With the soaring price of crude oil attributed in large part to speculation rather than current supply and demand fundamentals, is the market in store for a big dip, assuming geopolitical risks calm down?
Not according to Canaccord Genuity, which today jacked up its price forecasts for West Texas Intermediate after taking a fresh look at where oil may be heading.
It now sees the price hovering close to the $100 (U.S.) per barrel mark for the next three years, averaging $97.50 both this year and next (a rise of $10 and $5, respectively, from its earlier forecasts), and averaging $100 thereafter. It also raised its forecast for Brent crude prices, but expects the premium to WTI to subside later this year as pipeline expansions alleviate the supply glut at the key pricing hub in Cushing, Okla.
Canaccord mostly cited stronger underlying oil demand for the new forecasts. It also remains bearish on natural gas, believing that oversupply and only a modest uptick in demand will leave prices for that commodity in a $4-$5 range through 2013.
The new price forecasts result in several changes to its outlook for equities in the sector.
Overall, analyst Derrick Whitfield suggests investors look for "early-stage transformation stories with increasing leverage to oil and underappreciated growth stories," as well as free cash flowing assets.
The specific revisions to equities include:
ARC Resources Ltd. was upgraded to a "buy" with the price target raised to $27 (Canadian) from $25.50;
Vermilion Energy Inc. was also upgraded to a "buy" with the target raised to $55 from $50;
Celtic Exploration Ltd.'s price target was raised to $31.25 from $27.25
Lithium Americas Corp. has released a preliminary economic assessment for its flagship Cauchari-Olaroz project in Argentina that suggests operating cash costs of $1,430 (U.S.) per tonne of lithium carbonate. That's 41 per cent lower than earlier estimated by Jennings Capital Inc. analyst Ken Chernin, and potash credits could reduce costs further. "We believe that the project could be one of the lowest, if not the lowest, cost lithium-brine operations in the world," he said.
Upside: Mr. Chernin raised his 12-month price target by 75 cents (Canadian) to $4.50.
Canadian Natural Resources Ltd. shares have declined 2 per cent year-to-date while its peers have gained 5.9 per cent, noted UBS analyst George Toriola. "While some of this performance can be attributed to the Horizon fire incident and the impact to near-term operating cash flow, we see the company generating significant free cash flow starting in 2012, with optionality to grow organically or through acquisitions, raise dividends, reduce debt, or a execute a combination of these alternatives," he said.
Upside: Mr. Toriola upgraded the stock to a "buy" from "neutral" while keeping his price target unchanged at $50.
The software and IT services sector has solid fundamentals for the coming year, and CGI Group Inc. is positioned well to benefit, said Versant Partners analyst Tom Liston. Merger and acquisition activity is pushing up valuations in the industry, and CGI offers clients the benefit of receiving IT services within North America at a low cost of delivery, he said.
Upside: Mr. Liston raised his one-year target by $1 to $24 and maintained a "buy" recommendation.
Constellation Software Inc. recently announced it is reviewing strategic alternatives - a timely decision, given improved software spending and increased M&A activity in the sector, noted Versant's Mr. Liston. "Constellation is one of the best-run companies we have encountered and thus we see the business being attractive to several potential suitors," he said.
Upside: Mr. Liston raised his stock price by $12 to $70, but he rates the stock with a "neutral," noting shares could see downside pressure if no deal is done.
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