Scotia Capital Scotia Capital analyst Jason Bouvier continues to be bullish on Canadian energy exploration & production (E&P) companies.
“In our view, the valuation difference between Canadian companies and their peers is too wide and does not account for progress that has been made on both environmental aspects (federal ITC, Pathways initiative) and egress (Line 3 expansion on-stream, TMX expected in late 2023),” he said.
In a research note released Thursday, the firm upgraded its commodity price forecast with its 2022 Brent and WTI crude estimates sliding 5 per cent and 6 per cent, respectively, to US$103.63 and US$98 per barrel. Its 2023 Brent projection rose by 1 per cent to US$100, while its WTI forecast dropped 1 per cent to US$94.
“In our view continued capital discipline (i.e., minimal volume growth) and improving egress have laid the groundwork for robust Canadian liquids prices,” said Mr. Bouvier. “We expect demand for Canadian oil to increase as SPR releases end (although they may be extended) and the impending EU embargo on discounted Russian oil comes into effect. Heading into winter, we expect condensate demand to increase due to higher diluent requirements. Further, our forecast assumes SCO will trade at a US$2.50 per barrel premium to WTI in 2023/2024 due to strong diesel cracks. In the long term, we forecast the SCO differential gradually normalizing until SCO is trading at par with WTI. Our forecast assumes that in 2023 the WCS differential will average US$19/bbl. We expect the WCS differential to normalize at US$14-US$16/bbl following the construction of TMX in late 2023.”
With the price deck alterations, he cut his cash flow per share projections for oil-weighted names by an average of 7 per cent in 2022 with an increase of 2 per cent to 2023.
With those changes, he made a pair of rating changes and several target price adjustments.
Despite reaffirming it as one of his large-cap “top picks” (along with Cenovus Energy Inc., CVE-T), Mr. Bouvier lowered Imperial Oil Ltd. (IMO-T) to “sector perform” from “sector outperform” previously.
“Imperial Oil will be net debt free in late 2022 or early 2023, according to our forecasts,” he said. “Coupled with the company’s capital discipline and low payout ratio, we expect strong growth in shareholder returns (dividends and SBB) going forward. However, due to modest share price outperformance and movement in commodity prices (weaker heavy oil prices, falling cracks, stronger SCO prices) our implied return is now more in line with Sector Perform rated companies.”
His target for Imperial Oil shares fell by 3 per cent to $78 from $80. The average on the Street is $74.76.
The analyst also lowered Enerplus Corp. to “sector perform” from “sector outperform” with a $26 target, up from $25 and above the $23.50 average.
“Enerplus has been THE top performing oil-weighted energy stock we track over the past six months,” he said. We continue to like the company’s strategy of adding assets in their core area (Bakken) when oil prices were weak (and assets cheap) and now selling non-core assets when oil prices are higher. However, given the significant outperformance our implied return is now more in line with Sector Perform rated companies.”
His other target changes are:
- Africa Oil Corp. (“sector perform”) to $3.50 from $3.25. Average: $26.57.
- Cenovus Energy Inc. (“sector outperform”) to $33 from $34. Average: $33.34.
- Freehold Royalties Ltd. ( “sector perform”) to $19 from $18. Average: $20.34.