ATB Capital Markets analyst Patrick O’Rourke thinks the Canadian energy market has begun to “clearly differentiate between higher and lower quality business models” over the past year, “driven by an M&A cycle that has instructively placed a premium on inventory in transaction multiples.”
“As a result of the clear differentiation, we currently view stock picking within the sector as inherently more challenging, where investors will have to weigh a trade off between lower-quality and higher-risk business models and assets at cheaper valuations and higher-quality, lower-risk assets at more expensive valuations, and the breadth of alpha is likely to narrow,” he added. “We favour higher-quality business models, at opportunistic valuations and favour names such as ARX, ATH, CVE, and TVE at this time.”
In a research report released Wednesday wrapping up earnings season in the sector, Mr. O’Rourke emphasized commodity price volatility continues to make stock picking difficult and warned further uncertainty lingers.
“[With] WTI prices now exceeding US$82.00/bbl (from $71.65/bbl at year-end 2023), companies within our coverage universe are gearing up to generate significant FCF in 2024, already seeing the TSX Energy subindex as the best performing subindex year-to-date (up approximately 14.5 per cent YTD vs the TSX at up 4.3 per cent),” he said. “Current benchmark oil prices and Canadian heavy oil differentials have already seen a considerable improvement YTD (WCS Hardisty differential has improved 37 per cent YTD to US$12.30/bbl, from US$19.50/bbl) and are anticipated to further improve through 2024 (WCS Hardisty diff Q3/24 futures are trading at US$10.95/bbl) with TMX potentially fully complete by the end of May and first waterborne exports are now anticipated by the end of June; current natural gas pricing is affected by a lack of winter heating demand, but in the near-term there is strong potential to see a La Nina event by summer 2024 (NOAA predicts a more than 60-per-cent probability by summer, >80% by late summer) following the strong El Nino winter, along with the imminent start-up and commissioning of LNG Canada, leading to a potentially improving natural gas pricing environment in H2/24 and into 2025.”
“With 2023 reserve reporting now complete for our universe, we wanted to highlight the considerable strength seen across our coverage in terms of reserve efficiency, intrinsic value per share growth, and inventory depth, highlighting some of the strongest 2023 reserve reports in our universe from ATH, SCR, and CNQ that incrementally supported both reserves magnitude and quality.”
After updating his financial models, the analyst made a series of target price adjustments. His changes are:
- Athabasca Oil Corp. ( “outperform”) to $6 from $5.50. The average on the Street is $5.86.
- Canadian Natural Resources Ltd. ( “outperform”) to $107 from $100. Average: $100.79.
- Crew Energy Inc. ( “strong buy”) to $6.50 from $7.25. Average: $6.85.
- Imperial Oil Ltd. ( “sector perform”) to $90 from $85. Average: $86.61.
- Kelt Exploration Ltd. ( “outperform”) to $8.50 from $9. Average: $8.18.
- Meg Energy Corp. (“outperform”) to $35 from $32. Average: $31.15.
- Prairiesky Royalty Ltd. (“sector perform”) to $27 from $26.50. Average: $26.31.
- Tourmaline Oil Corp. ( “outperform”) to $80 from $85. Average: $77.25.