Desjardins Desjardins Securities analyst Chris MacCulloch expects the impact of the wildfires in Western Canada will dominate focus during the coming second-quarter earnings season for Canadian energy companies.
“Wildfires, wildfires, wildfires — get ready to hear a lot about wildfires!,” he said. “Pardon our cynicism, but for many producers, the wildfires that raged across Alberta and northeast B.C. throughout 2Q23 provided a welcome opportunity to reset expectations. We also highlight an active turnaround season for oil sands producers and refiners. To that end, with a few notable exceptions, particularly among heavy oil producers benefiting from tightening WTI–WCS differentials, we expect the trend of cash flow moderation to continue, with most companies expected to post modest reductions in quarterly CFPS prints vs 1Q23. We also do not expect major changes in capital returns as producers continue approaching net debt targets.”
In a research report released Tuesday, the analyst maintained his “constructive” outlook on oil price, however he acknowledged his prior 2024 forecast of US$90 per barrel for WTI was “too aggressive,” pointing to a “a global economic slowdown and a sluggish recovery in Chinese demand exiting zero-COVID.”
Accordingly, he lowered his 2024 estimate by US$5 to US$85 per barrel. He also trimmed his NYMEX forecast for next year to US$4 per thousand cubic feet from US$4.50, wanting “better visibility on production declines approaching the critical winter heating season.”
“Looking ahead to the reporting season, we expect the trend of cash flow moderation to continue, with most companies expected to post modest reductions in quarterly CFPS prints vs 1Q23, particularly among the small-cap natural gas producers, which are expected to bear the brunt of softer commodity prices and wildfire-related disruptions,” said Mr. MacCulloch. “On the other hand, there were some notable standouts that received a tailwind from narrowing WTI–WCS differentials, namely ATH, HWX, MEG and TVE. Meanwhile, CPG and VET are expected to lead light and medium oil-weighted mid-cap producers with strong cash prints on the back of stellar well results and an active hedge book, respectively.
“However, the strongest quarterly improvement in CFPS is expected to come from CVE, which is beginning to benefit from a recovery in downstream operations now that the Toledo and Superior refineries have both started coming back online. Refinery margins are expected to remain depressed in 2Q23 with the full absorption of operating costs and the required inventory build-up to support operations at Toledo and Superior while utilization rates are expected to land close to the 50-per-cent level. Nevertheless, we expect most investors to look beyond the 2Q23 financial results and remain focused on 2H23 when the company should finally reap the full benefit of its integrated business model with stronger margin capture, even with our expectation for a modest softening of refiner crack spreads.”
The analyst also made a series of target adjustments.
For large-cap stocks, his changes are:
- Canadian Natural Resources Ltd. ( “buy”) to $95 from $97. Average: $90.35.
- Cenovus Energy Inc. ( “buy”) to $31 from $32. Average: $29.72.
- Imperial Oil Ltd. ( “hold”) to $76 from $79. Average: $78.47.
- Suncor Energy Inc. ( “buy”) to $50 from $55. Average: $50.33.
For dividend-paying stocks, his changes are:
- Crescent Point Energy Corp. ( “buy”) to $14 from $14.75. Average: $13.61.
- Enerplus Corp. ( “buy”) to $21 from $23.50. Average: $23.13.
- Headwater Exploration Inc. (“buy”) to $9.25 from $9. Average: $8.75.
- Tamarack Valley Energy Inc. ( “buy”) to $5.50 from $6.25. Average: $6.02.
- Whitecap Resources Inc. ( “buy”) to $12.75 from $14.50. Average: $13.48.
His other changes are:
- Athabasca Oil Corp. ( “buy”) to $4.50 from $4. Average: $4.
- Freehold Royalties Ltd. (“buy”) to $19 from $20.50. Average: $20.28.
- MEG Energy Corp. (“hold”) to $26.50 from $25.50. Average: $26.
- Nuvista Energy Ltd. (“buy”) to $14.50 from $16.50. Average: $15.52.
- Spartan Delta Corp. ( “buy”) to $6.50 from $7.50. Average: $9.30.
- Topaz Energy Corp. ( “buy”) to $27 from $28. Average: $27.25.
“We continue to favour oil-weighted producers in the near term and highlight that small- and midcap producers provide the most torque to our expectation for a robust oil price recovery,” he concluded. “That said, we believe investors should retain exposure to natural gas–weighted producers given our more constructive outlook on NYMEX and AECO prices moving into 2024. Our top picks are CVE (integrated oil), ARX (large-cap natural gas), CPG (mid-cap oil), AAV (small-cap natural gas), FRU (royalty) and ATH (oil sands).”