opportunities https://seekingalpha.com/author/rida-morwa/research

Occassionally write articles on Tag Oil for the Panick High Yield Report


Analyst’s Disclosure: I am/we are long AETUF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (25)

Jim Wallingford profile picture
Analysts are going to have to adjust their estimates. Consensus was C$.18 for Q1 according to Yahoo Finance versus the C$.50 just reported. That large beat makes some of the price targets of C$12-C$14 look attainable.
Long Player profile picture
@Jim Wallingford Hard to tell though as sometimes one time things swing a quarter quite a bit.
Jim Wallingford profile picture
@Long Player Good point. The impairment reversal of C$112 million accounts for ~C$.32 per share of net income, leaving the C$.18 consensus as "real" earnings. Investors seem to like the results. Up nearly 8% on heavy volume in Toronto. Notice my smart buy at C$7.52, up 17% in 2 weeks! God I'm good! LOL
Long Player profile picture
@Jim Wallingford The thing many don't realize is that in Canada you can recover an impairment. That cannot happen in the US. Then the market compares earnings without really digging in .
Jim Wallingford profile picture
Bought some more today at C$7.52. Price targets are moving up with the exception of National Bank (C$12.50 from C$13). Lowest is C$9.50. Recommendations remain bullish at Outperform. The chart shows the price is near the bottom of the range for the last month. Wouldn't be surprised the price would test the C$7.16 low of March 25. My trailing stop is set at C$7.13.
Consensus earnings estimate for this year is C$.76, a forward P/E of less than 10. Analysts are never wrong, right?
If the merger goes well this stock could gain 50%. If the merger turns out to be a cluster-f, then my stop gets exercised for a loss of about 6%.
With a 3% yield this is a company I want to own. At the right price, of course. The market will tell me what that price is when the short-term bottom is hit. I think that bottom was hit yesterday at C$7.36 but it could re-visit that C$7.16 mark.
theheckwithtech profile picture
Short interest more than doubled as of March 15th from the previous month. From 11 million to over 22 million on a stock with an average volume of around 67,000. Seems risky long or short right here.
Jim Wallingford profile picture
@theheckwithtech It's nearly 27 million as at Mar 31. The shorts are betting the merger does not go smoothly? Earnings estimates imply a P/E for this year of around 10, falling to less than 8 next year. Pretty cheap for a BBB rated company paying over 3%. Those short shares could provide a boost if the company continues to perform.
The volume you cite if for the US market. Three month average for the TSX is ~3.3 million.
Long Player profile picture
@Jim Wallingford the shorts may just be locking in profit by selling stock they expect to receive in the merger. You never know for sure when it comes to shorting.
Jim Wallingford profile picture
Down over 5.5% today on the TSX and 6%+ in the US. Volume higher than average but not cataclysmic. Could be a good entry point here but I'm waiting for a reversal before buying more. Anyone see any news causing the decline? Or is this just profit-taking?
Long Player profile picture
@Jim Wallingford There is news that some gas players were downgraded by another firm (see CRK). Now that the freeze is over there are a bunch of brokers that cannot wait to say "sell" because someone has a profit and they want a pat on the back.
Thanks for articles like this. I bought a lot of Junior Canadians back in early December. I hold both Co's named here. I recently took some profits on PEYUF and JRNGF, each up respectively about 100% and 200%+; not a bad move in 4 months 😛 Most of my others have nice gains not quite as luxurious.
@Long Player, what is your strategy in the energy market as far as taking some profits on your investments? Are you keeping 100% in or taking some profits off the table?
Long Player profile picture
@Boomshakalakah The one I sold so far was GTLS. I lightened up a little on AM to refinance my house. But am still very much overweight on AM
@Long Player, thank you! I always struggle on when to take some profits off the table on how much! And try not to be too greedy even though I feel like the energy market still has a lot of gains left!
Long Player profile picture
@Boomshakalakah I saw one book on this and its an old one by Justin Mamus titled "When to Sell". I think 99% of the books out there tell you when to buy and then let you guess when to sell.
For me, ARC is one of those I may just hang onto because its conservatively managed. So no matter where we are in the business cycle, it is going to be around tomorrow.
But the downcycle this last time was so long and so vicious that I suspect it will take us awhile to get back to normal.
Jim Wallingford profile picture
Although the takeover of the equity in VII is through a share issue (725 million combined in the new company) Arc is raising C$1 billion by issuing senior unsecured notes. These are rated BBB by DBRS with rates of 2.354% on the five year tranche and 3.465% on the 10 year. The investment rating on the debt plus the low rates show the strength of the balance sheet. A rough calculation shows debt/equity increasing from ~.27 to ~.63. Still conservative.
Adding cash flow for the two yields ~C$1.5 billion and free cash flow of ~C$400 million (TTM for both as at Dec 31,20). 400/725 gives free cash flow per share of C$.55, more than enough to cover the current C$.24 annual dividend and provide increased capex or increased shareholder returns. I realize these are just "back of the napkin" calculations but the numbers look promising.
The future of natural gas looks bright and Arc will be there to reap higher returns.
I'd be a buyer of this at current prices in spite of the significant dilution.
Long Player profile picture
@Jim Wallingford ARC has generally been very conservative. So I don't see much long term risk in the company from these prices.
Jim Wallingford profile picture
@Long Player Second and third that.
What I read is this brings no value to seven gen but brings liquid production to Arc, and seven gen share holders lose a superior CEO, I sold 1/2 my positions in Seven Gen and put it in Tourmaline, I’ll be patient with the other 1/2.
Full_Package profile picture
@robmclaughlin99 Smart move. There will be significant challenges merging the two companies. The author points out some interesting longer term opportunities, but Tourmaline is a better place to keep your money while these pan out.
Long Player profile picture
@robmclaughlin99 Definitely possible. ARC has some of the most productive natural gas plays in North America. Their profitability is definitely up there. But this will add flexibility.
Long Player profile picture
@Full_Package I have not been a fan of Tourmaline for some years. They really have not done much since I wrote an article comparing them to Peyto. But they did avoid what happened to Peyto with dry gas production.
Excellent Article , the industry is rebounding nicely.
Long Player profile picture
@JoeMonte Certainly looks that way
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