Normal Large Acquisition Digestion? Copied from Stockwatch Energy today via looneytunes
Here in Canada, one company claims to be feeling nothing but excitement for the future. Alberta Montney producer ARC Resources Ltd. (ARX), down eight cents to $7.34 on 9.62 million shares, closed its merger with fellow Montney player Seven Generations Energy last week and subsequently began hyping its postmerger plans to analysts. Scotia Capital analyst Cameron Bean has published a research note about his discussion with ARC's management. "The future looks bright," he opined, in typically obliging fashion. Although he expects ARC to go through "a period of recalibration" -- apparently his term for a drop in the share price, which has fallen to $7.34 from over $8 since the start of the month -- Mr. Bean said this is perfectly normal for a company digesting a large acquisition. Ultimately he expects ARC to "work through this process over the next several months ... [and] move forward as a stronger company."
In terms of actual future plans, Mr. Bean reported that ARC's management is planning to hold Seven Generations' production flat over the next year or so, keeping it at 180,000 to 185,000 barrels of oil equivalent a day. (ARC's premerger production was about 170,000 barrels a day.). In the past, Seven Generations' assets have produced as much as 220,000 barrels a day, but ARC is not in a hurry to bring them back to that level. Mr. Bean concluded that ARC will use these assets as a "free cash flow engine." It will use the cash in part to develop a higher-priority asset, its Attachie Montney project, where it wants to set development in motion by the end of this year. ARC is also open to increasing its dividend, said Mr. Bean, although he does not see this happening until 2022 or 2023. (The current six-cent quarterly dividend represents a yield of 3.3 per cent.)
Unlike some other acquisitive companies lately -- such as Whitecap Resources Inc. (WCP: $5.42) and Tamarack Valley Energy Ltd. (TVE: $2.30), both of which have been announcing one deal after another since last summer -- ARC is not particularly interested in further acquisitions, according to Mr. Bean. He noted that ARC may in fact look to sell some assets. It has a position in the Alberta Cardium that is producing 6,500 barrels a day and is now considered non-core in light of the expanded Montney assets. Mr. Bean did not speculate on any buyers. (One of the likeliest potential buyers happened to be the above-noted Whitecap, but its CEO pooh-poohed this rumour on BNN last month, saying Whitecap looked at these assets but decided not to buy them because of their high cleanup costs.)
Mr. Bean concluded that ARC's outlook is "positive" in the wake of its "transformational" merger. He reiterated his "sector outperform" rating on the stock and kept his price target at $11, compared with today's close of $7.34. A disclaimer at the bottom of his research note indicated that his employer, Scotia Capital, expects to receive or seek compensation from ARC within the next three months for unspecified investment banking services.