RBC Greg Pardy, RBC Dominion Securities’ Head of Global Energy Research, says he’s “unapologetically bullish on Canada” heading into third-quarter earnings season.
“Oil price volatility is not going away, but the reengineered model that energy producers have embraced has afforded investors with a sector that has financial resiliency and shareholder return optionality like never before,” he said. “With the 590,000 bbl/d Trans Mountain Pipeline Expansion having come on-stream in May (and operating smoothly), western Canada is long export pipeline for the first time in well over a decade. Oil Sands producers have enhanced global market optionality for their crude streams and greater surety that WCS-WTI spreads should remain contained. With most oil sands weighted producers having achieved their net debt targets—most recently MEG Energy and Cenovus—shareholder returns have moved to/towards 100 per cent of excess free cash flow returns with an accent on share repurchases. The pace of buybacks may vary, but the direction of travel is unmistakable. And so, we remain unapologetically bullish on Canada’s oil sands majors in particular, despite a mixed macro backdrop, as companies shrink their common share counts and bolster per share dividends over time.”
While his funds from operations per share estimates for the Canadian majors fall below the Street’s expectations, which he said reflects downstream inventory revisions, Mr. Pardy thinks they may “move more into line as formal corporate surveys are released.”
“We estimate that Canada’s oil sands weighted majors—Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil—generated relatively stable free funds flow (before dividends and working capital movements) of $5.5 billion in the third quarter, and repurchased about $3.6 billion of their common shares—up sharply from about $2 billion in the second quarter,” he said. “Our updated 2024/25 operating earnings/FFO estimates reflect third-quarter actual commodity prices, disclosed share buybacks and other various fine-tuning adjustments. We have also introduced our 2026 estimates under our transition year (placeholder) price outlook.”
Mr. Pardy reaffirmed Canadian Natural Resources Ltd. as his favourite senior producer. It remains on the firm’s “Global Top 30″ and “Global Energy Best Ideas” lists with an “outperform” rating and $59 target. The average target on the Street is $54.48.
“With the achievement of its $10 billion net debt floor at the end of 2023, this marks the third quarter in which CNQ is allocating 100 per cent of its excess free funds flow on an annual (forward-looking) basis as incremental returns to shareholders,” he said.
Suncor Energy Inc. , which is a member of the “Global Energy Best Ideas” list, remains his preferred integrated company with an “outperform” rating and $64 target. The average is $60.17.
“We are looking forward to Suncor’s third-quarter conference call for an energetic update on several operating fronts,” he said.
MEG Energy Corp.also on the “Global Energy Best Ideas” list, is his favorite intermediate producer with an “outperform” rating and $35 target. The average is $33.61.
“Our constructive stance toward MEG reflects its strong leadership, enhanced market access via Flanagan-Seaway to the U.S. Gulf Coast, strengthening balance sheet, and long-life assets,” said Mr. Pardy.