A yellow Encana natural gas pipeline marker is seen along a road on state forest park land in Kalkaska, Michigan June 20, 2012.Reuters
Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.
The 'Golidlocks' era for energy exploration and production companies has come to an end, says Citigroup, and the outlook for the sector "has turned quite dire."
Analysts cut their price targets on the 22 firms in the coverage universe and lowered their estimates for earnings per share in 2015 by an average of approximately 57 per cent, leaving them 50 per cent below the consensus calls.
"We expect this strong correlation between crude prices and the E&P sector will hold throughout 2015, in large part due to the higher liquids production mix as the sector shifted its exploration and development focus away from natural gas since 2012," said analyst Robert Morris. "Thus, movements in equity prices within our E&P sector over 2015 are more likely to be driven by changes in the outlook for oil prices than by company-specific fundamental differentiators – successful exploration, drilling efficiency gains, improved well results, and others."
Two Canadian energy giants were among the firms that had their price targets trimmed by Citigroup's team.
Mr. Morris reduced his price target on Canadian Natural Resources Ltd. to $28 (U.S.) from $36 and EnCana Corp.'s to $14 from $16.50, but kept "neutral ratings" on both stocks.
Citigroup maintained "buy" ratings on Antero Resources, Eclipse Resources, EOG Resources and Devon Energy, companies whose cash flow per debt-adjust share growth prospects offer upside relative to their current valuations.
Anadarko Petroleum Corporation, Chesapeake Energy Corporation, Cabot Oil & Gas Corporation, Concho Resources Inc., EP Energy Corporation, Newfield Exploration Co., Noble Energy Inc., Pioneer Natural Resources Co., Range Resources Corporation, and Whiting Petroleum Corp. were all downgraded to "neutral" from "buy."
Marathon Oil Corporation, Oasis Petroleum Inc., and Cimarex Energy Co. were downgraded to "sell" from "neutral."
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Worries about how the turmoil in oil prices will affect Altus Group Limited are overblown, says CIBC.
Analyst Stephanie Price acknowledged that the company's geomatics division does face challenges stemming from slowing growth in the energy sector, which prompted her to lower her estimates for revenues and margins in this segment. However, she highlights the 15 per cent decline in the stock price over the past month as proof that the downside risks have been more than priced in.
"We believe the impact of lower oil prices will be less pronounced than 2009 given greater diversification within the division (65 per cent exposed to oil versus 85 per cent in 2008) and the company (geomatics 20 per cent of overall revenue versus 30 per cent prior)," she said. "In addition, we believe the company has levers to pull to reduce costs (employee reduction, overtime restrictions, etc.)."
Ms. Price upgraded the stock to "sector outperformer" from "sector perform" and lowered her price target to $24 from $25.50.
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A deteriorating outlook for gold prices could limit Barrick Gold Corp.'s ability to generate enough cash to reduce its high debt levels, RBC Dominion Securities analyst Stephen Walker said.
Meanwhile, uncertainty surrounding capital requirements at the company's four Nevada development projects, and questions regarding the future of the suspended Pascua Lama mine in Argentina and Chile have clouded the company's near-term prospects.
"We await further clarification and updates on the company's capital spending plans in Nevada, a plan for Pascua-Lama, and the outlook for the higher cost African and Australian operations," Mr. Walker said.
He downgraded Barrick's stock to "sector perform" from "outperform" and lowered his target price to $14 (U.S.) from $17.
RBC lowered its forecasted gold price for 2015 to $1,250 per ounce from $1,300 per ounce, which resulted in reductions to Barrick's expected earnings and cash flow.
The analyst also lowered his target multiple on Barrick's stock to reflect project uncertainty combined with high leverage. Previously, the stock was afforded a premium based on the superior quality of its gold mines. "We believe the company should trade in line with peers until it has the financial flexibility to reduce debt and finance its core Nevada development projects," Mr. Walker said.
Barrick's $13.1-billion long-term debt load, which translates to a debt-to-total capital ratio of about 45 per cent, makes Barrick more highly leveraged than its peer average.
The company gave itself some balance sheet flexibility in late 2013 when it deferred the Pascua Lama project, into which Barrick has already invested about $6.7-billion. A Chilean regulator also ordered environmental improvements to the mine over concerns for potential water supply contamination.
RBC is expecting Barrick to "complete the required environmental remediation work by late 2015, continue to advance discussions with the Chilean government on potential development re-start, and potentially seek a joint venture partner for the mine," Mr. Walker said.
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CIBC World Markets analyst Jacob Bout expects Agrium Inc. to outperform its peers in 2015.
Mr. Bout, who names Agrium as his top pick for 2015, expects agriculture and fertilizer stocks to outperform natural resource stocks in general in 2015, as agriculture fundamentals remain solid. "In fact, our outlook for the US agriculture market has improved dramatically in the past 3-6 months, reflecting drought in South America and improved US exports to Asia driving pricing (in particular corn) higher," he says. "We also expect Agrium to outperform its peers as we believe it has the best growth and margin improvement story of the global fertilizer industry."
He is projecting EPS to grow from $5.55 (U.S.) in 2014 to $7.54 in 2015 and $9.00 in 2016.
Mr. Bout maintains his "sector outperformer" rating and is raising his target price to $125 (U.S.) from $118.
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New Gold Inc. is facing a "strategic fork in the road," according to Dundee Securities.
Analyst Josh Wolfson notes that the company will face production pressures should it delay or cancel its proposed Rainy River project, but that proceeding with its construction would significantly increase the firm's indebtedness.
"With either development decision outcome, we see challenges which would arise and a resulting corporate outlook where either financial or strategic flexibility is reduced," he said.
Mr. Wolfson downgraded the stock to "neutral" from "buy" while hiking his price target to $6.50 from $5.50. The analyst consensus price target is $6.17 (Canadian).
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In other analyst actions
Deutsche Bank downgraded Eli Lilly to "hold" from "buy" with a price target of $75 (U.S.).
Nomura Securities upgraded Molson Coors to "buy" from "neutral" and raised his price target to $85 (U.S.) from $70.
Archer-Daniels-Midland was downgraded to "market perform" from "outperform" at BMO. The 12-month target price is $52 (U.S.).
Linamar was downgraded to "hold" from "buy" at TD Securities. The 12-month target price is $77 (Canadian).