CIBCMaintain their $10.00 target. GLTA
EQUITY RESEARCH
April 13, 2022 Earnings Revision
Oil & Gas Q1/22 Preview
First-quarter Realizations Expected To Outrun Inflation
Our Conclusion
Q1 earnings should provide a good marker for profitability under a much
stronger commodity tape. In calibrating our Q1 earnings expectations, we
have adjusted for higher cost expectations in some instances that could stifle
cash flow generation. Even so, we expect cash flows to be up by an average
of 22.2% versus Q4/21 levels. Geopolitical instability had long faded from
conversations, given a combination of OPEC+ cooperation in managing the
price and supply of oil. We now see a focus on energy security creeping into
headlines and even political decisions, which could bode well for oil and
natural gas equities. We have marked to market our commodity price deck,
but with a positive bias vs. the longer-end of the curve on oil. While we
continue to view an eventual return to supply/demand balance, we expect oil
prices are likely higher for longer given a combination of reasons. Given
these revisions, but keeping in mind the volatility, we continue to be focused
on the following companies: ARX, CVE, SU, NVA, TOU, TVE, and SDE as
near-term top ideas.
Key Points
Capital allocation priorities continue to focus on cash returns to
shareholders. We expect companies to provide further increases to cash
returns via a combination of base dividend increases, share repurchases
(NCIB and SIB) and special dividends. At US$100 WTI, the large-cap group
could show 2022E FCF yield of 26%, and 20% for the SMID-cap group, with
D/CF for our coverage universe of 0.3x. We estimate additional details on
these capital allocation structures from BIR, CVE, IMO, NVA, PEY, SDE, and
TVE.
SCO premium could drive improved oil sands margin. We believe that
Synthetic crude oil represents an attractive replacement for Russian Urals
volumes; this could expand the margin that oil sands projects receive. We
highlight SU and CNQ as the two companies with the greatest SCO
exposure within our large-cap coverage universe.
Downstream margins have been improving, but partially offset by
narrowing differentials. Given the pace of economic re-opening and the
increased consumption of refined products, we believe downstream
operations could experience a renaissance in 2022. Incrementally, the oil
price volatility could lend itself to opportunistic marketing profits for
companies with significant storage (and the ability to manage pricing). We
continue to highlight SU and IMO as showing considerable Canadian refining
margin.
Strong NYMEX forwards offset by summer maintenance activities in
Western Canada. We see strip AECO differentials reflecting this potential,
but hold a more cautious stance on forward NYMEX.