Best of BMO - september 20https://capitalmarkets.bmo.com/en/news-insights/markets-plus/bmo-equity-research-presents-best-bmo-equity-ideas/
Camilla Sutton:
It’s a really interesting story, Jim, thank you for that. Randy, what about in the energy sector? What is your Best of BMO idea?
Randy Ollenberger:
Thanks Camilla. Our Best of BMO idea is Cenovus Energy, which were rate Outperform with a target price of $33 versus a current market price in the range of $25. However, before running through our thoughts on Cenovus, I want to make a few comments on the oil market, which has been a big influence on the performance of the oil and gas equities. Oil has been volatile over the last several months and has traded lower over the last two months in particular, but we remain bullish on the oil price outlook. Despite the relative weakness we think investors need to understand that the world is in the midst of the most significant energy crisis since the 1970s. We believe that the factors weighing on oil prices are largely transitory. Firstly, demand has underperformed this year due to the global recession, rising rates, and other factors. As the recession comes to an end, we expect oil demand to resume its growth patterns that have been well established over the last decade. Second oil supply has been higher than expected as Russian oil and product exports have continued to flow into Europe despite the war in Ukraine. We expect tightening sanctions by the end of this year to start to reduce those Russian exports in 2023, which should help tighten the overall supply demand balance. Thirdly, the U.S. and other OECD countries have been releasing strategic oil reserves, and that has boosted oil supplies by as much as one and a half million barrels a day. These programs are expected to have run their course by the end of 2022, again, helping to tighten up that supply demand balance. Against that backdrop, global oil investment is not growing at a pace that's sufficient to meet future demand growth. We believe this will become increasingly evident to investors over the next several years. Now on to Cenovus. We believe Cenovus is very well positioned to benefit from a stronger oil price environment. The shares remain inexpensive relative to its peers and less than three times 2023 EBITDA while offering a free cash yield in excess of 20%. Many of the companies in the group are offering very attractive free cash yields; however, we think Cenovus could be one of the first companies to pivot to 100% distribution of that free cash flow. We think that that could happen as early as the first quarter of 2023, compared to many of its peers, which might take until the end of 2023 to reach a similar point in their distribution strategies. We also like the company's asset base. It has some of the best oil sands assets in Canada, very strong ESG performance, and a suite of downstream assets that has improved with the recent acquisition of BP’s Toledo refinery. We believe all of these factors will coalesce to drive an expansion in Cenovus’s valuation multiple relative to its peers and should drive additional share price upside. Cenovus is our top recommendation in the oil and gas group. And I'll leave it there, Camilla.