Desjardins Securities analyst Justin Bouchard and Chris MacCulloch continue to see “deep value” in the Canadian energy sector heading into fourth-quarter earnings season.
“The rally in oil prices caught us by surprise; we were expecting this type of move later in the year,” they said in a research report released Monday. “Natural gas has been a story of commodity whiplash, with an extremely mild, deflationary December reflated by a jolly January and, so far, fantastic February forecasts. Either way, the current commodity price environment translates into significant FCF generation for energy producers, carrying with it the ability to further strengthen corporate balance sheets and enhance shareholder returns. We have upped our targets on every producer under coverage, each of which maintains a Buy recommendation.”
In the report, the analysts moved their 2022 price forecast for WTI to US$80 per barrel from US$70 previously, and they introduced a US$90 estimate for 2023.
“While there are still several potential near-term headwinds for oil prices, by all accounts that ship has sailed,” they said. “Traders are laser-focused on the expectation that global oil markets are woefully unprepared for eventual tighter supply balances later this year— and unconvinced of OPEC+ spare capacity. When combined with the systemic capital starvation of oil-producing assets in recent years, it is a recipe for higher prices.”
With that view, the analyst said they would continue to buying producer equities “with reckless abandon.”
“Following a blockbuster performance in 2021, it is the same story this year for the sector,” he said. “The combination of US$80+/bbl WTI and US$4+/mmbtu NYMEX prices, along with industry’s newfound zeal for capital discipline, continues to support one of the most compelling recent investment climates for Canadian oil & gas equities. Factoring in the growing inflationary storm, there are few safer harbours than physical commodities. The FCF story is long and strong. Most importantly, the majority of producers are in the final innings of their respective balance sheet cleanups. In other words, short of a breakdown in capital discipline or an unexpected collapse in commodity prices, investors can count on significant capital returns through a combination of share buybacks, dividends and special dividends.”
Raising their target prices for all stocks in their coverage universe, Mr. Bouchard made these adjustments to large-cap stocks:
- ARC Resources Ltd. to $25 from $21. The average on the Street is $18.54.
- Canadian Natural Resources Ltd. to $75 from $65. Average: $66.43.
- Cenovus Energy Inc. to $25 from $21. Average: $21.24.
- Imperial Oil Ltd. to $60 from $50. Average: $51.20.
- Suncor Energy Inc. to $50 from $42. Average: $41.87.
- Tourmaline Oil Corp. to $71 from $70. Average: $63.14.