09:49 AM EST, 01/12/2021 (MT Newswires) -- Tudor, Pickering & Holt on Tuesday said it is moving to a bullish outlook for Canadian natural-gas producers as it raises its price forecast for the fuel to US$3.25 per million British thermal units from US$2.75.
"With our expectation for Henry Hub gas pricing to rise above $3/mmbtu in the near term and stay there through 2023, there are certainly good times on the horizon for CAD gas producers," the investment bank said in a note. "However, with the strongest realized pricing in years, producers will also face the greatest test yet in terms of capital discipline. At $60 Brent / $3.25 Henry Hub we calculate an average FCF/EV of 24% for the CAD producers (US avg 13%), with debt completely wiped out for a number of operators. Additionally, drilling economics will be robust but avoiding the temptation of deploying incremental capital will be key to ensuring price strength longevity. This is also why we'd like to see more consolidation across the basin, as it resolves the need to grow to achieve scale, and with growth in check pricing strength can become more permanent. While rising commodity prices are expected to lift all boats, our top picks remain TOU and ARX, with 2022 FCF/EV of 29% and 26%, respectively, under our upside price scenario. Additionally, as consolidation continues to play out, we think you want to own the consolidators (namely TOU) as accretive deals are expected to further strengthen those who already have the strongest hands.