Desjardins Desjardins Securities analyst Chris MacCulloch thinks recent market volatility has “provided a compelling opportunity for investors to pick up exposure to the Canadian E&P sector, which continues to benefit from windfall commodity prices.”
In a research report released Tuesday, he made minor tweaks to his commodity price forecasts, including trimming his WTI price assumptions for the second half of 2022 and 2023 to US$100 per barrel and US$90 per barrel, respectively, from US$102.85 and US$100 based on a “more cautious” near-term outlook.
“While we believe that recessionary fears are warranted given the abrupt shift in monetary policy, from our perspective, most equities are already pricing in an economic downturn following the recent market correction,” said Mr. MacCulloch. “Meanwhile, we continue to see robust FCF yields across the sector, providing further support to balance sheet deleveraging and capital returns. Despite our generally upbeat tone, we have started normalizing our rating system to reflect diminishing returns to target following an extended period of sector outperformance when we were carrying Buy ratings across the Canadian E&P landscape.”
For large-cap stocks in his coverage universe, Mr. MacCulloch’s target price adjustments were:
- Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $95 from $100. Average: $90.76.
- Cenovus Energy Inc. (CVE-T, “buy”) to $31 from $32. Average: $31.56.
- Suncor Energy Inc. (SU-T, “buy”) to $57 from $60. Average: $55.79.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $91 from $80. Average: $90.73.
“We expect another exhilarating quarter jam-packed with cash flow beats and increased returns to shareholders as industry benefited from what may have been, in hindsight, the top of the commodity price cycle, at least on the oil side, particularly for the integrated producers capturing record crack spreads,” he said. “Inflationary pressures will be another major theme, with several producers likely to announce increased capital spending programs. We have attempted to account for both trends by modelling enhanced shareholder returns for those producers that have provided explicit guidance while also ramping capex assumptions. All that said, we see ATH, AAV and HWX offering the largest upside potential between our 2Q22 CFPS estimates and consensus expectations.”