On today's TSX Breakouts report, there are 53 stocks on the positive breakouts list (stocks with positive price momentum), and 12 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a reader's request for a profile on a stock. It is a stock that I would typically not feature as the share price is struggling to gain traction. The stock appeared on the positive breakouts list earlier this week; however, the share price appeared to be merely bouncing off of a low. Year-to-date, the stock has been a laggard within the S&P/TSX composite energy sector. From a fundamental basis, the company has a strong balance sheet, attractive yield, and reported solid second quarter financial results. The company featured today is ARC Resources Ltd. (ARX-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Calgary-based ARC Resources is a gas-weighted energy company with core projects located in northeast British Columbia and Alberta.
This year has been a challenging one for many natural gas stocks, including ARC Resources, with the commodity price down sharply since the beginning of the year. In recent months, natural gas prices have been uneventful, hovering around the U.S. $3/MMBtu (million British thermal units). Right now, we are in the quiet "shoulder season", a period when demand is low. Last week, the weekly natural gas storage report released from the U.S. Energy Information Administration (EIA) was negative, reporting a larger-than-expected build in natural gas inventories. Commodity price weakness appears to be keeping investors on the sidelines.
Looking forward, in a report released from the EIA on Sept. 12, the Henry Hub natural gas spot price is forecast to rise to an annual average of U.S $3.29/MMBtu in 2018, up from an expected $3.05/MMBtu average in 2017.
Another headwind, or challenge, to consider is the rising Canadian dollar relative to the U.S. dollar, reducing the price the company receives for its products, which are denominated in U.S. dollars.
Turning to the company's operational performance, after the market closed on Aug. 3, the company reported second quarter financial results that were in-line with expectations.
Importantly, the company's capital budget for 2017 was increased by $80-million to $830-million, aimed at accelerating the company's growth. This positive news that helped lift the share price by 5 per cent the following trading day. The company reported solid financial results with production of 113,410 barrels of oil equivalent per day (70 per cent gas weighted, 30 per cent oil and liquids) and cash flow per share of 48 cents, a penny ahead of the Street's expectations. The company's has a healthy balance sheet with a net debt to annualized funds from operations ratio of 0.8 times, below management's targeted range of between 1.0 and 1.5 times. For 2017, management increased the lower end of its production guidance to between 120, 000 boe/d and 124,000 boe/d up from its previous guidance of between 118,000 boe/d and 124,000 boe/d.
The company is expected to report its third quarter financial results in November. The consensus cash flow per share estimate is 49 cents.
Dividend policy
The company pays its shareholders a monthly dividend of 5 cents per share or 60 cents per share on a yearly basis. This equates to an annualized dividend yield of 3.4 per cent.
In the first half of 2017, the payout ratio amounted to 30 per cent, which is within management's targeted payout ratio of between 25 per cent and 30 per cent.
Analysts' recommendations
There are 18 firms that provide research coverage on this company, of which 16 analysts have buy recommendations and just two analysts (the analysts at BMO Capital Markets and Morningstar) have hold recommendations.
Financial forecasts
The Street is forecasting a cash flow per share of $2.02 in 2017, rising to $2.29 in 2018.
In recent months, earnings estimates have increased slightly for this year; however, forward estimates for 2018 have fallen. For instance, three months ago, the consensus cash flow per share estimates were $1.96 for 2017 and $2.37 for 2018.
Valuation
The stock can be valued using various methodologies such as using an enterprise value-to-debt adjusted cash flow (EV/DACF) multiple or price-to-cash flow (P/CF) multiple. According to Bloomberg, the stock is trading at a P/CF multiple of 7.6 times the 2018 consensus estimate, below its historical three-year average multiple of approximately 8.5 times.
The one-year consensus target price is $22.09, suggesting there is 25 per cent upside in the share price over the next 12 months. Target prices are concentrated in the low $20 range. Individual target prices provided by 17 firms are as follows in numerical order: $19, three at $20, 21, $21.50, four at $22, four at $23, two at $24, and $26.
Revised recommendations
Since the beginning of August, four analysts revised their target prices – the majority of which reduced their expectations.
In September, Brian Krisjansen, the analyst from Macquarie, reduced his target price by $1 to $21.50.
In August, Travis Wood, the analyst from National Bank Financial, tweaked his target price, lifting it to $20 from $19. Amir Arif, from Cormark, slashed his target price to $23 from $28. Andrew Frew from Credit Suisse cut his target price to $23 from $26.
Insider Transactions
Recent insider transaction activity has been mixed with both a buyer and seller in the public market.
On Sept. 21, board member John Dielwart sold 15,000 shares at an average price of $17.857 per share, leaving a portfolio balance of 106,995 shares.
Taking an opposing approach, on Aug. 23, chairman of the board of directors Harold Kvisle purchased 10,000 shares at an average price per share just under $16, increasing his portfolio balance to 115,000 shares. The previous day, Mr. Kvisle bought 5,000 shares at an average cost per share of $15.88.
Chart watch
Year-to-date, the share price is down over 23 per cent and has been a laggard in the S&P/TSX composite energy sector. The share price remains in a downtrend and is trading just above its eight-year low of $15.04, set on January 13, 2016.
On a positive note, month-to-date, the stock price is up 8 per cent, relatively in-line with the TSX energy index.
In terms of key resistance and support levels, the stock price has initial overhead resistance around $19, close to its 200-day moving average (at $18.69). Should the share price retreat, there is downside support around $17, near its 50-day moving average (at $16.82). There is strong support at $15, close to its multi-year low.
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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