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The threaded end of one of hundreds of drill pipes is shown in front of the Baytex Energy Ltd.'s Pembina oil rig near Pigeon Lake, Alta., on Feb. 17.Norm Betts/Bloomberg

Inside the Market's roundup of some of today's key analyst actions

CIBC World Markets analysts expanded coverage of the Canadian intermediate exploration and production sector on Wednesday, initiating coverage of 10 companies.

"The ongoing industry downturn has dramatically reshaped the Canadian energy landscape. Investors have justifiably rewarded with premium valuations those companies best positioned to thrive in the new commodity reality while financial leverage has prompted a number of other producers to fall by the wayside," the analyst said in a research note. "Sector multiples have clearly expanded – in our view – as capital migrates to a shrinking pool of investable stocks. The challenge for investors is to identify producers that can create real value in a rapidly shifting commodity price environment, while remaining mindful of valuation."

"Generally speaking, we believe our investment recommendations reflect a balanced outlook that rewards value creation, business sustainability, and growth while remaining cautious on financial leverage even as the market moves to incorporate higher commodity price assumptions. Relative valuation also figures prominently in our investment recommendations. We are very conscious that sector multiples have expanded through the trough and we have made significant effort to place company valuations in historical and relative contexts."

They initiated coverage of the following stocks with a "sector outperform" rating:

ARC Resources Ltd. (ARX-T) with a target of $24.50. Consensus is $23.06.

Analysts: "Bottom line, we regard ARC as one of the best-positioned companies in the E&P space, financially and operationally. With ARC's focus on the Montney, which accounts for 80 per cent of production, the team is able to reap the benefits of scale and experience. We foresee extremely strong returns from drilling its core developments at Dawson and Tower, with strip internal rates of return (IRRs) at 82 per cent and 73 per cent, respectively, well ahead of the oil and gas play median returns."

Enerplus Corp. (ERF-T) with a target of $10.50. Consensus is $8.67.

"Our bullish outlook is based on the market not fully recognizing: 1) the extent to which the company's portfolio has improved; 2) that growth has become much more focused (on two operated assets, Fort Berthold and Canadian EOR, with growth expected at both); 3) the improvements in Marcellus pricing; and, 4) balance sheet rejuvenation."

Vermillion Energy Inc. (VET-T) with a target of $50. Consensus is $47.63.

"Vermilion has a strong operational track record and screens well on return on common equity (ROCE), margin and free cash flow metrics. Coming out of a six-year period of investment in the Corrib gas project, we believe improved free cash flow visibility – which is likely earmarked for debt reduction – will be viewed favourably by investors, and we remain comfortable with our premium valuation on this stock."

The following companies received "sector performer" ratings:

Baytex Energy Corp. (BTE-T) with a target of $9.50. Consensus is $6.60.

"With strong operational, financial and valuation leverage to oil prices, this stock remains a call on oil. However, D/CF [debt to cash flow] remains very high at 7.4x [times] and with production expected to decline into 2017 it is difficult to fashion a cogent investment thesis for this stock at current oil prices. Although we acknowledge that Baytex could outperform materially should oil prices push through our current forecast, the company still has plenty of work to do even at $60.00 (U.S.) per barrel WTI."

Northern Blizzard Resources Inc. (NBZ-T) with a target of $5. Consensus is $5.15.

"Focused on a portfolio of low-decline heavy oil assets in Saskatchewan, Northern Blizzard has had operational positives (excellent growth at Cactus Lake) and negatives (the underperformance of Plover Lake SAGD) since going public in 2014. Financially, the company is well positioned for 2016 with a strong hedge book and a healthy balance sheet. However, the quality of the hedge book deteriorates in 2017 (based on our oil price forecast) and we foresee CFPS [cash flow per share] compression year over year as hedging gains turn into losses and the dilution from the share dividend plan continues."

Peyto Exploration & Development Corp.
(PEY-T) with a target of $37.50. Consensus is $36.59.

"An industry leader in tight gas development, Peyto screens well on a number of factors that we believe influence the long-term share price performance of energy stocks. However, at 10.3x 2017E EV/DACF [enterprise value to debt-adjusted cash flow], the stock is trading above the high end of its historical valuation range. We are concerned that the near-term direction of the stock will be dictated by production and natural gas prices, which are headed lower, and we regard the stock as fully valued at this time."

Trilogy Energy Corp
. (TET-T) with a target of $5.25. Consensus is $5.04.

"Financial leverage and liquidity remain a challenge for the company, with 2016E D/CF standing at 8.9x on strip pricing. The company has also missed market expectations in the past, the result of challenges at its Montney oil development. That being said, Trilogy holds a large (but limited cash flow) asset in its Duvernay land base, which is not captured in conventional leverage metrics and could be utilized to better position the balance sheet and/or growth profile."

These three stocks received "sector underperformer" ratings:

Bonterra Energy Corp. (BNE-T) with a target of $25. Consensus is $28.83.

"Given that Bonterra carries leverage ratios in the third/fourth quartile of the peer group (year-end 2016 D/CF is estimated at 3.8x on strip pricing), we find it hard to justify a top-quartile valuation for the stock. Although Bonterra may eventually regain its historical valuation premium, we believe debt repayment will take precedence over production or dividend growth for at least the medium term."

Pengrowth Energy Corp. (PGF-T) with a target of $1.85. Consensus is $1.74.

"We believe high leverage will remain a long-standing challenge for the company. While management took great precautions to protect the downside in 2016 with a substantial hedging program, we foresee leverage remaining an issue in 2017 as crude stays lower for longer and we believe a number of steps will be required to fix the balance sheet. Operationally, the company has done well at Lindbergh but is unable to expand the project until liquidity is unlocked."

Surge Energy Inc. (SGY-T) with a target of $2.50. Consensus is $2.74.

"Even though Surge has lagged its peers as oil prices have risen in Q2/16, the stock's valuation has expanded into the second quartile of the peer group. Operational leverage to higher oil prices notwithstanding, we struggle to find a sound fundamental basis for this premium. Surge will have to demonstrate considerable growth through H2/16 to backfill its current valuation (or oil prices will have to move much higher), something that isn't necessarily supported by the company's historical track record."

In general, the analysts noted: "valuations over the course of the current downturn have behaved very differently than they did during the last major commodity correction in the aftermath of the 2008/2009 financial crisis. During the previous correction, not only did crude prices collapse (and quickly rebound) but valuations contracted as investors largely withdrew from risky investments. There were also very different circumstances in the physical market; then, the correction was demand-driven rather than supply-driven as it is today. Investors seem to have an increased willingness to "look through" the trough this time round given the consensus view that production declines should return the oil market into balance throughout H2/16 and into 2017. Robust valuations remain a concern, but we continue to foresee the potential for positive returns in energy stocks if the market stays constructive on its long-term crude view."

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Though Raging River Exploration Inc. (RRX-T) has been "one of the few (very few) bright spots" in the Canadian intermediate exploration and production space over the past couple years, Raymond James analyst Jeremy McCrea said he's concerned about its current valuation in comparison to its peers.

Accordingly, he initiated coverage of the stock with a "market perform" rating.

"Since reaching a high of $11.06 per share on Aug. 22, 2014, the stock has since fully recovered (and then some), outperforming the TSX Capped Energy Index by a meaningful 41 per cent," he said. "The winning combination of best-in-class full cycle economics, low leverage, and profitable PDP NAV [proved developed producing net asset value] growth have allowed it to become one of the top-performing names in Canadian energy.

"As investors have sought safety in this market over the past 18 months, RRX is one of the few names that checks off all fundamental boxes (which very few can). As such, investor buy-in has been unyielding and unfortunately, we are now starting to believe the valuation (and EV [enterprise value]/PDP multiple) has expanded beyond what RRX's current inventory supports."

Mr. McCrea pointed out that the stock currently trades at 3.9 times its EV/PDP multiple, in comparison to a three-year average of 2.7 times. He said the current multiple reflects $2-billion in undrilled land value across its Viking land base.

"With an average Viking NPV/well at an estimated $0.9-million (under our $70 (U.S.) per barrel long-term call), investors are paying for 2,200 future undrilled locations while at current prices ($50/bbl), our NPV/well falls to $0.5-million, implying investors are paying for 4,300 locations, more than the company's 4,000 locations (including Rock Energy's inventory)," the analyst said.

"As such, we find ourselves in a predicament. How do you balance quality assets, above-average growth (15 per cent) solid execution, and balance sheet strength versus the potential reversion of an EV/PDP (or EV/DACF) multiple that we believe has now overstated the company's inventory? Unfortunately, in a market where we believe we have begun to move through the bottom of the cycle, we suspect we could see valuations improve more among Raging River's oil and natural gas producing peers, especially given improving balance sheets and well inventories that had previously been ignored under low commodity prices."

Mr. McCrea did emphasize that Raging River has achieved steady performance from its Viking assets while maintaining capital and operating cost discipline.

"For Raging River, we think that the company has done a terrific job in delivering profitable growth and, as a result, it appears to us that investors have sought safety in the name, pushing its valuation levels much higher than its three-year historical average and higher than its oil and natural gas producing peers – i.e., we believe investors have now priced in all future growth (absent of a large commodity rally still," said Mr. McCrea. "Although we have plenty of confidence RRX should deliver 15-per-cent production per share growth annually (as per guidance), we believe the risk to the share price is on a multiple contraction."

He set a price target for the stock of $12. The analyst consensus price target is $12.33, according to Thomson Reuters.

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IBI Group Inc. (IBG-T) is a "a solid turnaround story but an increasingly expensive stock," said Canaccord Genuity analyst Yuri Lynk.

Following institutional investing meetings with the Toronto-based architecture, planning, engineering and technology company on Monday, Mr. Lynk downgraded his rating to "hold" from "buy," citing valuation concerns. He cited the fact that the company's share price has doubled in 2016, leaving limited upside to his target price.

"Valuation aside, management continues to drive an impressive turnaround at IBI that includes group-leading organic growth and margin expansion," he said.

"Given that IBI is still more heavily leveraged than its peers the balance sheet was the main focus of investors. Through the culmination of a solid recovery and recapitalization plan, management has made significant progress in deleveraging the balance sheet from 8.0x debt-to-EBITDA in 2013 to 4.4x at the end of Q1/16. Management expects the ratio to decline below 3.0x by the end of 2018 on the back of strong organic free cash flow generation, an outlook supported by IBI growing backlog."

Mr. Lynk said management remains comfortable with its current margin levels, seeing them within industry "norms." However, he said the potential exists for margin expansion through the introduction of an ERP (enterprise resource planning) to reduce friction from its "fragmented" system and "capturing a portion of work subcontracted to others and bringing it in-house."

The analyst raised his target to $5 from $4.50 "as we refine our working capital needs assumption to better align with the company's project pipeline." Consensus is $4.80.

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Colliers International Group Inc. (CIGI-Q, CIG-T) is "just getting started," said RBC Dominion Securities analyst Michael Smith.

Mr. Smith initiated coverage of the Toronto-based real estate services provider with an "outperform" rating.

"At Berkshire Hathaway's 2016 AGM, both Warren Buffett and Charley Munger clearly articulated their love of capital-light businesses, something they find difficult to attain especially at scale," the analyst said. "We also prefer capital-light businesses and think Colliers fits the bill well, with minimal fixed assets, low capex requirements and sufficient free cash flow to fund its impressive growth target."

He added: "It is not new news that there is a big opportunity to consolidate the global real estate services industry (we provide the much-quoted statistics inside). Where we differ from others is our contention that the separation of Colliers from FirstService marks a new and exciting growth phase. Simply put, as a standalone entity management is positioned to take its 20+ year, finely tuned acquisition playbook to a global stage. What's more, owing to its capital-light business model, management should be able to achieve its goal of doubling the company's size in five years without issuing equity and without increasing its conservative leverage metrics. Free cash flow is a wonderful thing!"

Mr. Smith emphasized the fact Colliers has a "significantly" higher percentage of inside ownership, which he said was more than 5 times its two main peers combined.

"We think it's significant for two reasons," he said. "Firstly, it is a major differentiating characteristic of Colliers and we believe it indicates shareholder alignment and drives an 'owner' mindset as opposed to a "corporate" mindset. This, in our view, is the fundamental reason that the company has a growth-oriented entrepreneurial corporate culture. Indeed, we think the fruits of this mindset are clearly evidenced by a 20-year history of vibrant growth that saw a corresponding share price CAGR of roughly 20 per cent, exceptional by any measure in our opinion. Secondly, we think substantial insider ownership is also significant in the context of the company's multi-voting share structure, which provides CEO Jay Hennick with de facto control. Taken together, we think the management team is far more driven and aligned with shareholders because of the substantial insider ownership and the stability of the company's leadership/direction afforded by the multi-voting share structure."

He set a price target of $52 (U.S.) for the stock. Consensus is $46.89.

"We believe our valuation for Colliers reflects the company's global platform, management's established public market track record, strong insider ownership, low financial leverage and the company's overall franchise value," said Mr. Smith. "Based on our risk-adjusted return expectations versus its peers, we rate CIGI shares outperform."

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Expressing concern over its top-line expectations for the second half of 2016, Credit Suisse analyst Seth Sigman downgraded Best Buy Inc. (BBY-N) to "neutral" from "outperform."

Mr. Sigman expressed concern for a pair of near-term factors: the potential for its mobile division to not deliver the improvements necessary to hit fourth-quarter comparable same-store sales (comp) estimates and the fact that Best Buy is  "lapping market share benefits" from Sears Holding Corp., RadioShack Corp., hhgregg, Inc. and others "that may become less incremental through this year and next."

"The underlying concern is that expectations assume an improvement in Q4, and visibility is lacking," he said.

Mr. Sigman lowered his full-year earnings per share projection to $2.84 (U.S.) from $2.96, compared to a consensus. He said that implies 2-per-cent on comps dropping 0.5 per cent, versus his previous estimate of a previous comp forecast of a 0.3-per-cent rise.

"We continue to believe in this management team, and the transformation strategy, which has led to significant market share gains and stronger results even during some difficult periods," he said. "We expect additional progress this year, and still believe there is underlying value in BBY stock based on the cash flow. That said, we believe that sales are as important as ever for the investment story at this point in the transformation, and we would be looking for signs of an improvement in the second half."

Expressing the potential for upside from its Canadian operations, Mr. Sigman lowered his target to $31 (U.S.) from $36.50. Consensus is  $33.52.

"We still believe there is significant value at this level with BBY trading close to prior trough levels, yet we see a more difficult battle between controllable vs. uncontrollable factors this year, which creates uncertainty that may continue to limit upside to the stock in the near term," he said.

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RBC Dominion Securities analyst Mark Mahaney downgraded LinkedIn Corp. (LNKD-N) in reaction to the announcement of its $26.2-billion (U.S.) acquisition by Microsoft Corp. (MSFT-Q).

Moving his rating to "sector perform" from "outperform," Mr. Mahaney said the deal is a "clear" positive for LinkedIn shareholders.

"We upgraded LinkedIn last week following our recent online recruitment survey work and updated Marketing Solutions market analysis that made us view LNKD as still well positioned against several large TAMs [total addressable markets]," the analyst said. "What's more, the company doesn't appear to be facing material new competitive challenges. We thus continue to view LNKD as a fundamentally good growth asset, with a healthily diversified revenue base. We believe the deal makes sense and that the acquisition likely benefits from sales and marketing synergies between the two companies."

He moved his target to $196 (U.S.) from $160 to reflect the sale price. The average is $186.09, according to Bloomberg.

Elsewhere, UBS analyst Eric Sheridan moved his rating to "neutral" from "buy" and raised his target to $196 from $175.

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