Alvopetro Energy Ltd V.ALV

TD Notes

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Q3/21 Commodity Price Deck Update

Commodity Rally Picked Up Steam During the Quarter Maintaining Our Sector Stance at Overweight

TD Investment Conclusion

We are updating our commodity price deck for QTD actual results. Q3/21 saw a significant rally in both oil and natural-gas prices (Brent/WTI prices both up 7% q/ q, while NYMEX/AECO prices rose 48%/20% q/q, respectively). We estimate that Q3/21 FFOPS increased an average 23% q/q for our oil-weighted producer coverage (>60% of production) and 42% for our natural-gas-weighted coverage. We have increased our 2022E Brent assumption to US$70/bbl (from US$68.25/bbl) and WTI to US$67/bbl (from US$65/bbl). On the gas front, we are increasing our 2022E NYMEX assumption to US$3.95/mcf (from US$3.00/mcf) and our 2022E AECO assumption to C$3.65/mcf (from C$2.80/mcf). We are also introducing our 2023E company specific estimates.

Outlook for Oil & Downstream: We remain constructive on the oil outlook for the following reasons: 1) OPEC+ likely sticks to supply increases of 400 mbbl/d per month through YE2022 (next meets on October 4); 2) most North American companies remain committed to capital restraint and more structured shareholder return frameworks, which should translate into manageable mid-single-digit liquids growth; 3) U.S. total oil inventories are now down ~15% y/y and ~8% below the five-year average; and 4) the supply/demand outlook continues to point to supply tightness in 2022, exacerbated by upwards of 900 mbbl/d of incremental winter demand due to natural gas/liquid fuels switching and ~15% of GoM production remaining offline. The U.S. downstream outlook looks reasonable, given crack spreads ranging ~US$15-US$19/bbl (including RIN price impact) and total U.S. refined product demand, which is currently sitting above the top end of the five-year band.

Outlook for Natural Gas: The conversation regarding natural gas has changed materially since our last commodity price update. At that time, there was concern over low natural-gas storage levels in Asia and Europe. However, this has evolved to what some are calling a supply "crisis". Natural-gas prices have rallied over ~400% y/y and are currently trading at ~US$25/mmbtu in Europe and ~US$30/ mmbtu in Asia (JKM). This is due to a culmination of factors, including above-normal weather-related drawdowns last year, unexpectedly low wind power generation, the retirement of/intermittent outages in European nuclear plants, low hydropower generation in southern China, and high coal prices in northern China. This has now led to reduction in industrial consumers in Europe and rationing of power in parts of China. Although the U.S. and Canada have capacity (if producers are willing) to ramp up production, North America is currently running near maximum LNG export capacity. It appears that energy stability/security is gaining traction in a conversation recently dominated by decarbonization. We believe that this could result in continued strong demand for North American gas and potentially additional North American LNG export projects being greenlit over the medium term.

We are maintaining our OVERWEIGHT sector stance for the Canadian and U.S. energy equities.