Desjardins Securities analyst Chris MacCulloch expects second-quarter earnings season for Canadian energy companies to be a “relatively uneventful affair from an operational perspective,” however he cautioned the impact of wildfire activity remains a concern moving forward.
“While heavy oil producers have benefited from tightening WCS differentials following the recent commissioning of the TMX pipeline, 2Q24 also included the heaviest period of the year for maintenance turnarounds, which disproportionately impacted oil sands producers and refiners,” he said. “Natural gas producers also faced another challenging quarter within the context of depressed commodity prices, particularly for those highly exposed to the AECO and Station 2 market (with limited relief on the horizon until 4Q24). As a result, we expect most producers to post slightly lower sequential cash flows (vs 1Q24).
“With respect to our 2Q24 CFPS projections vs consensus, we highlight that our estimates are generally skewed below Street expectations, with the notable exception of HWX (up 6 per cent), VRN (up 6 per cent) and TVE (up 3 per cent) where we anticipate modest beats. Meanwhile, we could see potential misses from AAV (down 17 per cent), IMO (down 15 per cent), NVA (down 11 per cent) and MEG (down 8 per cent) to the extent that our CFPS estimates are materially below consensus expectations, although we caution that the first three are based on less reliable Bloomberg data (vs corporate surveys).”
In a research report released Tuesday, Mr. MacCulloch made modest adjustments to his commodity price forecast, particularly for the second half of the year. That led to a series of target adjustments for stocks in his coverage universe.
“From a high level, returns to target have expanded since our last sector update in late May, in part a reflection of subdued equity performance,” he said. “By extension, we are growing more constructive on the sector, with a particular bias toward natural gas–weighted producers given our expectation for a robust recovery in AECO prices next year coinciding with the first phase of LNG Canada.”
His top picks are currently:
Large-cap oil: Cenovus Energy Inc. with a “buy” rating and $33 target, up from $31.50. The average on the Street is $33.77.
Natural gas: Tourmaline Oil Corp. with a “buy” rating and $74 target (unchanged). Average: $77.88.
Liquids-rich natural gas: Arc Resources Ltd. with a “buy” rating and $31.50 target, up from $30. Average: $30.72.
Small/mid-cap oil: Veren Inc. with a “buy” rating and $15 target (unchanged). Average: $14.81.
Special situations: Vermilion Energy Inc. with a “buy” rating and $21 target (unchanged). Average: $21.10.
Royalty: Topaz Energy Corp. with a “buy” rating and $28.50 target, up from $26.50. Average: $28.92.
His other large-cap changes are: Imperial Oil Ltd. ( “hold”) to $101 from $92 and Suncor Energy Inc. (“hold”) to $59 from $56. The averages are $98.68 and $60.48, respectively.