Desjardins Securities On Wednesday, Mr. Bouchard and Desjardins Securities colleague Kristopher Zack released a research report previewing the coming third-quarter earnings season for oil and gas sector, which they billed "light on cash, bloated on gas."
"We expect crude price volatility to persist as the market continues looking for the right balance," the analyst said. "While the recent drawdown in U.S. crude and product inventories has provided a more constructive backdrop, the potential for another increase in drilling activity and producer hedging at higher prices keeps us cautious on the potential near-term price upside. We are maintaining our 2018 price deck at $55 (U.S.) per barrel WTI; however, when combined with our stronger Canadian dollar assumption of 80 cents (U.S.)/$1 Canadian (from 75 cents), our Canadian dollar-denominated crude price deck is down 10 per cent.
"Pipeline congestion remains a significant headwind for AECO gas prices. This was painfully demonstrated during 3Q as the AECO-NYMEX spread continued widening while Station 2 spot prices averaged a mere 90 cents (Canadian) per thousand cubic feet. Structural improvements in demand are increasingly evident in the US market and we are seeing storage levels track slightly below the five-year average entering the winter, which should position the market favourably. However, we remain cautious that egress challenges could continue to limit the upside for western Canadian producers. Consequently, we are trimming our 2018 AECO forecast to $2.50/mcf (from $2.75/mcf), noting that investors will likely continue favouring gas producers with strong hedge books and diversified price exposure, backed by solid balance sheets."
In the note, Mr. Zack raised his rating for Whitecap Resources Inc. (WCP-T) to "buy" from "hold" with a target price of $11.50, falling from $12.50. Consensus is $12.58.
He downgraded Crescent Point Energy Corp. (CPG-T) to "hold" from "buy" with a $11.50 target (down from $20. Consensus is $15.12.
"WCP appears attractive from a free cash flow perspective, while the balance sheet also provides strong financial flexibility," said Mr. Zack. "And while we have been fairly cautious on the stock, we now see a more attractive entry point from a relative return perspective compared with peers. Conversely for CPG, our sense is that investors are now looking for more of a strategic catalyst, the potential timing of which remains somewhat uncertain in the current market"”which is reflected in our revised target multiple."
The analysts cut their target prices for stocks across their coverage universe in response to the impact of a higher loonie and "softer" AECO prices. They did, however, emphasize they remain "positively disposed toward companies focused on sustainability while maintaining financial flexibility."
"Our sense is that the market's preference is shifting from growth to returns for producers on both sides of the border, with an overriding focus on free cash flow," they said. "Our top oil picks include CNQ, ERF, RRX, SPE, SU and TOG. We would remain tactically defensive on the natural gas side "”we currently favour ARX and TOU, and we note VII's significant diversification provided by its Alliance pipeline exposure. Within the midstream sector, we have a continued bias toward names exposed to liquids-rich production in NW AB/NE BC and which have more conservative capital structures; from that perspective, our top picks remain KEY and PPL."