RBC October 11, 2022
Canadian E&P Perspectives Q3/22 Preview - The Beat Goes On
Q3/22 reporting season kicks off on October 24th with PSK after market close, with a constructive outlook for the industry continuing, though macroeconomic events continue to drive volatility in our coverage universe. We see investor focal points as costs/inflation, FCF allocation, and 2023 outlooks, with a subset of producers positioned to disclose formal 2023 outlooks. With this preview, we include updated estimates following our Q3 actualized pricing (note here).
Earnings Kickoff - October 24th
• Q3/22 CFPS estimates down 10% QoQ, on average. Potential catalysts and estimates for our coverage are shown in Exhibits 1/2. We estimate CFPS for oil-weighted producers is down 2% QoQ with gas-weighted producers down 15%, impacted by wide AECO basis in the quarter along with inflationary pressures. Our production estimates are broadly in line with consensus, though we are mostly below consensus on CFPS estimates after actualizing for lower WTI and AECO pricing. We are more than 10% below CFPS consensus for AAV, ATH, BIR, BTE, CJ, HWX, KEL, LOU, PEY, PIPE, POU, WCP, and TOU.
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Capital programs in check, though accelerations likely into Q4/22. We estimate 78% of guided 2022 capital programs have been spent across our coverage through Q3, which could lead to accelerations into Q4/22, particularly as cost inflation continues to weigh on capital planning for 2022 budgets and into 2023. Earlier this year, we noted inflation across the board to the tune of 10-20% driven by steel/commodities, labor, and consumables (note here). We've adjusted capital budgets accordingly (with a number above guidance) but we await incremental detail for potential Q4 'accelerations' to level load services and maintain crews.
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Free cash, RoC strategies remain a key focus. Investor focal points continue to revolve around FCF allocation, capital discipline, and M&A. We expect buybacks/dividends remain a key focus - our outlook calls for incremental dividend increases in 2022/2023 from ARX, BIR, CJ, CPG, FRU, PEY, POU, PSK, PXT, TOU, TPZ, TVE, and WCP on top of buybacks in many cases. Select producers also appear to be eyeing modest increases to capex, given short project paybacks, inflationary pressure, and softened views on growth as balance sheets rapidly delever.
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Estimate changes - broker numbers expected to fall. We expect broker estimates to fall into the reporting period as producer price decks are actualized to generally-lower WTI pricing. Select maintenance related facility outages (planned/unplanned) impacted producer volumes with costs generally moving upward over time. That said, strong commodity and FX (note here) tailwinds continue to support strong producer cash flow generation. FCF yields now map to 27% on average (RBC deck), with a range of 7-46%.
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Top ideas. Our top ideas feature what we believe to be favourable long- term sustainability and RoC metrics and top-decile assets, though not necessarily the most “torque” to commodity prices. Our top names include ARC, Enerplus, Freehold, Tamarack, and Tourmaline.