RBC Dominion Securities analyst Greg Pardy expects third-quarter financial results from Canadian energy producers to display “much stronger financial performance amid robust upstream-downstream commodity price tailwinds along with an ongoing commitment to capital discipline, net debt reduction and shareholder return.”
“Under our recut base outlook for 2024, we peg shareholder returns — dividends and buybacks — across the oil sands weighted majors below at a hefty $30-billion,” he said.
“We estimate that Canada’s oil sands weighted majors — Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil — generated free cash flow (before dividends and working capital movements) of $8.3-billion in the third-quarter (up 127 per cent sequentially), reduced net debt by $3.1-billion, repurchased $3.1-billion of their common shares (up 107 per cent sequentially as IMO resumed repurchases, including our estimate of Cenovus’ warrant repurchases) and paid/accrued cash taxes (to all jurisdictions) of about $2.2-billion (up 69 per cent sequentially).”
In a research report released Tuesday, Mr. Pardy upgraded his earnings and cash flow estimates to reflect commodity prices, share buybacks and other adjustments.
That led him to upgrade MEG Energy Corp. to “outperform” from “sector perform” with a $31 target, up from $27 and above the $27.77 average on the Street, according to Refinitiv data.
“Our third-quarter outlook for MEG incorporates bitumen production of 102,000 barrels per day (vs. 98,000 bbl/d previously), up 19 per cent sequentially following planned turnaround activities at Christina Lake completed in the second quarter,” he said. “We peg MEG’s third-quarter bitumen realization at $98/bbl, with all-in operating costs at $8.28/bbl (excluding estimated power sales of $38-million) and royalty rate of 26 per cent (on net revenue). All said, our third-quarter operating cash flow estimate for MEG sits at $470-million ($1.65 per share) with estimated free cash flow of approximately $372 million in the context of $98-million of capital investment. We peg MEG’s net debt (company definition) at $1.0-billion (US$747-million) as of September 30 (before working capital movements)—down from $1.32-billion on June 30 — amid common share repurchases of $58 million. Our 2024 outlook for MEG factors in production of 105,000 bbl/d amid a $525 million capital spending program.”
Mr. Pardy also made a series of target price adjustments:
- Baytex Energy Corp. ( “outperform”) to $8.50 from $8. Average: $7.35.
- Canadian Natural Resources Ltd. ( “outperform”) to $95 from $90. Average: $95.14.
- Cenovus Energy Inc. (“outperform”) to $30 from $27. Average: $31.38.
- Imperial Oil Ltd. ( “sector perform”) to $80 from $77. Average: $83.33.
- Ovintiv Inc. ( “sector perform”) to US$50 from US$47. Average: US$56.63.
- Suncor Energy Inc. ( “outperform”) to $51 from $49. Average: $51.86.
“Our favorite producer remains Canadian Natural Resources (Global Top 30 and Global Energy Best Ideas lists), with Suncor Energy (Global Energy Best Ideas list) remaining our favorite integrated over a one-year horizon,” said Mr. Pardy. “Enerplus Corporation remains our favorite intermediate producer. MEG Energy (recently upgraded to Outperform), Cenovus Energy and Baytex Energy round out our Outperform roster.”