Scotia Capital Upgrade Scotia Capital analyst Jason Bouvier continues to see “significant tailwinds” for the Canadian energy industry stemming from surging commodity prices.
“Capital discipline remains strong and balance sheets continue to strengthen at a rapid pace. Dividends have been on the rise and we expect a shift to special/variable dividends (ie: more investor returns) in 2023,” he said.
With stocks in his Canadian oil-weighted coverage universe are up 64 per cent thus far in 2022, Mr. Bouvier expects the trend upward to continue, leading him to raise his target prices by an average of 17 per cent on Wednesday.
“In our view, on balance, the robust commodity price environment, continued capital discipline, and strengthening balance sheets outweigh the headwinds industry is facing,” he said.
“We continue to believe Canadian Energy trades at a steep discount to its U.S. peers. With recent wins to egress (we believe Canada will be long pipeline capacity for many years to come) and de-carbonization coupled with strong capital discipline and healthy balance sheets, we like what we see. Our Canadian oil weighted large caps trade at an average 2023 DAFCF (strip) yield of 16 per cent vs. its U.S. peers at 13 per cent and our Canadian oil weighted SMID caps trade at 25 per cent.”
Mr. Bouvier upgraded a series of stocks:
* Enerplus Corp. to “sector outperform” from “sector perform” with a $25 target, rising from $20 and above the $22.50 average.
“ERF has meaningfully underperformed its peers in 2022 and is trading at a 2023E DAFCF yield (strip) of 30 per cent vs the Canadian oil-weighted SMID cap average of 24 per cent (ex. ERF),” he said. “We believe ERF’s underperformance is unwarranted as management has maintained capital discipline and is focused on increasing shareholder returns. Further, the sale of its non-core Canadian assets could be a catalyst for the stock. The current commodity environment should enable ERF to realize a robust price for its Canadian assets. The proceeds from a potential sale could be used to enhance shareholder returns.”
For oil-weighted E&P stocks, his changes were:
- Baytex Energy Corp. ( “sector perform”) to $9 from $6.75. Average: $8.61.
- Ovintiv Inc. ( “sector outperform”) to US$70 from US$60. Average: US$64.33.
- Whitecap Resources Inc. ( “sector perform”) to $13 from $12. Average: $14.92.
For royalty companies, his changes were;
- Freehold Royalties Ltd. ( “sector perform”) to $18 from $17. Average: $20.14.
“Our favorite stocks are: Large Cap — CVE, IMO, and OVV; SMID Cap — CPG and ERF,” he said.