National Bank analysts Dan Payne and Travis Wood see the Canadian energy sector screening well on value and enjoying multiple expansion for the first time in over a decade, pointing to “balance sheet and liquidity strength at record levels and return of capital frameworks that are broadly supported by sound return on capital initiatives.”
“Notably, CNQ [Canadian Natural Resources Ltd.] is the first to trade in line with its historical 10-year average forward EV/DACF [enterprise value to debt-adjusted cash flow] multiple,” he said. “We believe companies which showcase sound capital discipline and have an asset base to support an attractive return on capital profile will experience value expansion as well. As a function of our multiple expansion thesis, compounded by a modestly improved commodity price outlook, our target prices now reflect this more constructive outlook, implying a total return of 42 per cent (on average).”
In a research report released Friday previewing the approaching earnings season, the analysts emphasized the energy sector “remains in pole position from a total return standpoint” thus far in 2024, noting the iShares S&P TSX Capped Energy Index ETF is 22 per cent versus the broader TSX at 3 per cent. They attribute those gains to “rising oil prices following OPEC+ restraint, compounded by continued geopolitical risks and a growing appreciation that global fossil fuel demand should remain healthy.
“In Canada, full operation of the long anticipated TMX line is imminent (we assume some stops and starts), which has tightened domestic differentials,” they said. “Natural gas remains the laggard, and with an abundance of supply, persistent drilling and completion activity and rising inventory following a mild winter, our assumptions are below the forward strip.
“Balance sheets continue to improve as companies approach net debt targets, most recently demonstrated by CNQ’s move to return 100 per cent of CFCF to shareholders (since this, the stock has outperformed the XEG by 5 per cent). Looking through the rest of 2024, we expect MEG and CVE will be the next to announce 100-per-cent allocation ... Our coverage is set to generate more than $80 billion of cash flow this year, of which we forecast $35 billion will be returned to shareholders.”
Ahead of earnings season, the analysts upgraded their forecasts and target prices for companies in their coverage universe to reflect their “more constructive” outlook.
For senior and integrated companies, their changes were:
- Canadian Natural Resources Ltd. ( “sector perform”) from $120 from $94. The average on the Street is $107.77.
- Cenovus Energy Inc. ( “outperform”) to $38 from $29. Average: $32.68.
- Imperial Oil Ltd. ( “sector perform”) to $120 from $90. Average: $94.20.
- Suncor Energy Inc. (“outperform”) to $75 from $57. Average: $53.58.
Changes for large and mid-cap stocks were:
- Advantage Energy Ltd. ( “outperform”) to $12.50 from $12. Average: $12.96.
- Arc Resources Ltd. ( “outperform”) to $33 from $25. Average: $27.63.
- Crescent Point Energy Corp. ( “outperform”) to $19 from $14. Average: $13.54.
- Freehold Royalties Ltd. ( “outperform”) to $18 from $17. Average: $17.88.
- Headwater Exploration Inc. (“outperform”) to $10.50 from $9.50. Average: $9.04.
- Kelt Exploration Ltd. ( “outperform”) to $9 from $7.50. Average: $8.30.
- Meg Energy Corp. ( “sector perform”) to $37 from $32. Average: $33.85.
- NuVista Energy Ltd. ( “sector perform”) to $15 from $14. Average: $15.40.
- Ovintiv Inc. (“outperform”) to US$68 from US$59. Average: $60.99.
- Peyto Exploration & Development Corp. ( “outperform”) to $18.50 from $15. Average: $16.55.
- Paramount Resources Ltd. ( “outperform”) to $40 from $37.50. Average: $35.50.
- Prairiesky Royalty Ltd. ( “sector perform”) to $18.50 from $15. Average: $26.81.
- Spartan Delta Corp. (“outperform”) to $5 from $4.50. Average: $4.79.
- Vermilion Energy Inc. ( “outperform”) to $22 from $21. Average: $20.58.