Canaccord Canaccord Genuity analyst Mike Mueller initiated coverage of five oil and gas exploration and production (E&P) companies on Friday.
Believing it has established itself as “the preeminent, pure-play Montney name following efforts to concentrate its asset base,” he gave ARC Resources Ltd. a “buy” recommendation.
“With the phased growth projected from Attachie in 2025/2028 and its pure play Montney asset base, we believe ARX offers investors exceptional exposure to the onset of incremental LNG export capacity coming online in North America through the balance of the decade,” he said.
Mr. Mueller thinks Arc’s diversified commodity mix and sales points “offer flexibility”, adding: “While ARX is the country’s third largest natural gas producer, and gas makes up the bulk of its total production at 62 per cent (Q1/23), the company is the largest producer of condensate in Canada. With TMX set to come online in Q1/24, regional demand for condensate is expected to grow from a point where local demand already outstrips intra-basin supply. On the natural gas front, ARX is targeting up to 25 per cent of its production to be sold into markets where it receives international (i.e., LNG) pricing (in Q1/23, JKM prices were nearly 6x NYMEX HH). We expect the company to continue adding to the supply agreements it has already penned as its production base grows.”
Emphasizing investors can expect both dividends and buybacks to “remain central to ARX’s business while it maintains a healthy balance sheet,” he set a target of $22.50 per share. The average target on the Street is $23.15, according to Refinitiv data.
Mr. Mueller also initiated coverage of these companies:
* Baytex Energy Corp. with a “buy” rating and $6 target. The average is $7.15.
“While the company’s leverage (D/CF, TTM) of 1.8 times (2023) and 1.2 times (2024) exceeds its peer group averages of 1.2 times and 0.8 times, respectively, we believe the company’s torque to oil prices offers upside while having comfort in the fact that over 65 per cent of its debt is termed out to 2027/2030,” he said. “Although its recent $2.9-billion acquisition of Ranger Oil diluted its overall asset base, it did increase its operated acreage in the Eagle Ford from 0 per cent to 70 per cent, which should increase its flexibility to deploy capital across its asset base and respond to prevailing commodity prices, in our view.”
* Crescent Point Energy Corp. with a “buy” rating and $12.50 target. The average is $13.61.
“We believe the company’s streamlined asset base, now focused in the Duvernay and Montney, has put it in a position of strength for the size of its production base (more than160,000 boe/d) and to facilitate the market’s general inclination towards a return of capital model,” he said.
* Tourmaline Oil Corp. with a “buy” rating and $75 target. The average is $80.07.
“With the company’s strong track record of distributing excess FCF to shareholders via special dividends (incremental to its base dividend) and self-funded organic growth of 6 per cent (compound annual growth rate) through 2028, TOU offers investors the best of both worlds. In our view, TOU is one of the top vehicles to gain exposure to an improving macro backdrop for North American natural gas development with the onset of incremental LNG export capacity (of which TOU already benefits from),” he said.
* Vermilion Energy Inc. with a “buy” rating and $24.50 target. The average is $25.46.
“We believe the company’s international exposure provides investors with a unique vehicle to participate in European natural gas and Brent crude prices, which sets the company apart from its domestic peers,” he said. “However, we recognize that the numerous geographies the company operates in bring increased risk from a policy standpoint, which could hamper cash flows (as was the case with the windfall taxes in 2022). We believe significant upside remains given volatility in the European natural gas market and believe Vermilion stands alone in its positioning to benefit from this.”