Upgrade Canadian oil-weighted energy producers continued to create “significant” free cash flow in the third quarter, said Scotia Capital analyst Jason Bouvier, emphasizing most are “maintaining their capital discipline with healthy contributions to debt repayment, increased dividends and share buybacks.“
“This has not gone unnoticed by the market with the Canadian Large Caps and SMID Cap oil weighted companies up 30 per cent and 46 per cent, respectively in the past 6 months,” he said in a research report released Friday. “Even with the run-up, FCF Yields continue to remain robust under futures strip pricing. We continue to believe the Canadian oil space offers tremendous value, but also think investors will need additional clarity on de-carbonization costs before the valuation gap (between Canadian and U.S.) begins to narrow. We expect the federal government to provide additional details on both incentives to de-carbonize as well as the Clean Fuel Standards over the coming months.”
In a post-quarter review of ratings and target prices for companies in his coverage universe, Mr. Bouvier upgraded Imperial Oil Ltd. one of his top large-cap picks, to “sector outperform” from “sector perform.”
“IMO’s upstream performance continues to improve and we see upside to management’s plan to reach 280 mbbl/d (gross) at Kearl by 2024/25,” he said. “The company’s downstream assets give IMO exposure to improving refined product demand and the advantaged Canadian refined product market. IMO’s net debt will hit zero in Q1 and the company is committed to maintaining capital discipline. As such, we believe the company will materially increase shareholder returns via both increased dividends and SBB. The company recently accelerated the pace of its NCIB. We expect further clarity regarding shareholder returns to be a meaningful catalyst for IMO.”
His target for Imperial Oil shares rose to $52 from $48. The average on the Street is $47.63, according to Refinitiv data.
Mr. Bouvier also raised his target for Cenovus Energy Inc. his other large-cap preference, emphasizing its “continued balance sheet and operational streamlining via non-core asset sales and accelerated shareholder returns.”
With a “sector perform” rating, his Cenovus target rose to $19 from $16.50, exceeding the average of $19.57.
His other changes were:
* Baytex Energy Corp. (“sector perform”) to $4.25 from $3.75. Average: $4.73.
* Enerplus Corp. ( “sector outperform”) to $15 from $13.50. Average: $15.13.
* Freehold Royalties Ltd. (“sector perform”) to $14 from $13.50. Average: $15.65.
* MEG Energy Corp. ( “sector outperform”) to $14 from $13. Average: $14.35.
* Suncor Energy Inc. ( “sector outperform”) to $37 from $33. Average: $38.78.