Q3/21 Reporting Calendar and Estimates Preview
Forecasting a 20% q/q Increase in Aggregate FFO
Strong Balance Sheets may Trigger Additional Shareholder Returns
The performance of key commodity benchmarks remained strong in Q3/21, a continuation of the recovery we have witnessed YTD. Average WTI oil prices rose ~US$5/bbl q/q (+7%) to ~US$71/bbl, while average U.S. crack spreads were up an average 12% despite lower RINs prices q/q. Heavy oil also rose 8% q/q (C$71/bbl), although the WCS-WTI heavy differential widened by 18% q/q to what is still a very healthy ~US$13.50/bbl. Looking to natural gas, Q3/21 NYMEX and AECO gas rose sharply on supply tightness concerns, up 48% and 20% q/q, respectively.
Although spot oil prices are at multi-year highs, we remain optimistic on near-term pricing. Europe and parts of Asia are experiencing energy crises which is boosting oil demand due to gas-to-liquids switching. This has caused the EIA to boost its 2022 demand forecast by an additional 0.21 mmbbl/d (+7%). We also highlight that OPEC + has indicated that, for now, it does not intend to increase production on higher demand beyond its original plan of 0.4 mmbbl/d per month. For natural gas, we are entering the heating season with seasonally lower inventories, which should, in the absence of above-average winter temperatures, support pricing.
We estimate a 20% q/q increase in aggregate Q3/21 FFO, and ~150% y/y: Drilling down, we forecast an average 19% and 30% q/q FFO increase for our oil- weighted and gas-weighted coverage, respectively.
Most 2022 budgets will likely reflect limited growth: Most producers are yet to disclose formal 2022 plans, but despite some of the strongest industry fundamentals in decades, we expect most public companies to remain relatively disciplined in 2022. We forecast a 13% and 8% spending increase in 2022 for our Canadian and U.S. coverage, respectively.
With L3R in service as of October 1, 2021 (+370 mbbl/d, see here), the basin egress outlook is also the best we have seen in years. This, combined with higher pricing, could tempt higher spending in 2022—something we hope not to see. We expect TMX to come online in H1/23 (versus YE2022 formal guidance), which would add another +590 mbbl/d of egress.
Strong balance sheets to accelerate shareholder returns into 2022+: Given strong strip FCF generation in 2022, we estimate that our Canadian and U.S. coverage will exit 2022 with net debt/FFO of only 0.1x and 0.6x, respectively. We forecast that 12 of our Canadian producers (40% of coverage) could transition to net cash, compared with only one U.S. name, primarily due to more established shareholder return frameworks from oil-weighted producers.
This could trigger additional shareholder return initiatives across our Canadian coverage, in the form of buybacks, base dividend hikes (significant in some cases), and even special dividends and SIBs in select cases, in our view.