April 26, 2022
Integrated Oil, Oil Sands, and E&P
Model Updates – Higher Natural Gas Prices
Our view: Alongside our Globalizing Gas Prices report, we update our earnings/cash flow estimates for our coverage group. Factored into our estimates are Henry Hub prices of US$5.00 in 2022 and US$4.25 in 2023, AECO prices of $4.32 in 2022 and $4.03 in 2023, and NBP (European gas) prices of US$25.64 in 2022 and US$20.92 in 2023 (see Exhibit 1).
There are no changes to our recommendations. We continue to favor producers that possess solid operating performance, focused leadership teams, capital discipline, strong balance sheets, and favorable shareholder return policies. Our favorite integrated oil company remains Cenovus Energy (on our Global Energy Best Ideas List) and our favorite senior producer is Canadian Natural Resources (on our Global Energy Best Ideas List and Top 30 Global Ideas List). Enerplus Corporation remains our favorite intermediate producer, while MEG Energy is our Dark Horse selection. Imperial Oil and Ovintiv round out our Outperform-rated roster.
On average, our CFPS estimates are generally unchanged in 2022 and up 1% or so in 2023. Our estimates reflect unchanged production outlooks, stable downstream cash flow contributions, royalty rates, and cash tax rates. Lower earnings/cash flow estimates for Suncor Energy and MEG Energy reflect higher estimated oil sands fuel costs and their lack of gas production. We peg free cash flow generation (before dividends) across the Canadian majors—Canadian Natural Resources, Suncor Energy, Cenovus Energy, and Imperial Oil—at approximately $47 billion in 2022 and 2023 under our base outlook.
We selectively raise one-year price targets commensurate with our estimate revisions. Our prices targets remain based on a blend of debt-adjusted cash flow multiples and our net asset value estimates (applied at mid-cycle prices—US$55 WTI and a now higher Henry Hub of US$3.50 and NBP of US$9.45).