CIBCTargets for the stocks I own are as follows: ARX (raised to $25.50), BTE (maintained at $8.00), CVE (maintained at $31.00), CPG (maintained at $15.00), EFX (maintained at $12.00), ERF (maintained at US$22.00), FRU (lowered to $17.00), PD (lowered to $95.00), SDE (lowered to $7.50), TVE (maintained at $5.50), TOU (raised to $73.00) and WCP (maintained at $15.00). GLTA EQUITY RESEARCH
July 13, 2023 Earnings Revision
Energy: Q2/23 Preview & Price Deck Update
A Weaker Quarter For The Sector
Our Conclusion
Due to a combination of weaker commodity pricing and production
constraints, our producers under coverage will report cash flows that are
$2.2 billion (14%) lower than first-quarter levels. Although wildfire impacts
were disclosed for many companies, we still see room for consensus
estimates to push lower in the coming weeks, as our cash flow expectations
are >10% below Street expectations. The combination of an uncertain macro
environment, delayed activity due to wildfire impacts, and a more tepid
outlook in the next six months could see some operators moderate spending
programs in H2/23 in favour of retaining free cash flow for shareholder
returns. We believe natural gas prices are likely to remain rangebound in the
near term, and maintain a bias for liquids-weighted producers. Our top ideas
include CNQ, CVE, CPG, ERF, and NVA.
Key Points:
TransMountain Expansion continues to show progress. We believe
investors are taking a “believe it when they see it” on the completion of
additional egress capacity out of Western Canada. The consistent view
continues to be focused on competitive friction for barrels out of the WCSB,
which could drive narrower heavy oil differentials for producers. We have
seen mounting concerns over the impacts of the rising cost to complete the
pipeline and how that could impact tolls for committed shippers.
FIFO-LIFO adjustments could still be a significant impact in this
quarter. We believe that conflicting factors could drive a modest tailwind for
producers like Suncor vs. Imperial Oil with respect to refining margins
through the quarter. We continue to view Q2/23 as being a heavy turnaround
quarter, which should be the larger driver of downstream margin.
Inflationary pressures are easing, but not over yet. Our discussions with
operators suggest pricing increases have largely crested. As such, we would
be surprised to see capital spending increases this quarter. Although we are
not forecasting capital spending decreases, we would not be surprised to
see producers moderate capital spending programs in H2/23, particularly for
natural gas directed drilling.
Gas pricing is likely to remain rangebound in the near term. With
storage levels across Europe and North America well above the five-year
average, we expect natural gas pricing will remain rangebound through the
summer months. We maintain a preference for liquids-weighted producers,
including ARX, KEL, NVA, and TOU.
AECO and Station 2 differentials are likely to normalize through Q3/23.
Differentials were tight to NYMEX through Q2/23 due to curtailed production
volumes. Combined with a weaker NYMEX benchmark, this should
negatively impact cash flows for producers that have heavily hedged AECO
basis at wider levels (BIR, PEY). Outage forecasts for key pipes in Western
Canada are more subdued than originally anticipated, and excess capacity
should result in reduced price volatility compared to summer 2022.