Tuesday's analyst upgrades and downgrades

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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.

In a research note on the energy industry, Raymond James analyst Chris Cox adjusted his forward commodity price projections, resulting in a number of changes to his target prices and ratings.

Mr. Cox said: "A further deterioration in oil prices across the forward curve has led us to decrease our assumptions for full year 2015 and 2016 crude prices."

His 2015 estimate is now $48.78 (U.S.) per barrel of West Texas Intermediate (WTI) from $50.24. For 2016, his estimate fell to $41.01 from $51.32. His long-term assumption remains at $70.

His natural gas pricing for 2015 and 2016 fell to $2.54 per thousand cubic feed (Mcf) from $2.69 and $2.81 for NYMEX prices, respectively. His long-term assumption fell to $2.50 from $3.

"We have made a number of revisions to Canadian benchmark commodity prices to reflect the corresponding downward revisions in WTI and NYMEX assumptions," he said. "For 2016 we have reduced our Edmonton Par forecast to $47.57 (Canadian) per barrel from $58.25/bbl, our Western Canadian Select forecast to $35.68/bbl from $46.93/bbl, and AECO assumption to $2.38/mcf from $2.63/mcf."

Accordingly, Mr. Cox downgraded several companies. The changes were:

- Bonavista Energy Corp. (BNP-T) to "market perform" from "outperform" and a target of $2.50 from $4.25. Consensus is $4.05.

Mr. Cox said: "Bonavista's valuation has remained incredibly attractive over the past year in terms of what investors are 'paying' for in upside beyond its current PDP value. For example, at the end of 2011 the company traded at 2.3x enterprise value/PDP whereas today the company trades at 1.2x EV/PDP (based on our updated year-end 2015 forecast). That said, given the company's weighting to gas and NGLs (93 per cent of 2015 estimated production) and our revised long-term outlook for natural gas (AECO down to $2.50/mcf long-term), the company faces an uphill battle in terms of its leverage profile. Although we have no doubt in management's ability to ultimately emerge from this leverage overhang, the timing and risks around this particular headwind are becoming more meaningful."

- Painted Pony Petroleum Ltd. (PPY-T) to "outperform" from "strong buy" and a target of $6 from $9. Consensus is $8.57.

He said: "Although Painted Pony continues to demonstrate amongst the highest expected cash flow per share growth rates in the sector at an estimated 97 per cent for 2016 (even after our pre-emptive capital expenditure cut), continuing concerns on Station 2 price volatility heading into 2016, combined with our declining AECO prices (both near and long-term) increase the risk that Painted Pony may not be able to grow at the pace we had once expected (especially as we try and maintain the company's debt-to-cash flow at approximately 2.0x for 2016)."

- Chinook Energy Ltd. (CKE-T) to "market perform" from "outperform" and a target of 50 cents from 75 cents. Consensus is 84 cents.
- RMP Energy (RMP-T) to "market perform" from "outperform" and a target of $1.55 from $2.30. Consensus is $2.35.
- Storm Resources Ltd. (SRX-X) to "market perform" from "outperform" and a target of $4.30 from $5.25. Consensus is $5.50

He said: "Our mark-to-market price deck update has resulted in three other downgrades: Chinook, RMP and Storm are now Market Perform from Outperform previously. While we still like the business models of all three companies, other factors look to provide headwinds in the near-term. The rationale for the rating change for Chinook and Storm is modest levels of hedging with particular exposure to Station 2 pricing at a time when even AECO pricing has been challenged enough. The RMP downgrade is a function of a relatively modest level of hedging combined with a modest pace of capitalization this year."

His target changes also included:

- Canadian Oil Sands Ltd. (COS-T, market perform) to $10 from $10.75. Consensus is $9.29.
- MEG Energy Corp. (MEG-T, outperform) to $11 from $18.Consensus is $13.90.
- Canadian Natural Resources Ltd. (CNQ-T, CNQ-N, outperform) to $36 from $39. Consensus is $38.09
- Cenovus Energy Inc. (CVE-T, CVE-N, outperform) to $20 from $24. Consensus is $22.44
- Husky Energy Inc. (HSE-T, market perform) to $16 from $21. Consensus is $20.97.
- Imperial Oil Ltd. (IMO-T, IMO-N, market perform) to $45 from $52. Consensus is $46.16.
- Suncor Energy Inc. (SU-T, SU-N, outperform) to $40 from $43. Consensus is $41.87.

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"Giving credit where credit is due," Desjardins Securities analyst Michael Parkin upgraded his rating for MAG Silver Corp. (MAG-T, MVG-A) to "buy" from "hold."

"In April 2015, MAG reported a very positive exploration update, in our view, with the results of a four-hole drill program aimed at testing for mineral potential [approximately] 100 metres below the known resources of the Deep Zone of the Juanicipio project's East and West Valdecanas veins," said Mr. Parkin. "The results included the widest intercepts to date and high-grade mineralization. We have discussed the recent new drill program with management and have worked to develop a preliminary value for this new zone, which we discuss in this comment. Overall, we see very good potential for the new program, which may have 10 holes to report on, to be a significant value driver for the company. We have also reduced our 2016 assumed equity financing to bring it in line with the recently announced preliminary base shelf prospectus for up to S75-million U.S. (we were previously at $100-million)."

Mr. Parkin raised his target price for the stock to $11.75 from $11 based on a revised net asset value estimate. Consensus is $14.95.

"We looked at the sensitivity of the Juanicipio project to various metals price assumptions. Our basecase assumptions are basically our long-term metals prices of $19 (U.S.) per ounce silver, $1,325/oz gold, $0.76 per pound lead and $1/lb zinc (our long-term metals prices start in 2020)," the analyst said. "Under these assumptions and incorporating the [Updated Preliminary Economic Assessment Study], our model produced an net present value per share of $7.51 (Canadian) for MAG's 44-per-cent interest and an impressive after-tax internal rate of return (IRR) of 61 per cent.

"We also looked at the potential returns using a spot price assumption of $14 (U.S.)/oz silver (and spot prices for the other metals), and at these prices our model produced an NPV per share of $5.06 (Canadian) and an after-tax IRR of 47 per cent. We wanted to test a bear-case scenario and looked at the project economics at $12 (U.S.)/oz silver (and equally discounted other metals prices). Even under these low metals price assumptions, the project continued to yield an NPV/share of $3.55 (Canadian) and an after-tax IRR of 39 per cent, which would likely be the envy of most projects currently under developmental consideration."

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Pioneer Natural Resources Corp. (PXD-N) is "making all the right moves" in positioning itself to deal with a lower oil price environment, said BMO Nesbitt Burns analyst Phillip Jungwirth.

After a meeting with oil and gas exploration and production company recently, Mr. Jungwirth upgraded his rating for the stock to "outperform" from "market perform."

"Through hedging, asset sales/joint ventures, and most recently equity, Pioneer has built a war chest ... that provides visibility around the best multi-year outlook among the E&P sector,'" he said. "Valuation has historically kept us on the sidelines, but an approximately 20 per cent oil and low- to mid-teens total production compound annual growth rate from 2016-18 should translate to meaningful EV/EBITDAX multiple compression while leverage remains low.

"This compares to many E&Ps where multiples expand due to being caught in a spiral of outspending cash flow as production declines. As such, relative valuation has improved. In fact, PXD now trades at only 8.7 times our 2018 EV/EBITDAX estimate, only a 1x premium to the 7.7x large-cap median. While growing oil volumes 20 per cent with a low three handle on oil prices could be viewed as growth for growth's sake, on a relative basis Pioneer's wellhead returns are top-tier (with well productivity improving) and overall capital efficiency continues to get better evidenced by a $2.4-2.6-billion preliminary 2016 capital program that targets 10-15 per cent total production (an increase of 20 per cent oil) growth. Bottom line, we believe Pioneer has by far the best three-year outlook in E&P, which isn't dependent on higher commodity prices, while its relative valuation premium compresses rapidly in 2017-18."

Mr. Jungwirth said he's confident in Pioneer's ability to achieve its three-year growth targets and expects well productivity and capital efficiency to improve.

He maintained a $155 (U.S.) target price for the stock. The analyst consensus is $164.08.

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Though he noted an "uncertain" economic backdrop and "heightened volatility" in equity markets don't normally provide a macro environment that "bodes well" for airline stocks, CIBC World Markets analyst Kevin Chiang said he remains "constructive on the fundamental changes afoot within the Canadian aviation space."

"We are not here to debate whether the Canadian economy will grow or shrink in 2016," said Mr. Chiang in a research note on the sector's 2016 outlook . "This is an exogenous variable. We do point out, however, that the airlines are investing to create a less cyclical demand profile. Air Canada lowering its cost structure to tap into leisure travelers and WestJet becoming less geographically concentrated helps to de-risk their business models. We continue to view Air Canada as the airline best positioned to take advantage of the structural improvements in the airline sector. Its valuation remains at a steep discount to its peers and the company has an improving competitive profile and greater geographic exposure. For investors seeking a more 'defensive airline,' we recommend Chorus given its fixed fee compensation structure, compelling dividend yield, reduced counterparty risk, and valuation."

He added: "It must be frustrating for Canada's main airlines to post record results, delivering on their financial targets, and yet see their share prices under pressure. Unsurprisingly, and as we have noted in previous reports, this circumstance is a function of investor disbelief that airlines are truly investible vehicles and of concerns over whether the sector will remain "rational." With the Canadian airlines in the midst of executing on their long-term strategies, fundamentally we do not foresee our views on Air Canada, Chorus, Transat, or WestJet changing significantly. Instead, the question is whether 2016 is the year these airlines can convert the skeptics, especially given where their multiples trade today. Interestingly, we would argue that Air Canada and WestJet have addressed a number of concerns that investors have had historically about putting money into airlines, but we suspect that the noise around jet fuel prices and FX has served to distract."

For Air Canada (AC-T), he maintained his "sector outperformer" rating, but he lowered his price target for the stock to $16.50 from $18. Consensus is $17.30.

He also dropped his target for WestJet Airlines Ltd. (WJA-T) to $28 from $31, compared to a consensus of $28.13. He did not alter his "sector outperformer" rating.

"Perversely, it might take a recession to highlight the improved resiliency of airline profitability today to drive a positive re-rating," said Mr. Chiang. "Given we are not calling for a recession in Canada, we do highlight that the airlines today have a higher-margin buffer and increased capacity flexibility (i.e., increased variable costs). In essence, the multiples at which AC and WJA are trading ignore the improved earnings quality and the ability to better generate profits through a cycle."

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Upon the closing of Algonquin Power & Utilities Corp.'s (AQN-T) $327-million  (U.S.) acquisition of Park Water Corp., Desjardins Securities analyst Bill Cabel said the move and other growth initiatives are "supportive of continued dividend increases."

Mr. Cabel said the acquisition increases Algonquin's utility consumer base by almost 15 per cent and adds $35-million in earnings. He added: "There are substantial opportunities to add to the rate base and potential tuck-in acquisitions."

After removing the risking (of about 30 per cent) on the Park Water assets from his valuation, Mr. Cabel's target price for the stock rose by 25 cents to $12.75. The analyst consensus is $12.06.

He maintained a "buy" rating.

"We believe AQN has the potential to deliver strong, sector-leading returns, and it is one of our preferred names," he said. "It offers long-term stable operations combined with significant relatively low-risk growth, strong likelihood for continued annual dividend increases to fuel further share price appreciation and the potential to make accretive acquisitions."

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In other analyst actions:

DDR Corp (DDR-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst Omotayo Okusanya. The 12-month target price is $15 (U.S.) per share.

Digital Realty Trust Inc (DLR-N) was raised to "buy" from "hold" at Jefferies by equity analyst Jonathan Petersen. The 12-month target price is $88 (U.S.) per share.

Equity Residential (EQR-N) was raised to "buy" from "hold" at Jefferies by equity analyst Omotayo Okusanya. The target price is $92 (U.S.) per share.

Fidelity National Information Services Inc (FIS-N) was raised to "outperform" from "market perform" at Wells Fargo by equity analyst Timothy Willi.

HCP Inc (HCP-N) was downgraded to "underperform" from "hold" at Jefferies by equity analyst Omotayo Okusanya. The 12-month target price is $30 (U.S.) per share.

McKesson Corp (MCK-N) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst John Ransom.

Omega Healthcare Investors Inc (OHI-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst Omotayo Okusanya. The target price is $37 (U.S.) per share.

Occidental Petroleum Corp (OXY-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst Jason Gammel. The 12-month target price is $69 (U.S.) per share.

Senior Housing Properties Trust (SNH-N) was raised to "buy" from "hold" at Jefferies by equity analyst Omotayo Okusanya. The 12-month target price is $17 (U.S.) per share.

Taubman Centers Inc (TCO-N) was downgraded to "underperform" from "hold" at Jefferies by equity analyst Omotayo Okusanya. The target price is $65 (U.S.) per share.

WPX Energy Inc (WPX-N) was rated new "buy" at Guggenheim Securities by equity analyst Subash Chandra. The 12-month target price is $8 (U.S.) per share.

Yoho Resources Inc (YO-X) was downgraded to "hold" from "speculative buy" at Acumen Capital by equity analyst Trevor Reynolds. The target price is 40 cents (Canadian) per share.

With files from Bloomberg News