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The steam generator complex at Husky Energy’s Tucker Lake facililty.

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

Raymond James analysts made numerous changes to its ratings for the stocks of Canadian energy companies on Thursday in reaction to adjustments to its forward commodity price assumptions.

In a research note, the firm increased its 2017 and 2018 crude oil price assumptions to move in-line with forward prices. For 2018, its WTI projection is now $57.06 (U.S.) per barrel, rising from $51.06. Its 2019 estimate is now $54.31 per barrel, while its long-term assumption remains $60 per barrel.

For natural gas, its 2018 assumptions for NYMEX fell to $2.75 (U.S.) per thousand cubic feet from $3.02. For 2019 and long-term, its projections are $2.75 and $2.76, respectively.

The firm's 2018 Edmonton Par assumption now sits at $69.01 (U.S.) per barrel, rising from $60.08. Its 2019 projection is $65.46, while its long-term estimate rose to $72.61.

Its AECO assumption for 2018 is $1.55 (Canadian) per thousand cubic feet, down from $2.36.

Based on those changes, the firm's analysts made numerous rating changes, noting: "The lower near-term and long-term AECO price assumptions has resulted in material reductions to our forecasts for our gas-focused producers under coverage, resulting in reduced half-cycle well economics along with the expected pace of capitalization."

The following stocks were downgraded:

- Jeremy McCrea moved ARC Resources Ltd. (ARX-T) to "outperform" from "strong buy" with a target of $22, down from $24.50. The analyst average target is $20.61.

- Kurt Molnar lowered Crew Energy Inc. (CR-T) to "outperform" from "strong buy" with a target of $5.70, falling from $6.50. The average is $5.75.

- Mr. McCrea dropped Bellatrix Exploration Ltd. (BXE-T, BXE-N) to "underperform from "market perform" with a $1.75 target, down from $3.75. The average is $3.67.

- Mr. Molnar moved Chinook Energy Inc. (CKE-T) to "underperform" from "market perform" with a target price of 15 cents, down from 25 cents. The average is 42 cents.

- Mr. McCrea dropped Petrus Resources Ltd. (PRQ-T) to "market perform" from "outperform" with a price target of $2.25, down from $3.25. The average is $3.10.

"In addition to the deterioration in well economics from the lower gas price, we would also highlight concerns with respect to elevated debt levels for both Bellatrix and Petrus, creating an above-average risk profile for both of those producers heading into 2018," the firm said. "Along with the lower gas price realizations for Chinook, we continue to be concerned about its high cash costs and rapidly deteriorating spending capacity."

Among large caps, analyst Chris Cox upgraded Husky Energy Inc. (HSE-T) to "outperform" from "market perform" with a target of $19, rising from $16. The average on the Street is $17.76.

"We see an attractive free cash flow story beginning to play out for Husky heading into 2018, with the stock one of the best positioned to benefit from a remarkable improvement in refining margins in recent months," he said. "Furthermore, the company's integrated business model results in little to no impact from the structural weakness in heavy oil differentials that we expect."

At the same time, Mr.Cox lowered Crescent Point Energy Corp. (CPG-T, CPG-N) to "market perform" from "outperform" to a $10 target (from $13). The average is $13.99.

"We have also lowered our rating on Crescent Point to Market Perform from Outperform, primarily due to a shuffle in our relative order of preference among the large cap equities. With effectively all of the Canadian Integrateds likely to generate significant free cash flow into 2018, we see a more attractive combination of visible production growth and free cash flow driving a better risk-reward profile among most of those equities."

Among senior oil and gas producers, analysts made the following price target changes:

- Canadian Natural Resources Ltd. (CNQ-T/ CNQ-N, "outperform") to $49 from $50. The average target is $50.79.

- Imperial Oil Ltd. (IMO-T, "market perform") to $41 from $43. The average is $40.74.

- Suncor Energy Inc. (SU-T/SU-N, "outperform") to $53 from $52. The average is $49.36.

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After the recent rally from Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T), JPMorgan analyst Chris Schott now sees better opportunities elsewhere in the sector.

Accordingly, he downgraded the Laval, Que.-based pharmaceuticals company to "underweight" from "neutral," believing its nearly 100-per-cent jump in share price since the beginning on November has stretched the valuation of the company's fundamentals.

"While Valeant has made progress stabilizing its core operations and addressing near-term debt maturities, the company still faces significant patent erosion over time that will result in a step down in 2018 EBITDA … and muted recovery off of these levels," Mr. Schott said.

Though he noted the stock now trades at a premium to its specialty peers despite a "fairly challenging fundamental setup," Mr. Schott did raise his target price to $12 (U.S.) from $10.

The average target price on the Street is $16.40.

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Touting its growth opportunities overseas, Deutsche Bank analyst Paul Trussell upgraded Lululemon Athletica Inc. (LULU-Q) to "buy" from "hold."

Mr. Trussell made the change in a research note in which he said the athletic sector is "on more solid ground" following a period of disruption which saw consumer taste swing heavily toward a lifestyle focus from a performance wear preference.

"Lululemon drives enormously strong customer loyalty, controls its distribution unlike other brands, leads the industry in full price selling, and is still in its infancy growing its International business," said Mr. Trussell in reaction to the company's better-than-projected third-quarter results.

He added: ""LULU's international growth pillar continues to reflect one of the company's most significant opportunities. We think LULU will likely beat 4Q expectations on robust SSS [same store sales] and leverage of expenses."

Believing the company now provides greater visibility toward sustained profitable growth across all its segments, Mr. Trussell raised his target price for the Vancouver-based company to $89 (U.S.) from $72. The average target is currently $74.96.

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Though he expressed "enthusiasm" for Empire Company Ltd.'s (EMP.A-T) expansion of its FreshCo discount banner and feels it deserves credit for both its pace of change and results to date, Raymond James analyst Kenric Tyghe warned the company's Sobeys segment is "entering a period of maximum risk."

On Wednesday, shares of the company dropped fell 6 per cent after it announced it's planning to convert up to a quarter of its Western Canadian stores to the FreshCo banner in reaction to industry challenges and increased labour costs.

"As management highlighted (and while results to date have delivered positive surprises and Project Sunrise benefits are ahead of plan), despite best efforts on the risk mitigation front, the innate complexity (and risk profile) of what lies ahead is material," said Mr. Tyghe. "The majority of the roughly 64 stores slated for conversion to the FreshCo format over the next 5-years are (underperforming) Safeway (and a few Sobeys) stores that would otherwise be at risk of closure. While the long awaited move to increase its discount presence is incrementally positive, and we believe a strategic imperative, the timing adds another layer of complexity to the story at a critical juncture in the broader turnaround plan. In our opinion the strong Sobeys team (ably supported by a meaningful consulting presence) is however well positioned to deliver against it targets through our forecast window."

With the announcement, Empire reported second-quarter 2018 results that Mr. Tyghe deemed "strong."

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $242-million exceeded the expectation on the Street of $224.3-million, featuring better-than-anticipated gross margins and "solid" expense leverage. Adjusted earnings per share of 27 cents was a 2-cent beat.

The company reported sales for the period of $6.026-billion, slightly missing the consensus projection of $6.053-billion, on same-store sales growth of 0.4 per cent.

"The sales performance was broadly in line with expectations with weakness in Quebec more reflective of a very tough comp (in what remains a stronghold market for IGA)," the analyst said. "The 90 basis points gross margin expansion (in the context of both recent peer reports and increased competitive intensity) was solid even after allowing for the easy comp. We believe that in addition to the benefits of disciplined pricing and increased promotional efficacy that Sobeys is finally seeing some positive (fresh) mix impact."

Mr. Tyghe raised his earnings per share projections for 2018 and 2019 to $1.14 and $1.58, respectively, from $1.02 and $1.44.

Maintaining a "market perform" rating for Empire shares, he hiked his target to $26 from $24. The average target is now $27.45.

Elsewhere, CIBC World Markets analyst Mark Petrie downgraded Empire to "neutral" from "outperform," keeping a $27 target.

"Empire continues to make steady progress on its plans to become a more competitive player in an increasingly challenging grocery market," said Mr. Petrie. "We continue to believe that cost-cutting plans will largely fall to the bottom line, though we are not yet willing to incorporate market share gains, which we believe will be tough to come by in a fiercely competitive environment, and are needed to support compelling upside from here."

BMO Nesbitt Burns analyst Peter Sklar called Wednesday's stock reaction "overdone" and raised his target to $30 from $28 with an unchanged "outperform" rating.

Mr. Sklar said: "We found Q2/18 to be positive, as the company experienced significant improvement in gross margin, which we believe reflects a disciplined promotional approach. Empire also announced it will be launching its FreshCo banner in Western Canada, converting 25% of stores over the next five years. We believe this is a positive development, however, we are concerned that there are unresolved issues with the FreshCo banner in Ontario. Overall, we believe the return to inflation and savings from the Project Sunrise transformation should support improved performance in the coming quarters."

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BMO Nesbitt Burns analyst Kelly Bania lowered her target price for shares of DavidsTea Inc. (DTEA-Q) in reaction to the news that it is exploring its strategic options.

The Montreal-based company made the announcement on Dec. 7 while reporting third-quarter financial results that failed to meet the expectations of the Street, prompting Ms. Bania to adjust her sum-of-the-parts analysis for the retailer.

"We apply a 9.0 times EBITDA multiple to DTEA's Canada portfolio given its strong brand awareness. This is modestly lower than the 10.0 times EBITDA multiple Starbucks (SBUX-Q) paid for Teavana given that Teavana stores are closing," she said. "We apply a 14.0-times multiple to DTEA's e-commerce business given continued momentum (double-digit sales growth in F3Q18), which we estimate could be on track to reach near $29-million in sales in fiscal 2018 and could be further supported by the upcoming launch of DTEA's new E-Commerce platform in the first quarter of fiscal 2019 and launch of Amazon Marketplace, in our view.

"However, given ongoing challenges in the U.S., we assume DTEA could elect to exit the U.S. from a physical location perspective and apply zero value for the segment. We arrive at an estimated implied value of about $3.50 per share. DTEA has no debt and $36.9-million in cash (or $28.8-million U.S. and $1.11 per share as of third quarer fiscal 2018)."

She lowered her 2018 earnings per share projection to a 13-cent loss from a 5-cent gain, while her 2019 estimate is now a loss of 9 cents, falling from a 14-cent profit.

Ms. Bania's target for the stock is now $4 (U.S.), dropping from $5.50. The average is $3.75.

"We believe DTEA's modern in-store experience, innovative culture, attractive market positioning, and a track record of solid new-store returns in Canada bode well for the company; yet, with executional challenges, slowing store growth, a lack of visibility into sales trends, product assortment issues, and ongoing strategic alternatives, we rate the shares Market Perform," she said.

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Changes in the timing of major supply and demand increases have caused the price environment for methanol to become far more constructive, said Cowen analyst Charles Neivert.

Based on that, he raised his financial estimates and target price for Methanex Corp. (MEOH-Q, MX-T).

"Data gathered on our Asia trip led us to believe that major methanol supply increases would come far later than originally anticipated, placing them behind (rather than ahead of) major demand increases," said Mr. Neivert. "As a result, 1Q18 and 2Q18 methanol pricing, originally anticipated to be relatively weak, may turn out to be relatively strong. In addition to the supply/demand timing reversal, Asian markets are being affected by gas shortages in China, which may cut gas driven methanol operating rates into 1Q18/early 2Q18. We anticipated supply curtailments due to the more rigid enforcement of environmental regulations that affect coal-based production, but the gas-based production cuts did not seem to be on the radar screen until now.

"Our recent round of conversations with methanol traders and buyers in different global regions point to substantial price increases all over the globe. European spot values are going off at €315-€320 per metric ton. While we look for some volatility to exist in the year's closing week as producers and buyers clear hedged positions and physical inventories, we anticipate European list price to increase to about €360-€370/mt from the current level of €330/mt. Asia traded prices currently exceed $400/mt. Given the issues in China, when we expect MTO operational reductions to be largely offset by methanol supply curtailment, we would look for the January Asia Pacific price nomination in the range of at least $460-$470/mt, up from the December price of $430/mt. For North America, we look for January contract prices to increase from $412/mt to $440-$450/mt. (All prices are before the typical discount.) With these prices as our backdrop for the start of the quarter, we are increasing our prior price estimates."

Mr. Neivert's earnings per share estimates for Methanex in 2018 rose to $4.74 (U.S.) from $3.34 based on higher pricing. His 2019 estimate increased $5.41 from $4.66.

Keeping an "outperform" rating for the stock, his target jumped to $65 (U.S.) from $58. The average on the Street is $55.74.

"As before, we are modeling a share repurchase program that included a substantial issuer bid and a normal course issuer bid in 2018," he said. "We have also anticipated a dividend increase beginning in 2Q18. It is possible, based on the new model estimates, that both the share repurchase and the dividend could be increased in dollar terms during 2018 since there will be more available cash. However, we note that it is possible that share repurchase might be curtailed in 2018 if shares reach MEOH's determined level of 'intrinsic value.' At that point, MEOH will need to reassess its allocation of cash."

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Beacon Securities analyst Gabriel Leung lowered BSM Technologies Inc. (GPS-T) to "speculative buy" from "buy" in reaction to its fourth-quarter financial results.

"Overall, we view fiscal Q4 as another relatively uneventful quarter," said Mr. Leung. "From a bigger picture perspective, despite doing a good job scaling the business to its current subscriber base, we believe BSM has been impacted by management/customer churn, product integration delays, and a competitive market place. We also believe the relatively light balance sheet (albeit debt-free) potentially limits BSM's ability to consummate a material acquisition. That said, despite these challenges we continue to be of the view that the company remains a valuable asset given its scale and vertical expertise. Furthermore, we believe management's near-term strategic initiatives (i.e. platform consolidation / recent management streamlining) could make it more attractive to a potential acquirer."

He maintained a $2 target for shares of the Toronto-based company, which is also the current consensus.

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In other analyst actions:

Goldman Sachs analyst Neil Mehta upgraded Husky Energy Inc. (HSE-T) to "neutral" from "sell" and raised his target by a loonie to $17. The average is $17.76.

Scotia Capital analyst Jason Bouvier also upgraded Husky to "sector outperform" from "sector perform" with a target of $18, up from $17.

Mr. Mehta  upgraded ConocoPhillips (COP-N) to "buy" from "neutral" with a target of $60, up from $45. The average is $57.55.

Macquarie analyst Brian Kristjansen upgraded ARC Resources Ltd. (ARX-T) "outperform" from "neutral" with a target of $18.50, rising from $17.75. The average is $20.61.

Tudor Pickering & Co analyst Aaron Swanson downgraded ARC to "hold" from "buy."

Mr. Swanson also lowered Tourmaline Oil Corp. (TOU-T) to "hold" from "buy."

Cormark Securities Inc. analyst Jason Zhang initiated coverage of Total Energy Services Inc. (TOT-T) with a "buy" rating and $18 target. The average is $18.36.

Argus Research Corp analyst John D Staszak upgraded Nike Inc. (NKE-N) to "buy" from "hold" with a $75 (U.S.) target. The average target is $59.89.

Oppenheimer & Co analyst Anna Andreeva downgraded Gap Inc. (GPS-N) to "market perform" from "outperform" with a target of $30 (U.S.), down from $33. The average is $28.70.

HSBC analyst Sunil Rajgopal downgraded Verizon Communications Inc. (VZ-N) to "hold" from "buy" with a $52 (U.S.) target, which is 9 cents below the consensus.

Craig-Hallum Capital Group analyst George Sutton initiated coverage of Mitel Networks Corp. (MITL-Q, MNW-T) with a "buy" rating and $14 (U.S.) target. The average is $11.20.

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