National Bank Upgrade As fourth-quarter 2021 earnings season ramps up, equity analysts at National Bank Financial reiterated their view that the Canadian oil and gas sector is poised to deliver another year of strong returns, believing many companies “provide compelling investment opportunities in today’s commodity price environment.”
“Similar to last year, 2022 provides investors with a fascinating setup, backstopped by a myriad of factors that should complement the return of capital profile that investors are beginning to believe has some longer-term duration (with some skepticism),” said Travis Wood and Dan Payne in a research report released Thursday. “The well-documented tightness of the crude oil supply/demand complex is now compounded by growing geopolitical tensions, and given the continued strengthening in demand, we remain of the view that spot prices will remain relatively strong throughout most of 2022. Altogether, the sector is set to provide investors with a universe characterized by: liquidity strength, cheap valuations, ample FCF [free cash flow] and option value surrounding FCF allocation strategies. Keeping pace with the rapidly improved oil prices, we have updated our pricing assumptions to better align with strip pricing.”
The analysts expect earnings season to be “relatively uneventful quarter on the operations front” and project positive cash flow per share momentum to continue given stronger price realizations.
The firm raised his 2022 and 2023 forecast for WTI to US$81.00 per barrel (from US$70) and US$75.00 (from US$65), respectively. For natural gas, its 2022 NYMEX price assumption rose to US$4.05 per thousand cubic feet from US$3.75.
To align with those changes, the analysts made a series of target price adjustments to stocks in their coverage universe. The changes for large-cap stocks are:
- Canadian Natural Resources Ltd. ( “outperform”) to $90 from $74. The average on the Street is $66.87.
- Cenovus Energy Inc. ( “outperform”) to $28 from $25. Average: $21.43.
- Imperial Oil Ltd. ( “sector perform”) to $70 from $58. Average: $53.74.
- Ovintiv Inc. ( “outperform”) to $60 from $52. Average: US$49.67.
- Suncor Energy Inc. ( “outperform”) to $53 from $45. Average: $42.57.
For mid-cap stocks, their changes are:
- Advantage Energy Ltd. ( “outperform”) to $11 from $10. Average: $9.36.
- ARC Resources Ltd. (“outperform”) to $21 from $20. Average: $18.78.
- Birchcliff Energy Ltd. ( “outperform”) to $11 from $10. Average: $9.60.
- Baytex Energy Corp. ( “sector perform”) to $6.50 from $5. Average: $5.02.
- Crescent Point Energy Corp. (“outperform”) to $15.50 from $13.50. Average: $10.25.
- Enerplus Corp. ( “outperform”) to $20 from $19. Average: $17.58.
- Freehold Royalties Ltd. (“outperform”) to $18 from $17. Average: $16.17.
- Headwater Exploration Inc. (HWX-T, “outperform”) to $10.50 from $9. Average: $8.76.
- Kelt Exploration Ltd. (KEL-T, “outperform”) to $8.50 from $7. Average: $6.85.
- MEG Energy Corp. (MEG-T, “sector perform”) to $25 from $18.50. Average: $16.83.
- NuVista Energy Ltd. ( “sector perform”) to $11.50 from $9. Average: $10.04.
- Peyto Exploration & Development Corp. ( “outperform”) to $15 from $14. Average: $13.68.
- Pipestone Energy Corp. ( “sector perform”) to $6 from $4.50. Average: $5.17.
- Paramount Resources Ltd. ( “outperform”) to $35 from $30. Average: $29.60.
- PrairieSky Royalty Ltd. ( “sector perform”) to $22 from $18.50. Average: $18.80.
- Spartan Delta Corp. ( “outperform”) to $14.50 from $10. Average: $11.33.
- Tourmaline Oil Corp. ( “outperform”) to $62.50 from $57.50. Average: $63.21.
- Topaz Energy Corp. ( “outperform”) to $25 from $24. Average: $23.35.
- Tamarack Valley Energy Ltd. ( “outperform”) to $7 from $5.50. Average: $6.03.
- Vermilion Energy Inc. ( “outperform”) to $34 from $30. Average: $19.72.
- Whitecap Resources Inc. (WCP-T, “outperform”) to $16 from $14. Average: $11.67.
“we reiterate our top ideas which were highlighted in our 2022 outlook (CVE, WCP, CPG, HWX and TVE as our top oil ideas, and TOU, ARX, BIR and SDE as our top gas ideas). For context, this collection of names offers, on average, a FCF yield of 17 per cent on leverage of 0.1 times D/CF [debt to cash flow], while trading at 3.7 times 2022 estimated EV/DACF [enterprise value to debt-adjusted cash flow],” they said,