National Bank Revise Targets Only included companies that I own. GLTA
The Energy equity team at National Bank remains “constructive” on both medium and long-term fundamentals in the sector, despite what they call “shorter-term, sentiment-based volatility in the commodity complex.”
“Given the strength of underlying business fundamentals and current valuations, we view the recent pullback as an opportunity to purchase quality equities with an appreciation that volatility is likely to persist through this part of the cycle,” they said. “With most energy companies positioned with solid balance sheets, return of capital strategies and trading at discounted valuations, investment differentiation becomes difficult. For this reason, we see operational execution and strict capital discipline as key investment drivers as we look out over the next 12 months.”
In a research report previewing the second half of fiscal 2022 released Friday, they took a “more conservative stance” after reducing the firm’s WTI price assumptions “while remaining comfortably above strip to reflect our positive outlook beyond the current headline-driven volatility).” Their natural gas projections remain largely unchanged.
For WTI, the firm’s price forecast for 2022 slid to US$95 per barrel from US$100 previously. It’s 2023 and 2024 estimates fell to US$80 and US$75, respectively, from US$90 and US$85.
“We continue to view the global crude complex as tight on supply, which is showing up in global crack spreads, while also appreciating that transitory uncertainty may continue in the near term (SPR releases, China lockdowns, OPEC+ production cuts, Russian embargo, Iran nuclear deal, etc.),” the analysts said. “On the natural gas front, as we have previously highlighted, fundamentals have experienced structural changes in recent years (LNG exports, inelastic power burn, etc.) which has augmented the complexion of the supply/demand backdrop in support of a more resilient and investible commodity pricing.”
The firm expects the upcoming third-quarter earnings season to “provide a good barometer of whether companies are poised to meet, beat or miss 2022 corporate guidance.” They currently project most of their coverage universe to reach the midpoint of production guidance “but expect capex to trend towards the high end of guidance ranges given inflationary pressures.”
For investors, they think oil and gas equities “screen well” on valuation and think “sustainability of the current business models and compounding shareholder returns provide a reasonable risk profile in the sector.”
With the changes to their commodity price assumptions, the firm lowered its target prices for stocks by an average by 10 per cent “driven by oil-weighted names.”
“However, we see approximately-70 per-cent and 50-per-cent total return potential across our Outperform and Sector Perform rated names (no rating changes at this time),” they said.
For senior producers, their changes are:
- Cenovus Energy Inc. ( “outperform”) to $36 from $38. Average: $33.53.
For large-cap and mid-cap stocks, their changes are:
- ARC Resources Ltd. ( “outperform”) to $23 from $26. The average on the Street is $24.92.
- Crescent Point Energy Corp. ( “outperform”) to $18 from $20. Average: $15.27.
- Enerplus Corp. ( “outperform”) to US$21 from US$26. Average: $23.67.
- Freehold Royalties Ltd. ( “outperform”) to $19 from $20. Average: $20.34.
- Headwater Exploration Inc. ( “outperform”) to $9.50 from $10.50. Average: $10.28.
- Spartan Delta Corp. ( “outperform”) to $20 from $22.50. Average: $19.86.
- Tamarack Valley Energy Ltd. ( “outperform”) to $8 from $9. Average: $7.56.
- Whitecap Resources Inc. (, “outperform”) to $15.50 from $17.50. Average: $15.23.
“Many E&P equities hit 52-week highs in early June after a strong start in 2022, but have contracted by an average of 30 per cent since then,” the firm said. “The risk-off momentum has been largely driven by the rising rate environment, global recession risk, SPR releases, Iran nuclear deal and China lockdowns. However, despite the equity drawdowns, the Energy sector remains the top-performing sector year-to-date within the S&P/TSX Composite Index. As our colleagues in the NBF Economics and Strategy group published earlier this year, it is interesting to note that the Energy sector has historically outperformed during periods of high stagflation (i.e., 1973-1980). We expect continued strong relative performance for the sector given the sustainability of current business models, which, after multiple years of laser-like focus on strengthening balance sheets, are well-equipped to weather the ongoing commodity price volatility as base dividends have been stress-tested down to US$50/bbl WTI.”