Natural Gas Is Heating Up: Time to Buy This Top TSX Energy Stock

Here’s why investors may want to consider Arc Natural Resources (TSX:ARX) stock as a top energy stock to buy right now.

| More on:
Burning gas and electric cooker rings

Image source: Getty Images

Boy, how the energy sector is heating up right now. For top natural gas-oriented energy stock Arc Resources (TSX:ARX), this is certainly welcome news for investors. Indeed, for much of 2020 and 2021, Arc has been a value play that many investors simply didn’t want to touch.

That makes sense. Natural gas has been one segment many pundits have pointed to as oversupplied. The thought was that demand would never outpace supply, and new supply coming onto the market would depress prices further. Seeing where natural gas prices have gone in recent years proves this point.

However, in recent days, we’ve seen a sharp turnaround in the price of natural gas. Accordingly, over the last month alone, ARX stock is up more than 25%. That’s not bad, given the current state of the energy sector right now.

Here’s why I think Arc is a top energy stock to consider right now.

Risk/reward ratio is favourable for this energy stock

Rising natural gas prices obviously improve the risk/reward ratio for any company operating in this sector. For Arc, one of the major North American players in this regard, this is a fact that investors appear to be pricing in today.

Of course, analysts have jumped on this fact, highlighting the value ARX stock holds relative to its peers. Canaccord Genuity analyst Anthony Petrucci believes that this commodity price surge greatly improves Arc’s investment thesis. With such stocks with high exposure to natural gas prices trading at roughly 2.7 times EV/EBIDTA, there’s a lot to like about this stock from a valuation perspective.

On a cash flow multiple basis, this thesis rings true as well. Indeed, there’s no doubt Arc’s multiples are low right now. It appears investors may not trust the fact that natural gas prices will remain elevated for a significant period of time. And that may be true.

However, should the market for natural gas be pricing in more stability at higher levels, Arc could be a top energy stock to buy right now.

Bottom line

I have no doubt Arc will post some seriously positive numbers in the quarters to come. However, whether the market acknowledges these cash flows as sustainable or not is the question investors need to ask.

Commodities have recovered in impressive fashion from last year’s pummeling. That’s true. However, natural gas remains one of the more volatile commodities to bet on, and this has been proven over time. Accordingly, there is a level of risk with ARX stock investors are taking.

That said, given the risk/reward ratio of this company, I’m inclined to view this value stock favourably. Indeed, there are few pockets of value in the market as obvious as Arc right now. Accordingly, those seeking value can’t go wrong by considering Arc at these levels.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any of the stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »