Equity analysts at BMO Nesbitt Burns remain bullish on oil and the energy sector in 2023 despite lingering recession risks.
“2022 was another excellent year for oil and gas investors with the North American oil and gas group delivering a gain of roughly 50 per cent versus a decline of 15 per cent for the S&P 500 (5 per cent for the TSX).” the firm said. “The group also managed to materially outperform crude oil prices, which were relatively flat. As we enter 2023, the key question for oil and gas investors is how much upside is left after two-years of outperformance, especially against the backdrop of a recession. We think the sector has more upside to offer. Valuations remain attractive and the oil and gas group is in the strongest financial position in its history amid what we believe is a multi-year up cycle in crude oil prices. In 2022, the oil and gas group was focused on paying down debt alongside raising cash returns to investors; in 2023, we think that the group will pivot to more aggressive cash distribution strategies.”
They note consensus multiples remain in the bottom half of their historical trading range based on current strip prices. Also noting balance sheets “have never been stronger and returns on capital have never been higher” and believing the sector could “provide a market-leading real cash yield,” the analysts see the valuation for the group remaining “very compelling.”
“Our top recommendations are companies that we believe are best positioned to increase cash returns to investors in 2023. This group includes Canadian Natural Resources , Cenovus Energy , Chesapeake Energy, Chevron , EOG Resources , Hess , Matador Resources , Marathon and Tourmaline. We also like Step Energy Services and Schlumberger among the oil field services companies,” they said.
With revisions to their commodity price forecasts for 2023, including lowering their Brent/WTI price assumptions for 2023 to US$95 and US$90 per barrel from US$103 and US$100, the analysts made a series of target price adjustments to stocks in their coverage universe.
For Canadian large-cap companies, their changes were:
- Crescent Point Energy Corp. ( “outperform”) to $12 from $13. Average: $14.75.
- MEG Energy Corp. ( “outperform”) to $21 from $23. Average: $24.14.
- Suncor Energy Inc. ( “outperform”) to $54 from $55. Average: $54.05.
- Vermilion Energy Inc. ( “market perform”) to $32 from $36. Average: $39.36.
- Whitecap Resources Inc. ( “outperform”) to $12 from $14. Average: $15.