Heading into earnings season for the Canadian energy sector, Desjardins Securities analyst Chris MacCulloch sees rising downside risk for investors in the short term. “Gravol, anyone? It’s certainly been a wild ride in the energy sector, consistent with the broader financial market turmoil, as we enter 3Q22 financial reporting, which kicks off next week,” he said.
Oil prices tumbled in the quarter as global economic prospects darkened following the fastest pace of interest rate hikes in a generation. Meanwhile, the bullish setup for natural gas appears to be reaching its zenith due to a fresh wave of supply, which has eroded most of the US storage deficit in recent weeks.
Although softer commodity prices are obviously painful for producers, we believe they have been properly reflected in sector multiples, with most stocks still trading south of 3.0 times 2023 strip DACF [debt-adjusted cash flow] while offering FCF yields of more than 15 per cent.
Despite the gloomy economic outlook, we expect commodity prices to remain well-supported over the next 12 months, which should result in continued sector outperformance.”
Updating his commodity price forecast and making “minor” reductions to his financial forecast, Mr. MacCulloch tweaked his targets for several companies in his coverage universe.
For the dividend-paying stock, Pine Cliff Energy, his change is:
- Pine Cliff Energy Ltd. (PNE-T, “buy”) to $2.15 from $2.35.