Upgrade Canadian energy producers and royalty companies remain “attractive” despite recent share price appreciation, according to iA Capital Markets analyst Elias Foscolos.
In a research report released Tuesday, he raised his adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) estimates for 2022 for companies in his coverage universe by an average of 14 per cent in response to “substantially higher” third-quarter commodity prices and lower-than-average inventories ahead of the winter heating season.
“In addition to strengthening prices, many covered companies have hedges rolling off in the back half of this year, and into next, so we are likely to see lower hedging losses in the future impacting headline financial results and cash flow,” said Mr. Foscolos. “Our universe is now trading at a 4.2 times EV/EBITDA and 6.3 times P/AFFO multiple, which are both 0.5 times higher than our previous estimates.”
“Since last year, many companies are now keenly focused on streamlining operations, maximizing margins via lower operating costs, which reap benefits irrespective of commodity prices or high differential pricing, and minimizing downside risk as lower costs keep plays economic. As debt levels decline many of our E&P producers will be in an enviable position to make capital allocation decisions on whether to a) accelerate capital deployment, b) buy back shares, or c) increase dividends. We have seen a little of all of this within the last month as TOU announced an increased regular dividend and a special dividend while FRU deployed capital through its U.S. acquisition, and presently has a very conservative payout ratio. Our coverage universe has moved 40 per cent higher since our last update, and is trading at better multiples.”
With that view, Mr. Foscolos hiked his target prices for companies he covers by an average of 20 per cent.
Mr. Foscolos made these target changes:
- Arc Resources Ltd. ( “buy”) to $15 from $12.50. Average: $14.63.
- Nuvista Energy Ltd. ( “speculative buy”) to $7.25 from $5.25. Average: $5.39.
- PrairieSky Royalty Ltd. ( “buy”) to $17 from $16. Average: $16.88.
- Topaz Energy Corp. ( “buy”) to $21 from $20. Average: $20.32.
- Whitecap Resources Inc. ( “buy”) to $8.50 from $7. Average: $8.97.