Desjardins Securities’ Energy Research team, led by analyst Chris MacCulloch, is shifting away from its previous bullish natural gas thesis “toward a more oil-centric near-term viewpoint.”
“Although we remain bullish on longer-term natural gas fundamentals, we have been taken aback by how rapidly natural gas markets collapsed following one of the mildest winters (to date) in decades and have likewise trimmed price targets across the board for gas-weighted producers,” the group said. “Conversely, we are growing increasingly bullish on oil prices as China begins reopening amid continued uncertainty with respect to Russian supply and have hiked price targets across the board for oil-weighted producers. Despite a bifurcated near-term commodity price outlook, the environment remains stimulative for all producers, many of which are no longer burdened by debt and are now returning more than two-thirds of FCF to shareholders—a proportion that should expand to upwards of 85 per cent in 2024 at current strip prices. The energy rally still has legs in 2023.”
The firm raised its 2023 forecast for WTI to US$90 per barrel (from US$85 previously) and reiterated its 2024 estimate of US$100.
“Both are materially above the current strip, reflecting our belief that the market should have greater clarity on terminal interest rates and much better visibility on the demand impact of the Chinese government’s recent abandonment of its zero-COVID policy as well as the supply impact of the G7 price cap and EU embargo on Russian crude oil and refined products,” Desjardins said. “We also expect WTIWCS differentials to narrow to US$20.00/bbl in 2023 as SPR releases wrap up and the inventory glut from last month’s Keystone pipeline outage eases.”
Its 2023 NYMEX forecast dropped to US$4 per thousand cubic feet from US$5.50 to “better reflect the disappointing start to the winter heating season and our expectation for ample U.S. storage levels.”
“Beyond bearish weather conditions, North American natural gas fundamentals were already deteriorating from our perspective; we now believe the market is oversupplied by 1.0–1.5 bcf/d on a weather-adjusted basis although we expect the softer price environment to drive a slowdown in drilling activity, which should result in tighter supply balances moving into 2024,” the analyst said. “As a result, we are increasing our 2024 price forecast to US$4.00/mcf (from US$3.50/mcf), directly in line with the current strip.”
Desjardins did warn the Canadian energy sector’s ability to repeat its “strong” performance of 2021 and 2022 will be “a tall order.”
“However, producers have remained steadfast in their commitment to capital returns, and the commodity price environment remains highly stimulative within a historical context, even for natural gas producers,” it said. “That said, we believe the current market requires an increased focus on differentiation, with most of the easy gains from the commodity reflation story now in the rear-view mirror. Our best ideas are SU (integrated oil), TOU (large-cap natural gas), CPG (mid-cap oil), AAV (small-cap natural gas), SDE (liquids-rich natural gas) and FRU (royalty).”
With that view, Mr. MacCulloch made a series target price adjustments for stocks in his coverage universe.
For large-cap companies, his changes were:
- Arc Resources Ltd. ( “buy”) to $25 from $26. The average on the Street is $24.63.
- Canadian Natural Resources Ltd. ( “buy”) to $100 from $94. Average: $91.95.
- Cenovus Energy Inc. ( “buy”) to $35 from $33. Average: $33.06.
- Imperial Oil Ltd. ( “hold”) to $82 from $80. Average: $78.18.
- Suncor Energy Inc. ( “buy”) to $58 from $57. Average: $53.42.
- Tourmaline Oil Corp. ( “buy”) to $90 from $97. Average: $93.77.
For dividend-paying stocks, his changes were:
- Crescent Point Energy Corp. ( “buy”) to $16 from $15.50. Average: $13.94.
- Enerplus Corp. ( “buy”) to $25 from $22. Average: $24.42.
- Headwater Exploration Inc. ( “buy”) to $10 from $9.75. Average: $9.56.
- Peyto Exploration & Development Corp. ( “buy”) to $17 from $19. Average: $17.63.
- Pine Cliff Energy Ltd. ( “buy”) to $2 from $2.15. Average: $1.98.
- Tamarack Valley Energy Ltd. ( “buy”) to $7.25 from $6.25. Average: $7.16.
- Vermilion Energy Inc. ( “buy”) to $31 from $35. Average: $33.92.
- Whitecap Resources Inc. ( “buy”) to $14.50 from $14. Average: $14.47.