ARC Resources converted back to a corporate structure after years as an energy income trust. Will its blue chip status help it leave behind pre-conversion resistance levels?
The Stock: ARC Resources Ltd. (ARX-T) 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 switch to corporate status and began trading on the TSX as common
stocks last week.
Income trusts have certain capital restrictions that accompany the
tax-related income benefits of the asset, so the new common-share status
will deliver opportunities for market-timing investors looking for
capital gains. This slew of transformations may also offer investors a
fresh chance to capture bullish trends. 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 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.
The Trade
From its initial public offering in 1996 until its completed conversion
last week, ARC Resources has established itself as a successful player
in the 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 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 expected to elevate petroleum stocks in the quarter ahead.
Shareholders will be looking for fresh gains if the stock rallies out of
the current pullback and pushes decisively through the $26 level. When
ARC's units peaked above $30 in 2008 they were valued at 13 times
earnings. The stock now trades at 24 times forward earnings - an
indication of the changed valuations at work.
The Downside
The energy sector risk is that the North American recovery fizzles or
China's growth slows. ARC's shares would become Stock Trends Weak
Bullish at $23 - a fair trigger to exit the trade.
I've followed your recommendations since reading your columns in the Globe & Mail, and finding they published Stock Trends arrows in their financial listings. I do find them a guide to the general market and what I should be avoiding for declining chart trends.
