Taking a generally conservative approach as many of his targets are below (or well below) Street consensus. GLTA Raymond James analyst Luke Davis initiated coverage of eight small-to-mid-cap oil and gas producers and two royalty companies on Friday, believing the relative positioning of the group “looks compelling with many of the equities trading at material discounts to both larger-cap peers and underlying resource value.”
“While many of the business models have converged (at least on paper), we think differentiating by asset quality and duration, management track record and alignment, and valuation is a good starting point when coupled with a look at potential needle moving catalysts,” he said in a report. “With respect to the royalty cohort, we like the enduring nature of the model and, while equity performance is intrinsically linked to underlying commodity prices, the subdued relative risk profile may be better suited to more risk averse investors or those preferring a defensive tact.
“Structural shift in financial positioning is a theme with durability, in our view. At risk of sounding entirely redundant, we would be remiss to ignore industry’s shift in capital allocation priorities, which was undoubtedly fortified coming out of the depths of the latest energy downturn in 2020. Financial positioning (with respect to absolute leverage and term) is structurally better than any time in recent memory, certainly the past decade, and while we shared some skepticism early in the cycle, industry as a whole has put its money where its mouth is, with our coverage group returning $2.2-billion to shareholders over the past six years, while retiring 9 per cent of outstanding shares on average (including 2024). Reinvestment rates have fallen materially (circa 100 per cent to 63 per cent on average), with underlying corporate decline rates and capital efficiencies improving despite inflationary pressures, and are broadly managed with a more conservative undertone. While the wounds of the past cycle have largely been healed, we believe the scars run deep and have left a lasting impression, a feature we think will drive a persistent focus on shareholder returns and aid in a shift of broader stakeholder perception toward that of a mature and sustainable industry.”
Mr. Davis initiated coverage of the following companies:
- Athabasca Oil Corp. with a “market perform” and $5.50 target. The average is $6.33.
- Baytex Energy Corp. with a “market perform” rating and $5.50 target. Average: $6.15.
- Freehold Royalties Ltd. with a “market perform” rating and $16 target. Average: $17.50.
- Headwater Exploration Inc. with a “market perform” rating and $8.50 target. Average: $9.71.
- Obsidian Energy Ltd. with a “strong buy” rating and $15 target. Average: $14.
- PrairieSky Royalty Ltd. with a “market perform” rating and $33 target. Average: $29.98.
- Surge Energy Inc. with an “outperform” rating and $9 target. Average: $11.78.
- Tamarack Valley Energy Ltd. with a “market perform” rating and $5 target. Average: $5.36.
- Veren Inc. with a “strong buy” rating and $13 target. Average: $13.58.
- Whitecap Resources Inc. with a “market perform” rating and $13 target. Average: $13.56.
“Our top E&P picks are quite selective and oriented around where we see large dispersions in fundamental value vs what the market is currently pricing in. We also consider ability to weather potential near-term commodity price volatility, asset duration/inventory depth, and clear catalysts that we think could move the needle on valuation. We highlight OBE (SB), VRN (SB), and SGY (OP),” he said.