After the recent underperformance of shares of MEG Energy Corp. TD Cowen analyst Menno Hulshof sees a “discounted valuation on [a] top-tier name,” adding it to the firm’s “Canada Best Ideas” list.
“MEG has materially underperformed its Integrated/oil sands peers since the XEG [iShares S&P/TSX Capped Energy Index ETF] last peaked in April (and year-to-date), partially driven by investor capex concerns as it grows CL capacity to 125mbbl/d and wider-than-expected heavy differentials post-TMX,” he said in a research note. “However, consensus now captures the top-end of management’s 2025/2026 capex range, and with MEG trading at a multiple discount to peers, it is now our top pick.”
Mr. Hulsof noted MEG shares are down 27 per cent since the peak of XEG in April (versus a 16-per-cent decline for the ETF), which is the largest pullback in his Integrated/oil sands coverage.
“Since then, its strip 2025 estimated EV/DACF [enterprise value to debt-adjusted cash flow] multiple vs. its closest peers (ATH/SCR), has shrunk to a 0.2 times discount (from 1.0 times premium) while strip 2025 FCF yield (total capex) has shifted from being 1.2 per cent higher (i.e., cheaper) to 4.0 per cent higher,” he added. “We consider the current MEG discount (2025 FCF yield of 10.3 per cent vs. ATH/SCR at 6.0 per cent/6.6 per cent) unjustifiably large. We think MEG likely recently achieved its US$600-million ND target, triggering 100-per-cent return of FCF with Q3/24 results.
“While capacity growth to 125mbbl/d, and then 135mbbl/d, is well understood, management believes resource in the NW flank of Christina Lake (CL) may be superior to the SE, offering growth optionality to 145-150mbbl/d (when combined with facility optimization). Further, investors expressed concern when MEG first talked about a capex ceiling of $650-milliob through 2026 to fund growth to 125mbbl/d ($20k-$25k/bbl/d). However, ‘last 45-day’ 2025/2026E consensus capex estimates are now $640-million ($620-$650-million)/$660-million ($640-$680-million), suggesting ‘top-end’ scenario capex is now captured.”
The analyst reaffirmed his “buy” rating and $35 target for MEG shares. The current average is $34.25.