Driven by the industry’s “newfound focus on shareholder returns and capital discipline, backed by FCF yields well into the midteens for most producers at strip pricing,” Canada’s energy sector should see a “solid” 2022, according to Desjardins Securities analysts Justin Bouchard and Chris MacCulloch. “As we roll into 2022, we can state unabashedly that we have Buy ratings on every single producer under our coverage,” they said. “A focus on oil or natural gas, big or small—it really makes no difference, as we see an environment where a rising tide lifts all boats again despite the meteoric performance of the Canadian energy sector in 2021.
“To be sure, there are still a number of headwinds for oil before a sustained shift to significantly higher prices — but if the world does not experience another global lockdown due to Omicron (or the next variant), there is clear line of sight to a much stronger price environment in the second half of 2022. On the natural gas front, the heating season is off to another slow start, with a decidedly bearish December weather forecast. But there is still plenty of winter left, and the one thing you can always count on with natural gas markets is that volatility will remain front and centre.”
In a research report released Wednesday, the analysts called 2021 “the year of capital discipline” for the energy sector after oil prices beginning below US$50 per barrel “coming out of the depths of despair in 2020.”
“When we look at the sector based on current strip commodity prices, we see double-digit FCF yields across the board,” they said. “And if you believe in the strip, it is difficult to imagine that investors won’t eventually gravitate toward the sector in greater numbers, particularly if global inflation fears continue rising and companies practice what they preach with respect to shareholder returns. As we highlighted earlier, we still believe that the sector provides a compelling investment opportunity in 2022, even following its stellar performance this year.”
With that view, the analysts revealed a trio of “top picks” for the coming year:
* ARC Resources Ltd.
ARX-T +0.43%
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With a “buy” rating and $21 target, up from $20 and exceeding the $18.07 average.
“Over the past three quarters, ARX has been diligently working on the integration of assets following the strategic combination with Seven Generations earlier this year,” they said. “The deal provided ARX with increased scale and expanded capital allocation flexibility — both of which have significantly boosted its cash flow profile while providing additional diversification across the hydrocarbon value chain. The company’s production profile is roughly 60-per-cent natural gas and 40-per-cent liquids, which provides exposure to both commodities. In our view, the stock is heavily discounted and the valuation does not reflect the fundamentals of a company that is highlighted by a strong cash flow profile, low debt metrics and a commitment to returning 50–80 per cent of FCF to shareholders. It is also worth noting that in November, the company announced a 52-per-cent increase to the dividend (current yield of 3.6 per cent) — and there is visibility to further dividend growth in 2022.”