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Stock Trends

ARC riding wave of trust conversions Add to ...

The Stock: ARC Resources Recent price: $24.99

The Trend

With the arrival of 2011 there was the long-expected conversion of many TSX-listed income trusts. More than 50 business income trusts completed their conversions to corporate capital structures and began trading on the TSX as common stock last week, as a number have already in response to the changes in tax treatment of income trusts announced on Oct. 31, 2006. As newly constituted dividend-paying stocks some of these issues will entice new trading activity reflective of a shift in the character of shareholder expectations.

More technical analysis

Income trusts have certain capital restrictions that accompany the tax-related income benefits of the asset, so the new common-share status will deliver new opportunities for market-timing investors looking for capital gains. This slew of transformations may offer investors a fresh chance to capture bullish trends as their share prices begin to achieve new valuations associated with the market's expectations.

Some of the newly converted common stocks are in the energy sector, including well-known large-capitalization entries such as Canadian Oil Sands ,Penn West Petroleum and Enerplus Corp. Despite a recent pullback, the equity price trend of the oil patch remains as strongly bullish. The price of crude oil slipped below $90 (U.S.) last week as the U.S. dollar lifted with a revival of the flight-to-safety trade. Europe's debt woes will continue to incite capital flows that will affect other asset prices, but investors focused on the fundamentals of the energy sector will like the technical pullback in petroleum equity prices during recent trading sessions. Energy sector investors looking to buy on weakness should also consider some of the newly converted oil and gas players that have left behind their income trust shells.

The Trade

From its initial public offering in 1996 until its completed conversion to a dividend-paying corporation last week, ARC Resources has established itself as a successful player in the Canadian oil and gas sector, growing from its original $180-million capitalization to its current $6.9-billion market cap as an income trust. In late 2008 its units achieved membership in the S&P/TSX 60 index, and its stock will continue to attract institutional ownership as a result of its blue-chip status. Of interest now, though, is how the stock moves through price resistance levels established before the recent conversion.

The stock has been in a Stock Trends Bullish category since mid-November, after it rallied above the top end of a long-term trading range. The stock (units at the time) subsequently dropped to the 13-week moving average support line before rallying again to $26 before the Christmas holiday, a level that now serves as a price resistance marker. The stock is again retreating, trading below $25 in the Monday morning session. Technical traders would expect support above $24, so the early weakness gives a nice cue for a rally back to its 52-week high as the energy sector rebounds.

The Upside

Sector strength will guide this trade, with relatively firm crude oil prices helping to elevate petroleum stocks in the quarter ahead. That is the expectation. Shareholders will be looking for fresh gains if the stock rallies out of the current pullback and pushes through $26 decisively. When the ARC's units peaked above $30 in 2008 they were valued at 13 times earnings. Currently, the stock is trading at about 24 times forward earnings - an indication of the changed valuations at work. Perhaps that multiple could be pressed further - Enerplus's shares, as a comparison, now trade over 40 times earnings - and ARC's shares will deliver a 20-per-cent gain from their current level.

The Downside

The energy sector risk - that North American economic recovery fizzles or China's growth transforms from exponential to more subdued arithmetic gains - is a concern. ARC's shares would currently become Stock Trends Weak Bullish at $23 - a fair trigger for a trade exit.



Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca

Related contentRelated: Buying at ARC Energy Trust



 
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