Desjardins Securities analyst Chris MacCulloch is expecting “a relatively smooth” third-quarter earnings season for Canadian oil and gas producers, seeing operations benefiting from limited wildfire impacts and an absence of material infrastructure downtime this summer.
“This was most evident for oil-weighted producers as reflected in our estimates, which indicate a slight uplift in sector production relative to 2Q24 levels,” he said in a report titled Hold on to your broomsticks. “Although crude oil prices slid in 3Q24 as global market fundamentals continued shifting into an oversupplied situation, WTI–WCS differentials were relatively stable as the Trans Mountain Expansion (TMX) pipeline continued ramping operations. To that end, we expect industry to continue absorbing incremental egress capacity moving into 4Q24 as nearly every heavy oil producer under coverage is currently forecast to ramp production exiting the year.
“Conversely, the situation was far more challenging on the natural gas side in 3Q24 as AECO and Station 2 prices crashed to mere pennies throughout most of the quarter due to elevated supply and regional pipeline maintenance. Thankfully, several producers proactively took the opportunity to preserve molecules for an improved market by temporarily curtailing production—a decision we applaud given our overriding preference for maximizing value over volumes—which resulted in a modest decrease in volume forecasts relative to 2Q24 levels. Although most natural gas–weighted producers have largely maintained growth plans to date, with a view toward the looming start-up of LNG Canada Phase I (expected in mid-2025), we question whether a slowdown in capital spending could be in the cards as payouts stretch.”
Mr. MacCulloch said he remains “relatively commodity-price-agnostic beyond being cautiously optimistic on the prospect of a modest natural gas recovery in 2025.” He also continues to think sector valuations are “compelling within the context of historically attractive capital return yields.”
“Our top picks are CVE (large-cap oil), TOU (large-cap natural gas), ARX (liquids-rich natural gas), VRN (mid-cap oil), NVA (small/mid-cap natural gas) and HWX (small-cap oil),” he said.
“With respect to our 3Q24 CFPS projections vs consensus, we highlight that our estimates generally align with Street expectations, with the notable exception of HWX (+14 per cent) and CVE (+4 per cent), where we anticipate modest beats. Meanwhile, we could see potential misses from PNE (-13 per cent), AAV (-8 per cent), SDE (-7 per cent), ARX (-7 per cent), FRU (-6 per cent) and MEG (-4 per cent) to the extent that our CFPS estimates are materially below Street expectations, although we caution that consensus is primarily based on less reliable Bloomberg data (vs corporate surveys).”
The analyst made four target changes on Tuesday. They are:
- Cenovus Energy Inc. (“buy”) to $29.50 from $30. The average is $31.93.
- Peyto Exploration & Development Corp. ( “hold”) to $16.25 from $16. Average: $17.93.
- Pine Cliff Energy Ltd. ( “buy”) to $1.15 from $1.20. Average: $1.20.
- Suncor Energy Inc. (“hold”) to $61 from $60. Average: $59.60.