Due to the fallout between Ukraine and Russia, energy prices jumped significantly last year. After falling for much of the second half of 2022, energy prices have been rising again.
With oil demand expected to rise this year due to the demand recovery in China, it could be wise to buy ARC Resources Ltd. (AETUF). I have discussed several reasons I am bullish on the stock in this piece.
The rise in oil and gas prices could be attributed to the cut in oil production by the OPEC+ nations. The OPEC+ countries, comprising Saudi Arabia and other major oil producers, announced collective output cuts totaling 1.66 million barrels per day.
According to the OPEC, global oil demand will increase this year by 2.33 million barrels per day (bpd) or 2.3%. China’s oil demand is expected to rise by 800,000 bpd, up from the last month’s forecast of 760,000 bpd last month.
According to the International Energy Agency (IEA), world oil demand will climb by 2 mb/d (million barrels per day) in 2023 to a record 101.90 mb/d, driven by a ‘resurgent’ China, which is expected to account for 90% of growth in oil demand. Oil prices could also get a boost from American refineries undergoing spring maintenance and the transition to summer gas production, which constricts supply and hikes prices.
During the first quarter, AETUF’s EPS and revenue beat analyst estimates. Its EPS came 73% above the consensus estimate, while its revenue beat analyst estimates by 36.9%. The company announced that its board had sanctioned Attachie Phase I and that the cost to build and fill the facility would be approximately $740 million.
The facility is expected to deliver approximately 40,000 barrels of oil equivalent (BOE) and includes a 90 MMcf per day natural gas processing facility and 25,000 barrels per day of liquid-handling infrastructure. The company expects to achieve full productive capacity by the first half of 2025. During its first full year of operations, Attachie Phase I is expected to contribute approximately $450 million to funds from operations.
For fiscal 2023, AETUF raised its production guidance to between 350,000 and 355,000 boe/day from the previously predicted 345,000 and 350,000 boe/day. Its crude oil production is expected to come between 8,500 and 9,000 bbl/day. Its natural gas production was raised from 1,260 and 1,270 MMcf/day to 1,295 and 1,305 MMcf/day. Moreover, its NGLs target was revised from 47,000 and 49,000 bbl/day to 49,000 and 51,000 bbl/day.
AETUF is expected to pay a dividend of $0.17 per share to shareholders on July 17, 2023. Its annual dividend of $0.50 yields 3.96% on the current share price. Its four-year average yield is 5.12%. During the first quarter, the company repurchased ten million common shares.
AETUF’s stock has gained 7.8% in price over the past three months and 3.3% over the past year to close the last trading session at $12.66. Wall Street analysts expect the stock to hit $16.45 in the near term, indicating a potential upside of 30%.
Here’s what could influence AETUF’s performance in the upcoming months:
Robust Financials
AETUF’s net income for the first quarter ended March 31, 2023, came in at C$574.90 million ($427.84 million), compared to a net loss of $69.40 million ($51.65 million) in the year-ago quarter. Its total revenue, interest, other income, and gain on risk management contracts rose 52.4% year-over-year to C$1.79 billion ($1.33 billion). Its EPS came in at C$0.93, compared to a loss per share of C$0.10 in the prior-year quarter.
Mixed Analyst Estimates
Analysts expect AETUF’s EPS and revenue for fiscal 2023 to decline 19.4% and 12.2% year-over-year to $2.08 and $4.42 billion, respectively. On the other hand, its EPS and revenue for fiscal 2024 are expected to increase 0.8% and 2.1% year-over-year to $2.09 and $4.52 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters.
Discounted Valuation
In terms of forward EV/EBITDA, AETUF’s 3.75x is 21.5% lower than the 4.77x industry average. Its 6.46x forward EV/EBIT is 19.7% lower than the 8.05x industry average. Likewise, its 0.88x forward non-GAAP PEG is 45.4% lower than the 1.61x industry average.
High Profitability
In terms of the trailing-12-month gross profit margin, AETUF’s 65.02% is 42.9% higher than the 45.51% industry average. Likewise, its 61.92% trailing-12-month EBITDA margin is 73.9% higher than the industry average of 35.60%. Furthermore, the stock’s 0.72x trailing-12-month asset turnover ratio is 9.8% higher than the industry average of 0.66x.
Solid Historical Growth
AETUF’s EBIT grew at a CAGR of 304.4% over the past three years. Its revenue grew at a CAGR of 92.5% over the past three years. In addition, its EBITDA grew at a CAGR of 105.6% in the same time frame.
POWR Ratings Show Promise
AETUF has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AETUF has a B grade for Quality, consistent with its high profitability.
AETUF is ranked #13 out of 93 stocks in the Energy – Oil & Gas industry. Click here to access AETUF’s ratings for Growth, Value, Momentum, Stability, and Sentiment.
Bottom Line
AETUF reported strong growth in revenue and earnings on the back of stronger-than-forecasted base production during the first quarter. Also, the company raised its fiscal 2023 production guidance.
AETUF’s board sanctioned the Attachie Phase I facility, which is expected to start production in late 2024. This would contribute significantly to its funds from operations. With oil demand expected to remain healthy in fiscal 2023, AETUF is expected to benefit. Given its robust financials, high profitability, and solid historical growth, it could be wise to buy the stock now.
How does ARC Resources Ltd. (AETUF) Stack up Against Its Peers?
AETUF has an overall POWR Rating of B, which equates to a Buy rating. Check out these other stocks within the Energy – Oil & Gas industry with A (Strong Buy) or B (Buy) ratings: Cheniere Energy, Inc. (LNG), Weatherford International PLC (WFRD), and Centennial Resource Development, Inc. (CDEV).
What To Do Next?
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AETUF shares were trading at $12.66 per share on Friday morning, down $0.05 (-0.41%). Year-to-date, AETUF has declined -5.07%, versus a 8.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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