RE:Desjardins UpgradeHere's the article. GLTA
Desjardins Securities’ Energy Research team thinks the stage is set for a “very constructive” winter gas market.
In a research report released Tuesday, the firm updated its commodity price to reflect “the fever pitch in overseas power, natural gas and coal markets, many of which are now setting fresh record highs on a near daily basis due to fears of an impending winter supply crisis.”
Also pointing to structural tightening in the North American natural gas market, Desjardins moved its fourth-quarter NYMEX and AECO price forecasts to US$5.75 per metric million British thermal units and $5.50 per thousand cubic feet, respectively, from previous projections of US$4.50 and $4.50 (Canadian). Its 2022 NYMEX and AECO projection jumped to US$5 and $4.75, respectively, from US$4 and $4 (Canadian).
“While we acknowledge that the bull market did not fall into place the way we predicted when we unveiled our US$4 per metric million British thermal unit price deck last October, natural gas prices have clearly found their groove, entering the winter heating season near a 13-year high dating back to the dawn of the shale revolution,” they said. “We also see considerable upside relative to the current strip, particularly in the event of a cold winter which could propel NYMEX prices to double digits for an extended stretch, potentially even breaching the 2005 record high of US$15 per metric million British thermal units.”
Concurrently, the firm did not change its oil prices, noting: “Although we believe oil prices will benefit from the explosion in overseas natural gas prices, which could support upwards of 1–2 million barrels per day of power feedstock substitution this winter, we are inclined to view this as a temporary demand stimulus which needs to be weighed against other factors. In particular, we note that most market forecasters, including OPEC, still see an oversupplied crude market in 2022 as the cartel continues bringing idled production back online. We are maintaining our US$70 per barrel WTI forecast for 2022, which we now believe has considerable upside risk. Moreover, unlike natural gas prices, which we expect to hit their cyclical peak in 2022, we believe that conditions are ripe for even stronger oil prices moving into 2023, including a potential return to US$100 per barrel WTI!”
With that view, Desjardins recommends investors should be buying producer equities “with reckless abandon.”
“The combination of US$5-plus per metric million British thermal unit NYMEX and US$70-plus per barrel WTI prices, paired with relatively tight differentials for Canadian producers as well as industry’s newfound zeal for capital discipline and shareholder returns, has resulted in one of the most compelling investment climates for Canadian oil & gas equities in recent memory,” the analysts said. “However, equity valuations continue scraping at, or near, record lows. Regardless, the free cash flow story is coming home to roost in 2022, when most producers will have completed their balance sheet cleanups, enabling them to accelerate returns to shareholders. We would be buying producer equities with reckless abandon; for the first time since initiating coverage of the sector in 2013, we have Buy ratings on every E&P under coverage.”
The firm raised its target price for the majority of producers in its coverage universe.
Among large-cap stocks, their changes were:
- ARC Resources Ltd. ( “buy”) to $20 from $16. Average: $15.79.
- Canadian Natural Resources Ltd. ( “buy”) to $60 from $54. Average: $56.26.
- Cenovus Energy Inc. (“buy”) to $20 from $16. Average: $16.41.
- Imperial Oil Ltd. ( “buy”) to $44 from $41. Average: $42.
- Suncor Energy Inc. ( “buy”) to $41 from $40. Average: $35.43.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $70 from $52. Average: $56.25.