National Bank Lowers Targets in some cases, they are adopting an extremely conservative approach. GLTA
Analysts at National Bank Financial warn oil and gas investors should expect “another year of macro uncertainty.”
“The ebb and flow of conspiring oil and gas fundamentals influenced by uncertain and complicated global geopolitics have forced us to think of 2024 as a year of cautious optimism,” they said. “We expect much of the same turbulence in the year ahead as inflation continues to play a role, interest rates remain sticky and tense geopolitics persist (which makes a 12-month price prediction tricky). To start the year, we would describe our investment stance as ‘on the defensive’ given the macro uncertainty (but at the same time are not flagging material downside from here).”
While acknowledging their view of the energy sector is “tepid” at best, the firm thinks the Canadian oil and gas landscape is “well positioned with opportunities to differentiate through strategic shifts, operational prowess and capitulation on entrenchment.”
“This organic positioning is about to be bolstered by the approaching tidewater milestones for both oil (TMX) and natural gas (LNG Canada),” the group added. “From an equity perspective, the group is relatively healthy and backstopped by quality assets and liquidity positions which can support a healthy return of capital profile down to US$55.00/bbl as compared to our 2024 oil price assumption of US$75.00/bbl. We remain resolute in our belief that the leaders for the coming year will be those who demonstrate: strategic improvements from the core (as mentioned above), prioritized the balance sheet strength (return flexibility) and capital allocation to pursue optimizations and margin expansion (think efficiency).
“Simply put, the top performers for 2024 are likely those that have made moves to enhance operational and strategic differentiation. We have only made one change to our ratings at this time, downgrading BIR to Sector Perform. The revision reflects what we perceive as the street’s desire for greater visibility around its payout as we transit trough gas prices.”
In a research report released late Tuesday titled Drive To Differentiate; If You Ain’t First, You’re Last, the analysts pointed to four important investment themes for the year ahead:
1. Accelerated Returns
“With the last few companies set to hit their debt targets this year, 2024 is likely the last year we will see accelerated returns as a theme,” they said. “In total, we forecast our coverage has the ability to return ~$40 billion to shareholders in the year.”
2. M&A
“2023 was active for deal flow, and we expect more of the same for 2024,” they said. “Deals should be centred around inventory capture as companies look to add depth and efficiency to the portfolio as the demand for return of capital prevails ahead of growth.”
3. Strategic Shifts
“Although difficult to pinpoint, we support those companies looking to differentiate the business throughout the year, primarily through A&D and operational advancement to improve margins,” they said.
4. Growth
“Not necessarily on an absolute level, but think about the per-share growth in the context of share repurchases,” they said. “This return mechanism provides the ability to grow all aspects of the business, including dividends. Topline production growth should average 5 per cent, however, on a per-share basis this could represent an incremental 10 per cent based on the success of buyback programs.”
After updating their valuation methodology to reflect “long-term fair value in a more normalized pricing environment (mid-cycle)” as well as changes to the firm’s commodity price assumptions, the analysts cut their 12-month target prices for stocks in the sector by an average of 14 per cent. They now see 56-per-cent total return potential for companies with an “outperform” rating and 25 per cent for those with “sector perform” recommendation.
They also made one rating change, downgraded Birchcliff Energy Ltd. to “sector perform” from “outperform” with a $6.50 target, down from $9.25. The average target on the Street is $8.86, according to Refinitiv data.
“The revision reflects what we perceive as the street’s desire for greater visibility around its payout as we transit trough gas prices,” they said.
The analysts’ target adjustments are:
- Arc Resources Ltd. ( “outperform”) to $25 from $26. The average is $27.33.
- Baytex Energy Corp. ( “outperform”) to $7.25 from $8.25. Average: $7.95.
- Canadian Natural Resources Ltd. (, “sector perform”) to $90 from $100. Average: $97.22.
- Crescent Point Energy Corp. ( “outperform”) to $14 from $19. Average: $14.35.
- Crew Energy Inc. ( “sector perform”) to $5 from $7. Average: $8.05.
- Cenovus Energy Inc. (, “outperform”) to $29 from $36. Average: $31.79.
- Enerplus Corp. (, “outperform”) to US$21 from US$25. Average: US$20.60.
- Freehold Royalties Ltd. ( “outperform”) to $17 from $20. Average: $18.52.
- Imperial Oil Ltd. ( “sector perform”) to $89 from $110. Average: $85.17.
- Kiwetinohk Energy Corp. ( “outperform”) to $20 from $22.50. Average: $19.64.
- Kelt Exploration Ltd. ( “outperform”) to $7.50 from $8.75. Average: $8.98.
- Lycos Energy Inc. ( “outperform”) to $9 from $10. Average: $7.97.
- Logan Energy Corp. ( “outperform” $1.50 from $1.35. Average: $1.67.
- Lucero Energy Corp. ( “sector perform”) to 80 cents from $1. Average: 92 cents.
- MEG Energy Corp. ( “sector perform”) to $30 from $31. Average: $30.50.
- Nuvista Energy Ltd. (“sector perform”) to $14 from $15. Average: $16.32.
- Ovintiv Inc. (, “outperform”) US$53 from US$69. Average: US$58.52.
- Peyto Exploration and Development Corp. ( “outperform”) to $15 from $17.50. Average: $16.57.
- Paramount Resources Ltd. (, “outperform”) to $40 from $42.50. Average: $39.39.
- Prairiesky Royalty Ltd. ( “sector perform”) to $25 from $28. Average: $26.83.
- Spartan Delta Corp. ( “outperform”) to $4.50 from $6.50. Average: $5.75.
- Surge Energy Inc. ( “outperform”) to $11 from $13. Average: $13.33.
- Suncor Energy Inc. (“outperform”) to $57 from $74. Average: $52.58.
- Tourmaline Oil Corp. ( “outperform”) to $70 from $80. Average: $82.41.
- Topaz Energy Corp. ( “outperform”) to $27.50 from $30. Average: $27.65.
- Tamarack Valley Energy Ltd. ( “outperform”) to $6.50 from $6. Average: $5.65.
- Vermilion Energy Inc. ( “outperform”) to $20 from $24. Average: $25.11.
- Whitecap Resources Inc. ( “outperform”) to $15 from $18.50. Average: $13.87.
- Yangarra Resources Ltd. ( “sector perform”) to $2 from $4. Average: $2.85.