BMO BMO Nesbitt Burns analyst Jeremy McCrea reinstated coverage of a trio of energy stocks on Thursday:
* Headwater Exploration Inc. with an “outperform” rating and $9 target. The average target on the Street is $8.71.
“The Clearwater formation is one of the most economic plays in Canada, and Headwater is among the select few publicly traded companies that has exposure to it,” he said. “With a large land base, the company is still working through a meaningful development/waterflood program, anticipating many more years of progress ahead. With a healthy dividend yield and growing cash position, combined with emerging new exploration plays outside the Clearwater, we believe there’s lots to like.”
* Surge Energy Inc. with an “outperform” rating and $10 target. Average: $11.25.
“When we look back at which companies were the best performers over a certain time period, they typically have common attributes: 1) A material change in underlying asset performance; 2) an inexpensive valuation; and 3) are ‘off-the-radar’, setting up a favourable entry point. For Surge, we see the potential for outsized gains given this backdrop — especially if WTI prices improve. With better well performance lately in both the Sparky and Frobisher formations, and the potential for higher ‘value additive’ growth, investors have a lot to look forward to,” he said.
* Tamarack Valley Energy Ltd. with a “market perform” rating and $4 target. Average: $4.83.
“Tamarack has been one of the most acquisitive E&Ps over the last few years. The repositioning into the Charlie Lake and Clearwater has materially improved the company’s inventory duration, as well as its go-forward profitability. Unfortunately, with much of these acquisitions funded with debt, we’re likely to see a slow-down in organic growth as the company re-builds its balance sheet. Over the longer term, as long-lead infrastructure costs diminish and waterfloods take hold, TVE should show good full-cycle economics in these robust plays that would likely bring in new investors,” he said.
Mr. McCrea also assumed coverage of Whitecap Resources Inc. with an “outperform” rating and $13 target, exceeding the $12.70 average.
“One of the most important attributes with any E&P company is its ability to recognize, pivot, and improve its land/inventory base,” he said. “From that point, WCP is one of the few companies that has significantly upgraded its inventory over the last several years and has substantially extended its inventory duration especially with additions in the Montney and Duvernay. This ‘rate of change’ is typically when a multiple expansion occurs and why we believe this should be the case for WCP as these well results come more to light.”