ARC Resources (TSX:ARX): A Safer Choice in Uncertain Market Conditions

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Investors have many profitable options on the TSX in 2022, especially among Canadian oil stocks. The energy sector has been in a tear for most of the year due to rising commodity prices. Investors are taking the opportunity to take advantage of the strong rebound after the global pandemic wreaked havoc on the industry in 2020.

One action that should be high on your shopping list is ARC Resources Ltd. (TSX: ARX). In addition to being a prolific revenue stream, Canada’s third-largest natural gas producer and largest condensate producer is a safe bet in uncertain market conditions and heightened volatility.

As of August 19, 2022, ARC (+60.9%) outperformed the energy sector (+43.7%) and the broader market (-5.2%) year-to-date. Over the past 3 years, energy stock has produced a healthy return of 253.2%, a compound annual growth rate (CAGR) of 52%. At $18.27 per share, the one-year price return is 138.5%.

Competitive advantages

ARC prides itself on its diverse portfolio of high-quality, resource-rich properties. The $12.1 billion oil and gas company operates in the Montney region of Alberta and northeast British Columbia, where assets have significant growth potential. According to management, the oil and gas producer creates shareholder value through a combination of stable players, technical expertise and a risk management approach.

Low-cost operations and geographic diversity also position ARC to meet long-term energy demands. However, management is keen to stress that responsible development has long been a central corporate objective and adds that it has always been at the heart of how ARC does business.

Its President and CEO, Terry Anderson, said, “Top-decile environmental and social performance, transparency, and Indigenous and stakeholder engagement will be imperative as the energy transition continues. One of the main goals is to become the progressive energy leader in Canada.

Save Free Funds Streams

In the second quarter of 2022, ARC once again showed the strength of its market diversification strategy by achieving higher average prices than local benchmarks for both natural gas and condensates. This pricing advantage contributed to strong financial results for the quarter ended June 30, 2022. Net income reached $762.9 million, compared to a net loss of $123 million in the prior year quarter. ARC’s net income of $693.5 million for the first half of 2022 was 1,160.9% higher than the same period last year.

Cash flow from operating activities increased 139.6% year over year to $1.09 billion. Free funds flow of $677.3 million (+67% from Q1 2022) in the quarter was a 26-year high. The higher free cash flow per share helped the company further strengthen its balance sheet and return additional capital to shareholders.

Significant and growing dividends

Management reiterated that the dividend is the primary mechanism for returning capital to shareholders over the long term. In addition to maintaining a solid balance sheet and offering competitive returns, the company is committed to paying a significant dividend.

Additionally, the payout should grow with the underlying profitability of the business and be sustainable throughout the commodity cycle. In the second quarter of 2022, $406 million or 40% of ARC’s free funds flow was dedicated to paying dividends and repurchasing shares. If you take a position today, the dividend yield is a decent 2.65%.

ARC Resources is indeed a solid energy stock today. Potential investors may receive recurring income streams through dividends and could also derive considerable capital gain from price appreciation.

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