Excellent article - ESI mentioned Canada Stocks Take Two Days of Gains To Near 265 Pts, Buoyed By Commodities; BMO With Oil and Gas Q2 Preview
04:11 PM EDT, 07/18/2022 (MT Newswires) -- Canada's main stock market lost near 40 points over the final hour -- following the lead from US markets that turned negative over the second half of the session -- but, here, at least the Toronto Stock Exchange, still managed to hold on to gains of more than 200 points or more than 1%, with the resources heavy index buoyed by higher commodity prices. Among sectors, Energy gained 2.75% and Materials was up more than 1%.
Monday's gains add to the 65 points gained Friday, and this may signal something of a change in sentiment to positive for many after the Index lost close to 700 points over the first four days of last week. Market watchers such as John Gibson over at BMO Capital Markets is among those who seem to be upbeat on the outlook, not least for commodities.
With Q2 2022 earnings set to begin this week, BMO provided an update and adjusted estimates and target prices for its Canadian oilfield services coverage group. BMO believes recent weakness in equity performance creates a "compelling opportunity" for investors to enter the space. It said pricing appears to have taken a "significant step change forward" during the quarter, and this combined with high utilization levels, is driving strong earnings torque. But, it added, investors should be prepared for continued volatility.
Among Key Points, BMO cited Q2/22 Activity Levels Above Expectations. It noted rig counts in Canada and the US averaged near 719 rigs (up near 13% Q/Q) and near 131 rigs (up near 70% Y/Y), respectively. Both figures were modestly above expectations for the quarter. BMO expects upward momentum in North American rig counts into year-end 2022/early 2023 and was tweaking its rig count assumptions up modestly for 2022. Overall, BMO expects rig counts should average more than 210 rigs in Canada during the second half of 2022 and should stay well north of 750 in the US.
And BMO cited Pricing Step Changes in Q2/22. The bank now believes leading edge drilling day rates are moving into the upper $30,000/day range (from the low $20,000/day range during the COVID-19 downturn), while spot work for pressure pumping has increased 30-40% in some cases. Overall, it said, the market has not experienced an equipment supply/demand balance this tight in decades, which in BMO's opinion, gives oilfield service companies additional leverage to move pricing higher and could materially impact results moving forward. "Managing cost inflation continues to present a key challenge for service companies, although the majority of items appear to be passing through in terms of net increases," it added.
BMO also cited Multiples Becoming Very Attractive. It noted the recent equity price weakness, coupled with an even better financial outlook for the group has caused valuations to compress. In particular, it highlighted STEP Energy Services (STEP.TO) and PHX Energy Services, (PHX.TO) which are trading at extremely inexpensive levels of under 2x 2023 EV/EBITDA, although the majority were now trading at under 4x 2023 numbers, several turns below historical norms.
2H/22, BMO noted, is 'Shaping Up Positively'. According to BMO, "significant" increases in earnings should occur in the second half of 2022 as more equipment moves into higher pricing thresholds. As such, BMO's 2022 EBITDA estimates now reflect a near 50% improvement relative to 2021. For 2023, the bank was incorporating a further 25% Y/Y lift in EBITDA estimates.
BMO's Top Picks: The bank continues to like CES Energy Solutions (CEU.TO), Ensign (ESI.TO), Pason (PSI.TO) and Secure Energy Services (SES.TO), "which each hold significant torque to rising activity levels and pricing." On the pressure pumping side, STEP Energy Services is its top pick given its inexpensive valuation relative to Trican (TCW.TO).
Of commodities themselves today, gold prices rose on Monday as the US dollar fell off a near 20-year high with investors moving to risk assets. Gold for August delivery closed up $6.60 to US$1,710.20 per ounce.
Also, West Texas Intermediate crude oil rose back above the US$100 mark as Saudi Arabia declined to agree to raise production in response to a state visit from US President Joe Biden, though concerns over a potential recession and Chinese demand limited gains. WTI crude oil for August delivery closed up $5.01 to US$102.60 per barrel, Marketwatch reported. September Brent crude, the global benchmark, was last seen up $4.34 to US$105.50 per barrel, while Western Canada Select was up $1.85 to US$78.27 per barrel.