Downgrades for Talisman, Canadian Natural

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

Talisman Energy Inc. appears to be in a near-term holding pattern and major structural changes that could recharge its shares may be slow to surface, warned TD Securities Inc. analyst Menno Hulshof today as he downgraded the stock to "hold" from "buy."

Talisman has outlined strategic priorities, including matching spending with internally generated cash flow, reducing spending on high-risk exploration while focusing on core areas, and improving cash margins.

Although these priorities have the potential to create value long-term, "we are not yet convinced they will collectively be sufficient to trigger a re-rating of the stock over the next 12 months," said Mr. Hulshof. "On this basis, we believe that TLM is more likely to trade in line with the broader index."

"From our perspective, there is nothing to suggest that there is near-term potential for transformational transactions at this time," he added.

Upside: Mr. Hulshof cut his price target by $2 to $14 (U.S.)

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Mr. Hulshof is also turning a little less bullish on Canadian Natural Resources Ltd., downgrading the stock today to "buy" from "action list buy," TD's highest rating.

He's concerned that unfavourable differentials between Canadian heavy oil and lighter crude produced in the U.S. may continue to hinder the stock's performance.

"Even if we assume that differentials were to start to narrow in the second half of 2013, we believe that it will require a period of prolonged tighter differentials to convince the market that 1) they are sustainable, and 2) that it is once gain is safe to commit new capital to producers of Western Canadian crudes," he said.

Upside: Mr. Hulshof raised his price target by $2 to $40 (Canadian), still attracted to the company given its "unrivaled resource potential in addition to best-in-class technical and management teams."

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Imperial Oil Ltd. has always been the most expensive name among integrated oil producers, but its relative valuation is not reason enough to avoid the name, said Mr. Mulshof.

He upgraded Imperial to "buy" from "hold," citing strong production growth thanks to the ramp-up at its Kearl Lake operations, a balance sheet that can fund an aggressive development program, hedges that offset the problem of wide differentials, and the recent pullback in share price.

Upside: Mr. Hulshof raised his price target by $6 to $52 (Canadian).

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Northrop Grumman Corp., which provides products and services for the military, dodged a bullet as the U.S. "fiscal cliff" agreement didn't call for further cuts to the U.S. defence budget. But a decision on such spending "has only been punted two months out," noted RBC Dominion Securities analyst Robert Stallard.

"As the Congress grapples with spending cuts and the debt ceiling, we could again see reductions to the long term DoD budget," Mr. Stallard said in a research note.

He expects the stock to largely be range-bound over the next 12 months. "Continued budget challenges are likely to be offset by the floor of an attractive valuation and a decent (though still sub optimal) dividend yield. At this price point, we think the risk/reward is roughly balanced," he said.

Upside: Mr. Stallard upgraded Northrop to "sector perform" from "underperform" and raised his price target by $4 to $72 (U.S.).

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Dundee Securities analyst Josh Wolfson upgraded Yamana Gold Inc. to "buy-high risk," impressed with the company's ability to generate modest positive free cash flow last year while simultaneously ramping up one mine, constructing three projects and pursuing other development properties.

"We believe Yamana offers investors a combination of growing free cash flow, upcoming attractive catalysts and a track record of value creation that justifies its premium valuation," he said. Yamana shares currently trade at 1.29 times net asset value, an 18 per cent premium to other producers.

Upside: Mr. Wolfson maintained a price target of $21 (Canadian).

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Canaccord Genuity analyst Laura Champine is giving the thumbs down to a recent management shuffle at Lowe's Cos. Inc. and has slapped a "sell" rating on its shares. "The recent management realignment appears counterproductive in our view as senior merchandising and supply chain executives were reassigned to customer experience positions amid the restructuring process," she said.

Ms. Champine also questions the company's major investments in e-commerce, given that only 1 per cent of its total sales are generated online. "We believe e-commerce is unlikely to be a significant driver in the home improvement channel," she said.

Downside: Ms. Champine raised her price target by $2 to $27 (U.S.), which still suggests potential downside of 25 per cent over the next 12 months.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities