ATB Capital ATB Capital Markets analyst Amir Arif expects Canadian energy exploration and production companies to report “solid” third-quarter results, pointing to “the move up in WTI since late June and higher sequential production levels, with the second-quarter impact of wildfires and seasonal turnaround activity now behind us.”
“We expect key themes to include a more active quarter in terms of operational activity and well results relative to the seasonally slower Q2/23 activity levels, the timing efficiency of Q3 capex spend and potential impact on Q4 spend levels, the impact of the USD move, and the extent of hedges being layered in with the move in WTI,” he said. “On the operational front, we do expect key operational activity updates from several producers including BTE, CPG, CJ, IPO, and KEC.
“In terms of capex, given the efficiency of drilling and lack of disruptions in the quarter, Q3/23 spend levels should be slightly higher (we are 3.5 per cent above consensus on capex levels), suggesting companies will need to slow activity in Q4/23 or potentially increase full-year budgets slightly. Although the USD was fairly flat, on average, during the quarter relative to last quarter, the USD strengthened vs CAD, from 1.324 at end of Q2/23 to 1.358 at the end of Q3/23. This will have an impact on companies with meaningful USD-denominated debt (BTE, VET, CPG). On the hedging front, based on our conversations with producers, hedging activity had been picking up given the simultaneously stronger USD and higher WTI prices.”
While noting the pullback in share prices over the last week, Mr. Arif reiterated his “positive” outlook on the sector, citing “clean balance sheets, return of capital strategies, and 2024 FCF yield and EV/DACF valuations.”
“With the move up in WTI relative to H1/23, capital discipline in the industry will likely be in focus heading into 2024 guidance releases post quarter-end,” he added.
“On the large cap side, VET moves above BTE in our pecking order, though BTE remains a close second. On the midcap side, KEC remains a favorite name in light of upcoming catalysts. On the small cap side, HME remains our top idea,” said Mr. Arif.