Scotia Capital Scotia also updated its price deck for natural gas, lowering its Henry Hub estimate for the year to US$3.60 per one million British thermal units from US$3.75 previously.
“We are capitulating on the potential for cooperative winter ‘23/’24 conditions after a very warm December 2023 and expect weaker NYMEX natural gas prices to prevail over the next several months; however, we expect prices to recover in late 2024 and into 2025,” the firm said. “Our stock selection process continues to favour companies with (1) track records of prudent capital allocation, (2) a high degree of financial flexibility, (3) deep high-return drilling inventories, (4) high cash flow margins, and (5) compelling ‘rate-of-change’ stories.
“Our best ideas are AAV, TOU, and PEY for Canadian natural gas exposure, RRC for U.S. natural gas exposure, TPZ for balanced/oil levered exposure, and LGN for growth premium take-out potential.”
For those stocks, the firm’s target price adjustments were:
* Advantage Energy Ltd. (AAV-T, “sector outperform”) to $16 from $18. The average on the Street is $12.53.
Analysts: “. Most attractive gas-weighted mid-cap name. Top tier Montney asset base; Highest implied return on our valuation formula; clean balance sheet and low cost structure increase flexibility and offer lower risk natural gas exposure; clear line of sight on production (and cash flow) growth; essentially free option on Entropy Inc.”
* Logan Energy Corp. (LGN-X, “sector outperform”) to $1.50 from $1.90. Average: $1.64.
Analysts: “Intriguing suite of early stage and underappreciated Montney assets offers unique opportunity for value growth. Underutilized infrastructure provides convenient opportunity to demonstrate proof of concept and production growth at Simonette. Aligned management team with high degree of insider ownership, impressive technical acumen, and strong track record of creating value.”
* Peyto Exploration & Development Corp. (PEY-T, “sector outperform”) to $20 from $23. Average: $16.07.
Analysts: “Revitalized business model and longer runway following the Repsol acquisition. Strong hedge book and low cost structure protects the free cash flow and dividend proposition in a weak natural gas price environment. Room for the multiple to rerate upward if PEY can deliver the guided results from the new assets.”
* Range Resources Corp. (RRC-N, “sector outperform”) to US$40 from US$43. Average: US$35.13.
Analysts: “Highest quality producer in the U.S. natural gas space. Best screening stock on free cash flow durability, balance sheet strength, and valuation stability across a wide range of commodity price scenarios. Pending shareholder returns inflection point. The best upstream capital efficiencies in the group. Diversified commodity (more than 30-per-cent liquids) and gas marketing (less than 10-per-cent floating Appalachian price exposure) mixes.”
* Topaz Energy Corp. (TPZ-T, “sector outperform”) to $30 from $32. Average: $27.12.
Analysts: “Premium royalty income portfolio touching the best upstream plays in Western Canada (TOU’s Montney, Clearwater heavy oil, Charlie Lake light oil) and high-quality infrastructure backed by long-term take-or-pay agreements. Upstream exposure to AECO and WCS prices provides a unique way to play the upcoming WCSB pipeline completion / export growth theme. Track record of strong dividend growth, with a low current payout ratio paving the way for further growth. Positioned to capitalize on possible upstream and midstream opportunities as M&A heats up.”
* Tourmaline Oil Corp. (TOU-T, “sector outperform”) to $90 from $100. Average: $80.72.
Analysts: “Highest quality natural gas producer in North America; best-in-class Montney asset base, with strong complimentary Deep Basin assets; clear line of sight on high-return growth from Aitken/Conroy Montney assets coinciding with LNG Canada creating a gap in the western Canadian natural gas market. 20-per-cent exposure to premium gas markets (California and JKM). Pristine balance sheet and commitment to shareholder returns.”