Eldorado Gold's Säo Bento Mine in Brazil.
Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
Dividends are at risk for senior and intermediate oil and gas producers as well as oil sands companies, according to Raymond James analyst Chris Cox.
In an industry note ahead of the release of fourth-quarter 2015 earnings, Mr. Cox said he expects to see a further reduction in capital expenditures across the sector, predicting a decline of approximately 30 per cent from 2015 levels. With such cuts, he feels dividends will be re-examined.
"With the continued decline in oil prices putting further pressures on oil companies to spend below sustaining capital requirements, this should put further pressure on dividends," said Mr. Cox. "For many producers, dividends were viewed as somewhat sacrosanct heading into this downturn – we believe the market (and boards) now view dividends as a luxury many companies can no longer afford (at least at the current level). While there are some select stories where we believe dividends remain safe (most notably, Suncor Energy and Imperial Oil), we believe dividends across the rest of the space look at risk heading into 4Q15 results."
He added: "Weighing on results for the integrated producers (Cenovus Energy, Husky Energy, Imperial Oil and Suncor) will be expectations of sequential declines in downstream cash flows due to lower crack spreads and first in first out-based losses … We expect weaker downstream results to persist into 2016, largely driven by a deteriorating storage outlook in the distillate markets and a narrowing Brent-WTI differential."
Mr. Cox downgraded his rating for Cenovus Energy Inc. (CVE-T, CVE-N) to "market perform" from "outperform."
"While we expect very weak results across the board heading into 4Q15 reporting, we are most concerned with the potential market reaction to Cenovus' earnings," he said.
The analyst justified the change by pointing to a number of factors, including: "a combination of strong relative performance to start the year, expectations for fairly weak 4Q15 results, concerns about how the market might digest continued deterioration in operational performance at Foster Creek and a particularly weak cash flow outlook for 2016."
He said: "Given the weak cash flow outlook, we expect the company will likely make another cut to its dividend, as management and the board will likely be unwilling to allow for an accelerated drawdown of the financial resources it has gone to great measures to build up over the past 12 months."
He maintained a price target of $20 for Cenovus stock. The analyst consensus price target is $20.88, according to Thomson Reuters.
Mr. Cox also increased his price target for Canadian Oil Sands Ltd. (COS-T) to $11.25 from $10, maintaining a "market perform" rating. Consensus is $8.97.
"With the Board of Canadian Oil Sands recently agreeing to a friendly takeover from Suncor, we do not expect any noticeable highlights to emerge from 4Q15 results and expect the results to be a non-even for shares of Canadian Oil Sands," he said.
His target for Baytex Energy Corp. (BTE-T, BYE-N) fell to $6 from $7 with an unchanged "market perform" rating. Consensus is $6.78.
"In terms of managing liquidity in the current environment, our current forecasts would suggest Baytex is likely to breach its debt covenants at strip pricing, likely by mid-2016," said Mr. Cox. "Even with expectations of reduced capex, our estimates suggest the company will not be able to keep spending within cash flow under strip pricing. As such, we believe a key focus heading into the quarter is how the company will ensure sufficient liquidity in the current commodity environment."
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In part two of their 2016 outlook for the oil and gas sector, Desjardins Securities analysts said the market focus will remain on crude prices finding near-term stability.
"We are clearly in a period of hyper volatility for crude prices," the analysts said in a research note. "As a follow-up to our 2016 Outlook Part I, published on Jan. 12, we continue to recommend a more defensive posture in the current environment as the oil market seeks a balancing point ... While we expect elevated volatility to persist for the time being, as reflected by the current spot market, we are bullish relative to the forward curve given the widening disconnect between the spot market and the economic reality of producing crude. That said, we have limited visibility on timing with respect to the prospect of a potential price recovery."
Desjardins lowered their commodity prices forecasts for 2016 with West Texas Intermediate falling to $35 (U.S.) per barrel from $55.
"The net impact in Canadian-dollar terms is partially mitigated by the associated depreciation in the loonie; we are now assuming 69 cents (U.S.) per $1 (Canadian), down from 75 cents/$1. As a result, our cash flow per share estimates for oil-weighted producers in 2016 are down 59 per cent from our previous forecasts, and down 32 per cent for gas-weighted producers … We expect to revisit our price deck and producer forecasts more frequently in the first half of 2016 given the current volatility in commodity markets. At this point, we have reduced capital spending scenarios for those producers yet to provide updated guidance to accommodate more modest activity levels at our lower commodity price forecast. As such, our estimates could potentially vary versus our peers and the most recent management guidance."
The report also contained several rating changes and target price updates for the sector's stocks.
"Our bias remains weighted toward those producers positioned to withstand continued commodity pressure in the near to medium term, with an overarching focus on sustainability," the analysts said. "To that end, we expect another round of dividend and capital spending cuts to help rebalance cash flow at current strip prices, along with a continued preference for disposing of non-producing assets. While we are bullish on commodity pricing over the longer term, we believe that defensively positioned names will continue to outperform through the recovery (at least initially), recognizing that there will be an inevitable rotation into more leveraged names once the recovery is more entrenched and when volatility has subsided — but that might not happen in 2016."
Analyst Justin Bouchard upgraded Imperial Oil Ltd. (IMO-T) to "hold" from "sell" based on the stock's recent sell-off. He did lower his target for the stock to $38 from $41.50. Consensus is $44.72.
"The company has a long-life/low-decline production base, remains well capitalized and has a high degree of liquidity (owing to its relationship with ExxonMobil)," said Mr. Bouchard. "As a result, we now view IMO's valuation — which we believe has been historically overvalued relative to its peers — reflecting a value roughly consistent with its long-term fundamentals."
Mr. Bouchard downgraded MEG Energy Corp. (MEG-T) to "hold" from "buy." His target fell to $7.50 from $17.50. Consensus is $10.43.
"A precipitous decline in crude prices to $30 (U.S.)/barrel WTI from $50/barrel WTI in the two months from mid-November has left MEG vulnerable to a liquidity crisis," he said. "First, MEG's high net-debt position, questions about liquidity, lack of hedges and weak cash position have left the company with few options to access cash. Second, at $30/barrel WTI, the company is unable to cover cash costs on its operations, implying an acute need for cash, particularly given its debt burden. As a result, the company has limited options. Its best option may be to monetize the Access Pipeline, but we would argue that this is not a seller's market and we question how much liquidity a sale would provide. Given this context, and the lack of visibility on future oil prices over the medium term, we believe MEG's risk profile has increased to the point that the risk-adjusted return no longer warrants a buy rating. That said, the company provides meaningful leverage to an oil price recovery — but in this particular case, timing is everything."
Analyst Jamie Kubik upgraded Leucrotta Exploration Inc. (LXE-X) to "buy" from a "hold" rating "given its superior balance sheet and emerging Montney potential." His target remained $1.30, compared to a $1.39 consensus.
"In our view, the company's strong cash position and emerging Montney potential in the Doe region offer good upside potential from current trading levels," he said. "With service cost deflation significantly reducing well costs in the Montney, the company's material cash position will serve to fund more exploratory activities on its lands than it would have previously. We have increased our risk ratings for multiple stocks to reflect the volatility of the underlying commodity in the current price environment, particularly for companies with a higher use of debt relative to cash flow as compared with prior levels. We have also tempered the multiples used in our target price calculations on average, which are based on our 2017 cash flow estimates, given the overhang in market sentiment with respect to junior energy producers."
Baytex Energy Corp. (BTE-T) and Pengrowth Energy Corp. (PGF-T) were both downgraded to "hold" from "buy" by analyst Kris Zack. His targets for the stocks fell to $4.50 and $1.25 from $9.50 and $1.25, respectively. The consensus targets are $6.78 and $1.39.
"While we believe both stocks remain fundamentally undervalued while also providing sufficient leverage to an inevitable oil price recovery, we are taking a more cautious stance given our preference for a defensive strategy in early 2016," said Mr. Zack.
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An "optimized" life-of-mine (LOM) plan from Detour Gold Corp. (DGC-T) "sets the stage for significant free cash flow going forward," said Canaccord Genuity analyst Rahul Paul.
Mr. Paul said the revised plan, featuring a larger reserve and lower maximum mining rate for its Detour Lake mine in northern Ontario, highlights better-than-expected economics than he had forecasted.
"While site costs (particularly mining costs) and LOM capital were higher than indicated by the Feb. 2014 LOM plan, this was largely offset by the incorporation of additional reserves from Detour West (previously known as Block A), processing of low-grade fines and the optimization of the mine plan for a lower strip ratio (and capital requirements) in the first nine years," the analyst said. "Relative to our forecasts (which included conservatively higher capital and operating costs), the study highlighted materially better economics, thereby increasing our forward curve-based 5 per cent/net present value (after-tax) by 11 per cent. In addition to improving the economics, we believe the study significantly derisks Detour Lake and improves the company's profitability in the prevailing challenging gold price environment."
Mr. Paul said Detour has emerged in recent years as "one of the most notable success stories in the gold sector." He said the company has done an "excellent job" improving its balance sheet while derisking and ramping up the Detour Lake mine.
"[Monday's] update, in our opinion, optimizes an already robust mine plan, thereby setting the stage for significant free cash flow generation over the next few years," he said. "We estimate that even at $1,000/ounce gold (and the forward curve for the Canadian dollar), the company should generate $44-million in FCF in 2016 and growing further to $140-million in 2017, in turn increasing the attractiveness of the stock to investors."
Maintaining a "buy" rating for the stock, Mr. Paul raised his price target to $22.50 from $20. The analyst consensus is $19.85.
"Detour currently trades at 0.71 times price to net asset value and 5.1 times price to cash flow (estimated for 2017), marking 10-per-cent and 9-per-cent respective discounts to the overall group average," he said. "When considering the large-scale and long-life nature of the operation with its low geopolitical risk and Canadian dollar exposure, we believe the discount could ultimately translate into a premium if the operating momentum demonstrated in 2015 can be sustained over the next several quarters. Aside from operating results, we expect that exploration updates from the high-grade Lower Detour area could get the market excited about the higher grade potential at Detour Lake."
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Failing to see any catalysts over the next 12 months and given the uncertainty of its development plans in Greece, CIBC World Markets analyst Cosmos Chiu downgraded Eldorado Gold Corp. (EGO-N, ELD-T) to "sector performer" from "sector outperformer."
On Monday, Eldorado released preliminary 2015 operational results and 2016 guidance.
Mr. Chiu said the company's 2015 gold production was "solid" at 723,532 ounces, cash operating costs of $552 (U.S.) per ounce and all-in sustaining costs (AISC) of $841 an ounce, beating both the company's original and revised guidance.
For 2016, it is expecting 565,000-630,000 ounces at cash operating costs of $585-$620 per ounce and AISC of $940-$980/oz.
"Focusing on 2016, taking the mid-point of guidance, gold production is expected to decrease 17 per cent year over year, while cash operating costs and AISC are expected to increase 9 per cent and 14 per cent year over year, respectively," he said. "While we had expected lower year-over-year gold production, per ounce costs were higher than we had estimated. From a free cash flow perspective, using spot metal prices, even if we exclude development capital allocated to the company's Greek assets, we calculate approximately neutral FCF generation for 2016."
"The Greek situation continues to create a fair amount of uncertainty for development plans pertaining to Skouries and Olympias, specifically. As part of its $235-million development capital budget for 2016, $155-million has been earmarked for the Olympias project, where construction and development activities hinge on the issuance of a required installation permit from the Ministry by the end of the first quarter of 2016."
Mr. Chiu lowered his price target to $3 from $3.50. Consensus is $4.29.
Elsewhere, Dundee analyst Josh Wolfson raised Eldorado to "neutral" from "sell." His target price is $3 (Canadian) per share.
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The buzz is "strong" for the 2017 U.S. movie box-office outlook, said RBC Dominion Securities analyst Leo Kulp.
"The exhibitor stocks have been weak over the past several quarters reflecting a weaker 2015/2016 box office outlook, concerns over film rents and a more modest M&A environment," said Mr. Kulp. "As we look ahead, we see three reasons that make us positive on the stocks: 1) We believe that the 2017 box office is shaping up strongly; 2) The relationship between film rents and box office concentration is better understood; and 3) We do expect some M&A, though not at previous peak levels. With AMC trading at near-peer trough levels on our 2017 estimates, we don't believe these items are reflected in the stock's price and see a favourable risk/reward profile."
Mr. Kulp said he's taken a "more conservative outlook" on 2016 at the box office, expecting growth to decline by 4 per cent (down from his previous forecast of a decline of 1.5 per cent). Accordingly, he dropped his estimates for exhibitors.
However, he raised his estimates for AMC Entertainment Holdings Inc. (AMC-N) and upgraded his rating for the stock to "outperform" from "sector perform."
"With AMC trading at near-peer trough levels on our 2017 estimates, we don't believe these items are reflected in the stock's price and see a favourable risk/reward profile," said Mr. Kulp.
His 2016 earnings before interest, taxes, depreciation and amortization for AMC rose to $523-million (U.S.) from $513-million. His target for the stock did decline to $27 from $32. Consensus is $32.58.
At the same time, Mr. Kulp downgraded Regal Entertainment Group (RGC-N) to "sector perform" from "outperform") and lowered his target to $19 from $24. Consensus is $21.50.
"Given RGC's outperformance, we expect peers will have greater upside than RGC over the next 12 months," he said.
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In other analyst actions:
AcuityAds Holding Inc. (AT-X) was raised to "buy" from "speculative buy" at Paradigm Capital by equity analyst Spencer Churchill. The 12-month target price is $1.80 (Canadian) per share.
Baytex Energy Corp. (BTE-T) was downgraded to "hold" from "buy" at Desjardins Securities by equity analyst Kris Zack. The target price is $4.50 (Canadian) per share.
Cascades Inc. (CAS-T) was downgraded to "sector perform" from "outperform" at National Bank by equity analyst Leon Aghazarian. The 12-month target price is $13 (Canadian) per share.
Core Laboratories NV (CLB-N) was downgraded to "reduce" from "hold" at HSBC by equity analyst Phillip Lindsay. The target price is $75 (U.S.) per share.
Halliburton Co. (HAL-N) was downgraded to "hold" from "buy" at HSBC by equity analyst Gregory Brown. The target price is $32 (U.S.) per share.
High Liner Foods Inc. (HLF-T) was downgraded to "market perform" from "buy" at Cormark Securities by equity analyst Marc Robinson. The 12-month target price is $16 (Canadian) per share.
Public Storage (PSA-N) was downgraded to "equal-weight" from "overweight" at Barclays by equity analyst Ross Smotrich. The target price is $218 (U.S.) per share.
Southern Copper Corp. (SCCO-N) was raised to "overweight" from "neutral" at JPMorgan by equity analyst Rodolfo Angele. The 12-month target price is $29 (U.S.) per share.
TELUS Corp. (T-T) was raised to "outperform" from "neutral" at Macquarie by equity analyst Greg Macdonald. The 12-month target price is $41 (Canadian) per share.
With files from Bloomberg News
David Leeder