In his weekly report on the Canadian Energy sector, Canaccord Genuity analyst Mike Mueller emphasized global crude demand is “surpassing expectations with supply growth truncated.”
“Crude prices have surprised to the upside despite some initial concerns on the demand side of the equation rolling into 2024,” he said. “Year-to-date, spot WTI prices have increased 20 per cent to over US$85 per barrel. In our view, the market sits in tight balance, albeit artificial to some extent considering the 5.9 mmbbl/d [million barrels per day] of OPEC+ cuts that could (in theory) be returned to market. Conversely, with war waging on in the Middle East and in Europe, risks of supply being disrupted have yet to wane and are likely to remain a theme in the near term with no new signs of these conflicts de-escalating.”
Given that view, Canaccord raised its WTI oil price expectations for 2024 to US $79.28 per barrel (from US$75.00) and 2025 to US$75.00 par barrel from US$70. Its long-term outlook remains US$70 per barrel.
Conversely, the firm thinks a natural gas inventory surplus continues to weigh on pricing, leading it to cut its 2024 assumption for NYMEX Henry Hub prices to US$2.48 per thousand cubic feet from US$2.69. Its 2025 forecast remains US$3.50, while its long-term projection slid to US$3.25 from US$3.50.
“At risk of sounding like a broken record, this past winter brought record warm temperatures and a significant surplus in natural gas inventories (39 per cent above the five-year average in the U.S.),” said Mr. Mueller. “While the near-term outlook is unlikely to bring anything to structurally change the environment we’ve now become familiar with, the outlook vastly improves as we shift our focus towards year-end and into 2025. A resumption in U.S. LNG export capacity adds is expected later this year, and LNG Canada’s Phase 1 development remains on track to come online next year.”
With the price forecast adjustments, Mr. Mueller raised his 2024 and 2025 cash flow yield projections by 9 per cent and 12 per cent, respectively. His net asset value estimates were also adjusted.
He also made one rating change, downgrading Arc Resources Ltd. to “hold” from “buy” with a $27 target, up from $25 but 63 cents below the consensus on the Street.
“We believe that the stock’s recent outperformance (ARX up 28 per cent year-to-date versus the sector at approximately 22 per cent) is unlikely to be sustained in the near term,” he said. “We do note, however, that we believe its longterm outlook remains strong considering its breadth and depth of inventory. The company’s Attachie Phase 1 development remains on schedule to come online and ramp to full production next year, and we believe it is likely that an increase to its 2.7-per-cent dividend would logically coincide with commissioning of that project.”
He made these target changes:
- Birchcliff Energy Ltd. ( “hold”) to $5.50 from $5.25. The average is $6.31.
- Crescent Point Energy Corp. ( “buy”) to $14 from $13. Average: $13.54.
- Freehold Royalties Ltd. ( “buy”) to $19 from $19.50. Average: $17.88.
- Peyto Exploration & Development Corp. ( “buy”) to $17 from $16.50. Average: $16.55.
- Pine Cliff Energy Ltd. ( “buy”) to $1.20 from $1.40. Average: $1.51.
- PrairieSky Royalty Ltd. (, “hold”) to $28 from $24.75. Average: $26.81.
- Tourmaline Oil Corp. ( “buy”) to $72.50 from $75. Average: $76.63.
- Tamarack Valley Energy Ltd. (“buy”) to $4.75 from $4.25. Average: $4.85.
- Vermilion Energy Inc. ( “buy”) to $20.50 from $20. Average: $20.58.
- Whitecap Resources Inc. ( “buy”) to $14 from $12.50. Average: $12.83.