ATB Capital Markets analyst Patrick O’Rourke expects first-quarter earnings season for Canadian oil producers to be “challenging” from both an operational and financial perspective, however he thinks the outlook for the remainder of 2023 appears “favourable.”
“Cold weather notably hindered operations in the early part of the quarter, while producers faced a declining oil price environment that means that diluent costs will be elevated given the logistical time lag between barrel acquisition and blending and wider heavy oil differentials,” he said. “We believe this is well understood by investors (though there is the potential for some ‘sticker shock’ as results are reported), and the focus should be on a much improved outlook on the back of a recent surprise OPEC production cut and much improved differentials, alongside a step change in market access by way of the TMX expansion that is expected to be mechanically complete in 2H/23.”
“Investing into step change in return of capital events has generally been a winning strategy for oil and gas equity investors over the past 24 months, as investors continue to search for the highest quantum of sustainable and growing capital return. Asset quality, operational success, and inventory are all in the spotlight as companies attempt to win ‘The Great Canadian Energy Return of Capital Race.’ To that end, we believe that investors will be keenly focused on commentary from management teams with respect to projections on timeframes around achieving codified return of capital frameworks, with several negatively impacted by working capital adjustments in Q1/23.
In a research report released Monday, Mr. O’Rourke largely maintained his oil price forecast, noting benchmarks have remained “unchanged with modest near-term improvement reflect in heavy oil spreads.” His 2023 WTI estimate rose by 25 US cents to US$75.25 per barrel, while his 2024, 2025 and long-term projections remain US$70, US$65 and US$60, respectively.
“Oil prices have continued to surprise to the upside, with a recent surprise production cut by OPEC+ helping to sustain a view of tightening fundamentals globally in 2H/23, despite the continued potential for recessionary forces to erode some demand,” he said. “On balance at the margin, oil supply-demand fundamentals remain robust given the very tight inventory situation. Further, heavy oil spreads have continued to improve in 2023.”
The analyst did cut his 2023 and 2024 projections for natural gas prices, seeing “tremendous” near-term pressure after “a heating demand season where frankly winter just did not show up in key heating demand regions.”
Ahead of earnings season, Mr. O’Rourke made a series of target price adjustments to stocks in his coverage universe. His changes are:
Oil Sands
- Athabasca Oil Corp. ( “outperform”) to $4 from $3.75. The average target on the Street is $3.80, according to Refinitiv data.
- Canadian Natural Resources Ltd. ( “outperform”) to $90 from $94. Average: $91.35.
- Cenovus Energy Inc. ( “outperform”) to $31 from $36. Average: $31.83.
- Imperial Oil Ltd. ( “sector perform”) to $80 from $77. Average: $79.19.
Large Cap
- ARC Resources Ltd. ( “outperform”) to $21 from $22.50. Average: $21.90.
- Whitecap Resources Inc. ( “outperform”) to $15 from $16. Average: $14.22.
Mid-Cap
- Birchcliff Energy Ltd. (“outperform”) to $10.50 from $11.50. Average: $10.90.
- Tamarack Valley Energy Ltd. ( “outperform”) to $7 from $7.50. Average: $6.63.
Small Cap
- Crew Energy Inc. ( “strong buy”) to $7.50 from $8. Average: $7.54