National Bank “The new reality is that companies within the sector are now much more comfortable at mid-to-low cycle pricing with sustainable payout ratios (average POR less than 100 per cent at US$65/bbl prices based on current capital budgets), historically low debt levels and reduced AECO exposure,” they said.
“In addition, despite what feels like mounting negative sentiment in both the energy space and the economy in general (maybe we are turning a corner with the wave of rate cuts?), we remain constructive on the fundamentals (inventories, exports, OPEC+ restraint (although less clear today), etc.), although we appreciate the growing uncertainty around the rapidly changing dynamics into year-end and have updated our assumptions to capture this growing uncertainty and volatility. Given the recent stagnation in gas prices, our outlook for natural gas remains unchanged and largely longer-term constructive (implicit in the forward curve).”
In a research report released Friday, the analysts made the analysts upgraded their commodity price assumptions to reflect their current macro views on conditions surrounding oil and gas. Their WTI forecast for 2024 fell by 5 per cent to US$75.50 per barrel (from US$79.50 previously) with their estimates for 2025 and 2026 and beyond dropped by 6 per cent and 10 per cent, respectively, to US$75 and US$70 (from US$80 and US$77.50). For NYMEX natural gas, their projection for the current fiscal year dropped 11 per cent to US$2.40 per thousand cubic feet (from US$2.70), while their 2025 and long-term expectations remained unchanged at US$3 per thousand cubic feet.
“Since we last updated our price deck as part of our Q2 preview, crude prices have backed off significantly (still down almost 20 per cent since July 1 despite the recent claw back), while natural gas prices, at least in the U.S., continue to firm up as winter heating season approaches and storage fills slower than expected (we’re ready whenever you are AECO),” they said.
“Zooming out, macro-related fears and uncertainty surrounding both sides of the supply-demand balance continue to whipsaw investors, with conditions in financial markets muddying the tangible dynamics present in the physical market. This uncertainty, largely related to the unwinding of OPEC+ voluntary cuts, continues to befuddle investors, with mixed messaging and speculation exerting downward pressure on price. Despite the noise, with interest rate cuts underway around the globe (the Fed recently committed to a 50 basis point cut, its first since 2020, with more expected later this year), we believe product demand should firm up in the coming months (crack spreads currently approaching COVID lows) as the easing of rates drives a ramp-up in industrial and consumer activity, which in turn should help buoy crude demand. While underwhelming Chinese demand data has added apprehension to the market, we believe upside risk exists as the Chinese government tries to kickstart growth, in addition to the growing risk of a larger, regional conflict across the Middle East.”
With the price deck changes as well as an adjustment to their valuation approach, the analysts made notable price reductions to stocks in their coverage universe on Friday.
“Even with the recent sell-off in crude, the set-up for the space remains compelling with our coverage group now trading at 2025 estimated EV/DACF [enterprise value to debt-adjusted cash flow] multiples of 6.3 times for the seniors, 4.3 times for the oil peers and 5.6 times for the gas peers (and FCF yields of 6 per cent, 6 per cent and 2 per cent, respectively.),” they said. “However, largely a result of our commodity price deck update, our 2024 and 2025 total cash flow estimates are down by 11 per cent and 10 per cent, respectively, driving our target prices lower by 7 per cent on average. The updated target prices imply a total return of 49 per cent, with the Outperform and Sector Perform names returning 56 per cent and 33 per cent, respectively. We have made no rating changes at this time.”
For senior and integrated companies, their changes are:
- Canadian Natural Resources Ltd. (“sector perform”) to $52 from $58. The average on the Street is $55.23.
- Cenovus Energy Inc. ( “outperform”) to $31 from $38. Average: $33.45.
- Imperial Oil Ltd. ( “sector perform”) to $112 from $115. Average: $98.38.
- Suncor Energy Inc. ( “outperform”) to $73 from $77. Average: $60.69.
For large and mid-cap stocks, their changes are:
- Advantage Energy Ltd. ( “outperform”) to $11.50 from $13. Average: $13.85.
- ARC Resources Ltd. ( “outperform”) to $31 from $32. Average: $30.47.
- Athabasca Oil Corp. ( “outperform”) to $6.50 from $7.50. Average: $6.56.
- Birchcliff Energy Ltd. ( “sector perform”) to $6 from $6.50. Average: $6.77.
- Baytex Energy Corp. (“outperform”) to $7.50 from $8. Average: $6.35.
- Freehold Royalties Ltd. (“outperform”) to $16.50 from $17. Average: $17.61.
- Headwater Exploration Inc. ( “outperform”) to $9.50 from $10.50. Average: $9.88.
- Kelt Exploration Ltd. ( “outperform”) to $8.75 from $9. Average: $8.82.
- Meg Energy Corp. (“sector perform”) to $31 from $35. Average: $33.96.
- Nuvista Energy Ltd. (“sector perform”) to $14.50 from $15. Average: $16.95.
- Ovintiv Inc. ( “outperform”) to US$55 from US$66. Average: $58.91.
- Peyto Exploration & Development Corp. (“outperform”) to $18.50 from $18. Average: $17.85.
- Prairiesky Royalty Ltd. ( “sector perform”) to $33 from $31. Average: $30.02.
- Spartan Delta Corp. ( “outperform”) to $5.50 from $6. Average: $5.82.
- Tamarack Valley Energy Ltd. ( “outperform”) to $6.75 from $7.25. Average: $5.36.
- Vermilion Energy Inc. ( “outperform”) to $15.50 from $19. Average: $20.48.
- Veren Inc. ( “outperform”) to $15.50 from $19. Average: $14.38.
- Whitecap Resources Inc. ( “outperform”) to $14.50 from $15.50. Average: $13.79.