TD Notes Q2/23 Preview
Reducing Our U.S. Rig Count Outlook
Pricing Appears to be Resilient, Despite Reduced Activity Levels
TD Investment Conclusion
Updates to Our Industry Outlook: Although we did not make any substantive changes to our commodity price outlook in our recent deck update (full report), we note that the U.S. rig count has responded quickly to lower prices, declining 105 rigs year-to-date. Based on our recent conversations with our coverage universe, we expect that drilling and completions (D&C) activity in the U.S. will reach trough levels in the coming weeks and are likely to remain flat for the rest of 2023. In this context, our 2023 and 2024 U.S. rig count forecasts decrease to 700 rigs and 720 rigs from 745 rigs and 785 rigs, respectively. Conversely, we expect that Canadian activity levels will remain resilient as public companies dominate activity in Canada and appear less sensitive to changing commodity prices, and gas-directed activity is largely driven by natural-gas liquids economics. This activity profile is also supported by the recent Blueberry River First Nation/BC Government resolution, the sanctioning of ARC's Attachie and long-term LNG Canada-related growth ambitions. That said, Canadian Natural (CNQ-T, BUY, $95.00 TP) dropped 10 rigs recently, and if more producers follow suit, we may need to revisit this view in future updates. In concert with this report, we are unveiling our International rig-count forecast of 989 rigs in 2023 and 1,117 rigs in 2024.
Q2/23 Preview: Despite being affected by wildfires, Q2/23 Canadian D&C activity was seasonally strong, in our view. However, the U.S. rig count declined meaningfully throughout the quarter, and in many cases, we have reduced our estimates for companies with U.S. exposure as a result. We expect outlook commentary and conference call Q&A to focus on near-term activity and pricing.
Estimate Changes: On average, our 2023 and 2024 EBITDAS estimates decrease by 1.8% and 1.6%, respectively, and a recurring theme from our coverage universe was that they will prioritize pricing over activity. Additionally, some coverage universe constituents see the possibility of an increase in U.S. D&C activity later this year, although we do not contemplate any recovery in activity until 2024.
Our Sector Stance: OVERWEIGHT
Economists have been talking about a recession for over a year, and, in our view, Energy Services sector valuation multiples have contracted meaningfully over this time-period as investors increasingly price-in a reduced activity outlook. Despite these downward revisions, we expect that financial performance will remain strong due to a sector-wide prioritization of pricing over utilization and, as a result, valuations remain attractive, in our view. Enerflex (EFX-T, BUY, $16.00 TP) and Precision (PD- T, BUY, $105.00 TP), remain our top picks for sector exposure. In a concurrently published action note, we are initiating coverage on Pason Systems (PSI-T) with a BUY rating and $16.00 target price.