Stifel analyts Cody Kwong and Michael Dunn think the fourth quarter of 2023 was “relatively drama free” for Canadian energy exploration and production (E&P) companies.
In a research report ahead of earnings season, they predicted there will be few surprises, expecting most companies to have executed plans as forecasted. However, they warn 2024 budgets may “come under pressure.”
“With the weakness in the natural gas and crude oil price complexes since the end of 2023, we do observe some attrition in our 2024/2025 industry outlook,” they said. “Alongside the revisions that impacted earnings power and FCF of these businesses, are commensurate target price reductions that average 8 per cent across our Canadian E&P coverage universe. While there is still cause for optimism over the medium to longer term with the start-up of TMX and LNG Canada on tap for later this year, the remainder of winter and into the spring could be choppy trading territory for industry.”
With their target adjustments, the analysts revealed their top picks in the sector.
For oil-levered stocks, they prefer:
* Athabasca Oil Corp. (“buy”) with a $5 target, up from $4.75. The average is $5.07.
* Crescent Point Energy Corp. (“buy”) with a $14 target, down from $15.50. Average: $13.35.
* Headwater Exploration Inc. (“buy”) with a $8.50 target, down from $9. Average: $9.18.
* Tamarack Valley Energy Ltd. ( “buy”) with a $4.75 target, down from $5. Average: $5.46.
For natural gas-levered stocks, they selected:
* Advantage Energy Ltd. (“buy”) with a $13 target, down from $14.50. Average: $12.43.
* Peyto Exploration & Development Corp. ( “buy”) with a $16 target, down from $17. Average: $5.70.
“Given the soft near-term natural gas price outlook and a very volatile crude oil price tape, we will watch to see if more companies elect to moderate 1H24 or overall 2024 activity levels to preserve financial flexibility, dividend sustainability, and opportunistic share buyback programs,” the analysts said.”We have already seen several companies take a more conservative approach to 2024 investment vs the preliminary view out of names like ARX, CPG, BIR, HWX and OBE, and we would expect this list to continue to grow on receipt of year-end reports.
“Companies well positioned to take advantage of recent share price softness. At current strip prices, we expect ATH, ERF, NVA, LOU and PXT to be best positioned from a balance sheet and FCF perspective to be the most active with buybacks in 2025. Remember, a 2-per-cent share buyback Canadian federal tax kicked in on January 1st, 2024.”