Desjardins Securities analyst Chris MacCulloch thinks fourth-quarter earnings season for the Canadian energy sector “revealed the growing dichotomy in the sector as oil producers continued benefiting from relatively strong commodity prices while eagerly anticipating further tightening of WCS differentials with the impending startup of TMX.”
Conversely, it was a much more challenging environment for natural gas–weighted producers now staring down one of the bleakest short-term price outlooks in recent memory, which forced industry to re-evaluate development plans while formally acknowledging the painful reality of moderating capital returns,” he said.
“Results closely aligned with consensus expectations as the Street appeared to have been properly calibrated for a slight moderation in sector cash flows relative to 3Q23. That said, there were a handful of notable standouts, with CNQ, CPG, CR, CVE, ERF, NVA, SDE and TPZ all posting stronger-than-expected cash flow prints. SU and VET also reported stellar results, although headline numbers were positively impacted by non-recurring tax savings — namely, the successful harvesting of tax pools from the TotalEnergies Canada transaction (68 cents per share) and a reversal of the Australian petroleum resource rent tax (PRRT) accruals following last year’s extended Wandoo outage (16 cents per share).”
In a research report released Friday, Mr. MacCulloch adjusted his target prices for most of the producers in his coverage universe, which he said reflects “significant” adjustments to his 2024 natural gas and crack spread forecast.
“While we have seen greater evidence of multiple expansion as equities continue outperforming the underlying commodities, further thinning returns to target, we still believe there are select pockets of value in the sector,” he said.
“Our top picks are CVE (large-cap oil), TOU (large-cap natural gas), CPG (small/ mid-cap oil), AAV (small/mid-cap natural gas), VET (special situation) and TPZ (royalty).”
The analyst raised his targets for these companies:
- Athabasca Oil Corp. ( “buy”) to $5.75 from $5.50. The average on the Street is $5.96.
- Cenovus Energy Inc. ( “buy”) to $29.50 from $28. Average: $30.22.
- Crescent Point Energy Corp. ( “buy”) to $12.50 from $12. Average: $13.04.
- Enerplus Corp. ( “tender”) to $19.25 from $17.50. Average: $24.15.
- Imperial Oil Ltd. ( “hold”) to $88 from $86. Average: $87.31.
- MEG Energy Corp. ( “hold”) to $31 from $30. Average: $31.77.
- Suncor Energy Inc. ( “hold”) to $48.50 from $46. Average: $51.74.
- Tamarack Valley Energy Ltd. ( “buy”) to $4.75 from $4.50. Average: $4.85.
Mr. MacCulloch cut his targets for these stocks:
- Arc Resources Ltd. ( “buy”) to $29 from $29.50. Average: $26.56.
- Crew Energy Inc. ( “buy”) to $6.25 from $6.50. Average: $6.75.
- Nuvista Energy Ltd. (“buy”) to $14.75 from $15. Average: $15.02.
- Pine Cliff Energy Ltd. ( “buy”) to $1.25 from $1.50. Average: $1.51.
- Spartan Delta Corp. ( “buy”) to $4.50 from $4.75. Average: $4.66.
- Tourmaline Oil Corp. (, “buy”) to $75 from $76. Average: $76.50.
- Vermilion Energy Inc. (“buy”) to $20 from $20.50. Average: $20.54.
“Going forward, 1Q24 financial reporting is just around the corner, which will likely continue driving incremental support for liquids-weighted producers and further pain in Gasland,” concluded Mr. MacCulloch. “Either way, we expect industry to continue gradually accelerating capital returns toward 100% of FCF, with a particular emphasis on share buybacks despite the recent expansion of valuation multiples toward historical averages. Otherwise, sector consolidation will remain at the forefront of investor discussions as producers continue seeking opportunities to enhance profitability through operational and financial synergies while high-grading their respective asset base and strengthening inventory depth. Tick tock.”