Though there are several sources of volatility currently present in the energy sector, ATB Capital Markets analyst Patrick O’Rourke sees beneficial conditions for investors.
“Overall the bottom line is that we continue to view the medium-term fundamentals and valuation of the sector as a whole constructively, but transitory issues in the near-term, by way of noise surrounding an SPR release, winter COVID resurgence, and the TMX outage have the potential to further enhance the opportunity set, by adding to near-term commodity and equity volatility - investors should be well prepared to take advantage of these opportunities,” he said.
In a research report released on Tuesday, Mr. O’Rourke raised his raised his 2021 WTI forecast to US$68.50 per barrel from US$66.25 with his 2022 projection jumping to US$72.75 from US$65.00, pointing to “much-improved strip commodity prices.”
After also increases his 2022 natural gas forecast, Mr. O’Rourke made positive near-term cash flow revisions to the companies in his coverage universe, leading to higher target prices for their shares.
“Our revised commodity forecasts see directionally positive CF revisions to our equities (especially in the near-term), with 2022 CFPS [cash flow per share] estimates increasing from prior estimates by an average of 16 per cent, 13 per cent, 12 per cent and 15 per cent for our oil sands, large cap, medium cap, and small cap peer groups, respectively. Our price targets and NAVs are directionally positive as well, with upward revisions to the majority of our names, with near-term windfall cash flows assumed to reduce debt in our NAV modelling, while our longer-term pricing assumptions remain backwardated (and unchanged) at this time, leaving the potential for further significant NAV upside should we choose to improve our longer-term views at a later date.”
Mr. O’Rourke focused on five equities that he sees having “unique” investment thesis, raising their target prices:
* Whitecap Resources Inc. (“outperform”) to $11.25 from $10.75. Average: $10.59.
“WCP offers the highest return, across our E&P coverage, to our intrinsic NAV based target, at 60 per cent,” he said. “WCP’s CF generation is supported throughout the commodity cycle, by its peer leading corporate decline of 20 per cent (excluding the oil sands group), which it expects to maintain in 2022. WCP currently offers a 3.8-per-cent dividend yield, with a 2022e total payout of 45 per cent vs the peer group average of 47 per cent.”
* Cenovus Energy Inc. ( “outperform”) to $22 from $19.50. Average: $19.69.
“CVE currently offers the second highest upside, of the oil sands group, to our intrinsic NAV based price target, at 44 per cent, while we see an average upside of 31 per cent for the group, a key driver of our outperform rating. The focus on Cenovus’ merger with Husky was on improving market access and integrating its operations from the wellhead to the refinery. Cenovus is now focused on the $1.2-billion in identified cost structure savings and the project high gradings that were laid out in the merger announcement, and given the confidence and execution that CVE has been conveying, we believe there is further potential upside, though broader economic inflationary pressures may limit that.” In addition, we continue to believe there is plenty of opportunity to improve upon the prior existing and Husky acquired assets (most visibly through the margin enhancing integration of Foster Creek/Christina with Husky’s Lloydminster upgrader). Finally, we believe that CVE is also best positioned for asset rationalization that accelerates debt repayment and the path to shareholder returns relative to peers, with the obvious focus being the Deep Basin and retail assets (while the Company clearly alluded to the potential for other asset sales on recent investor calls.”
Mr. O’Rourke’s other changes included:
- Arc Resources Ltd. ( “outperform”) to $16.75 from $15.75. The average on the Street is $18.07.
- Enerplus Corp. ( “outperform”) to $15 from $12.25. Average: $15.25.
- Tourmaline Oil Corp. ( “outperform”) to $60 from $55. Average: $57.83.