Tuesday's analyst upgrades and downgrades

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

Canaccord Genuity analyst John Bereznicki thinks 2017 and 2018 consensus estimates for Canadian oilfield services companies have "largely bottomed," and future revisions are "likely biased to the upside."

"We believe this could support further multiple expansion in the sector as equities lead future estimate revisions," said Mr. Bereznicki in a research note on the sector. "We are increasing most of our target multiples accordingly."

He also upgraded Trican Well Services Ltd. (TCW-T) to "buy" from "speculative buy" and Mullen Group Ltd. (MTL-T) to "buy" from "hold."

"Since OPEC announced its intended production cuts on Nov. 30, the average constituent of our Canaccord Genuity Consensus Oilfield Universe (COU) is up 15 per cent, with the S&P/TSX Energy Equipment & Services (STENRE) Index up 12 per cent," he said. "While it remains to be seen whether the participants in this agreement ultimately honour their commitments, we believe there is historic precedent for this co-ordinated action. Between December 1996 and December 1998, WTI fell [approximately] 60 per cent to ($10.50 U.S. per barrel) amidst global oil over-supply and growing concern about the future relevance of OPEC, E&P productivity gains and a secular decline in oil demand in Asia and more mature economies. Oilfield sector P/Book valuations troughed in early 1999, at which point OPEC announced co-ordinated production cuts with Russia, Mexico, Norway and Oman. Over the next two years, industry P/Book [price to book] increased significantly before a U.S. recession took hold in 2001.

"In the current era, industry P/Book values bottomed in February of this year before recovering modestly prior to OPEC's announcement last week. While we doubt sector P/Book values are poised to recover at the same pace they did in 1999-2000, we nonetheless believe we are in the early innings of a fundamental recovery in the domestic oilfield sector."

Mr. Bereznicki made the following target price changes:

Trican Well Services Ltd. to $5 from $4.25.Consensus is $4.13.

Mullen Group Ltd. to $22 from $20.50. Consensus is $20.13.

Canadian Energy Services and Technology Corp. (CEU-T, buy) to $9.25 from $8. Consensus: $7.44.

Calfrac Well Services Ltd. (CFW-T, hold) to $4.25 from $3.25. Consensus: $3.84.

Ensign Energy Services Inc. (ESI-T, hold) to $10 from $8. Consensus: $8.71.

Canyon Services Group Inc. (FRC-T, buy) to $8.50 from $7.50. Consensus: $7.05.

Precision Drilling Corp. (PD-T, hold) to $8.50 from $7.25. Consensus: $7.90.

Secure Energy Services Inc. (SES-T, buy) to $13 from $12. Consensus: $11.67.

Trinidad Drilling Ltd. (TDG-T, buy) to $4 from $3.25. Consensus: $3.36.

Total Energy Services Inc. (TOT-T, buy) to $17 from $16. Consensus: $15.94.

Western Energy Services Corp. (WRG-T, hold) to $3 from $2.75. Consensus: $3.32.

"Thematically, we continue to favour those companies that are positioned to generate the most EBITDA torque in the early stages of a fundamental recovery," said Mr. Bereznicki. "More specifically, we like companies that: i) benefit from a secular increase in frac intensity; ii) have significant operating leverage in their cost structures; and iii) have exposure to the most economically advantaged drilling locations.

"Our focus large cap ideas remain CEU and SES. Amongst the pumpers, FRC remains our top idea for those seeking balance sheet strength, while TCW remains our relative beta pick. Elsewhere in our coverage universe, TDG remains our favourite driller, while we recommend TOT and MTL for those seeking cyclical exposure with relative downside protection."

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Northern Blizzard Resources Inc. (NBZ-T) has "set the right tone for 2017," said BMO Nesbitt Burns analyst Ray Kwan.

Citing the elimination of its stock dividend program (SDP) and a 50-per-cent cut in its dividend (to 2 cents monthly), Mr. Kwan upgraded his rating for the Calgary-based company to "market perform" from "underperform."

"We view both items positively as the previous dividend was unsustainable at current commodity prices in our view, and the SDP was creating unnecessary dilution," he said.

On Monday, the company also announced its capital spending plan for 2017 of $60-million with average production of 17,100 barrels of oil equivalent per day (boe/d). Both were slightly below Mr. Kwan's estimates ($65-million and 17,800 boe/d).

"Northern Blizzard intends to commence an issuer bid to cancel up to $75-million or 18.75 million of its shares at $4 per share (4-per-cent premium to Friday close)," he said. "The offer is expected to remain open until the second half of January 2017. The offer is not conditional on a minimum number of shares to be tendered, and note NGP and Riverstone (who collectively own 71.3 per cent of the common shares) have indicated their intention to tender all their shares pursuant to the offer."

After minor tweaks to his forward estimates, Mr. Kwan raised his target price for the stock to $4.50 from $3.75. The analyst consensus price target is $4.36, according to Thomson Reuters.

"In our view, the company provides investors with the means to leverage higher heavy oil prices," he said.

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Industrial Alliance Insurance and Financial Services Inc.'s (IAG-T) acquisition of HollisWealth from Bank of Nova Scotia is in line with management's strategy and appears to be a "good" deal, said Desjardins Securities analyst Doug Young.

However, in reaction to the deal, announced Monday, Mr. Young downgraded his rating for Industrial Alliance stock to "hold" from "buy" based on recent price appreciation and a 6.2-per-cent total return to his revised target price.

"IAG will pay [approximately 0.70 per cent of AUA (all cash; which today equates to $238-million), which is slightly below what we would expect for a dealer network and less than past comparable deals," said Mr. Young. "There will be an adjustment to the purchase price depending on the level of capital delivered at closing. It is unclear if this includes advisor retention agreements; if not, this could be an additional cost for IAG. The deal is expected to close in 3Q17, subject to applicable regulatory approvals."

"IAG is issuing $139-million in equity (2.5 million shares) at $55.65 on a bought-deal basis (2-per-cent discount to its previous day's closing price). There is also a 10-per-cent overallotment option available for a period of 30 days post close of the equity issue. We expect the deal to be slightly dilutive to EPS in 2017, and management expects modest accretion in 2018 and $0.05 accretion in 2019."

Mr. Young increased his target price to $59 from $56 after increasing his book value per share projection. The analyst average price target is $54.80, according to Bloomberg.

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In a research note analyzing the results of the Canada Mortgage and Housing Corp.'s annual market survey, Desjardins Securities analyst Michael Markidis raised his rating for InterRent Real Estate Investment Trust (IIP.UN-T) to "buy" from "hold."

"The national vacancy rate for purpose-built apartments across Canada was 3.7 per cent in October 2016 (an 18-year high), while the national average rent for a two-bedroom apartment increased 2.4 per cent year over year. Based on this survey, supply data and our view of local demand drivers, we've ranked the relative strength of eight major markets in the coming year. Vancouver and Toronto are at the top of our list. Edmonton, Calgary and Regina round out the bottom.

"In formulating our outlook [for 2017], we've identified four key themes. (1) In Vancouver, where market vacancy is sub-1% and the maximum allowable rent increase for 2017 has been set at a healthy 3.7 per cent, we believe that the pending 1% tax on empty homes and an uptick in the supply curve (approximately 6 per cent of the existing purpose-built inventory is under construction) are two risks worth monitoring. (2) Although the supply curves in Calgary and Edmonton are adjusting rapidly (units under construction are down [approximately] 40 per cent from recent peaks), we see further, albeit more modest, upward pressure on vacancy in the coming year. (3) In Toronto, where market conditions remain tight (vacancy came in at 1.4 per cent), the apartment supply pipeline has been trending higher for the past three years. At the same time, the rate of condo construction has declined, which gives us confidence that the market will remain balanced. (4) Finally, the federal government has maintained its annual immigration target at 300,000 in 2017. Broadly, this should support residential rental demand across the country."

While upgrading his rating, Mr. Markidis did lower his target price by 50 cents to $8 per unit. Consensus is $8.28.

"Our move to a Hold on Aug. 23 was largely a valuation call," the analyst said. "Since then, IIP has declined by 16 per cent on a total return basis versus [a decline of] 6 per cent for the S&P/TSX Capped REIT Index. Beyond recent weakness, three factors underpin our return to a positive stance, including: (1) favourable geographic composition, (2) above-average growth profile, and (3) capital recycling initiatives."

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Alterra Power Corp. (AXY-T) is gaining traction in the United States, according to RBC Dominion Securities analyst Nelson Ng.

He initiated coverage of the Vancouver-based company with a "sector performer" rating.

"Alterra owns six hydro, wind, and geothermal facilities in North America and Iceland with an average PPA term of 18 years (23 years in North America, which is positive)," said Mr. Ng. "The operating costs for the portfolio are low, and the assets are diversified with respect to geography and technology, limiting the seasonality and variability of cash flows."

"We believe the share consolidation and dividend initiation made the shares of Alterra more comparable to its peer group. The modest dividend yield and higher share price likely made the shares more appealing to some investors with respect to the subsequent equity offering. We believe the very modest dividend (C$0.05/share annualized or 0.9% yield) was initiated to signal that there could be future dividend increases as the company grows its portfolio."

Mr. Ng called the company's Icelandic subsidiary HS Orka a potential "hidden gem." He added it's an "attractive" geothermal business with the potential for good earnings growth over the medium term.

"We are generally comfortable with geothermal technology, particularly in Iceland, where the resource is abundant," the analyst said. "We believe HS Orka is an attractive investment with potential upside when the below-market power contracts linked to the price of aluminum expire in 2019 and 2026 (approximately 60 per cent of HS Orka's total generation). HS Orka also has two relatively inexpensive opportunities to expand the Reykjanes facility by 30 MW and 50 MW. The investment environment in Iceland is also improving with the gradual removal of capital controls."

Though he said it has "good" near-term opportunities for growth, Mr. Ng did caution about the potential for long-term uncertainty.

"Following its successful development of the Shannon wind facility in Texas, Alterra is now primarily focused on growing its U.S. footprint," he said. "However, given the recent change to a Republican government, of which select members have voiced concerns about the validity of climate change, there will be uncertainty with respect to the pace of growth in renewable energy developments. We expect that the current tax credits in place will continue to drive growth in the U.S. in the near term. In 2016, Alterra acquired a 200 MW Flat Top wind development, which management expects will reach COD in late 2017. Similar to the Shannon facility, we expect Alterra to sell down a 50-per-cent interest in the project to a financial partner once the development is more de-risked (near financial close). Additionally, Alterra acquired a 75-per-cent ownership in a two-project 20 MW solar portfolio in U.S. Midwest, which is expected to reach COD in H2/16 and 2017. Management noted that it is actively working on several other wind development opportunities, and the company intends to incur some costs to PTC-qualify the wind developments."

He set a target for the stock of $6. The analyst average price target is $6.88, according to Bloomberg.

"Our price target implies a blended EV [enterprise value] to 2018 estimated EBITDA multiple of approximately 13.5x, which is at the higher end of its peer group range of 10–14x because we believe a premium multiple is justified for HS Orka and Jimmy Creek," he said. "Our Speculative Risk qualifier is due to Alterra's relatively small market capitalization and the elevated debt levels in its capital structure."

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In other analyst actions:

Altius Minerals Corp. (ALS-T) was rated a new "buy" at TD Securities by analyst Carey Macrury. His target is $15.50 per share, compared to the average of $15.50.

Cott Corp. (COT-N, BCB-T) was downgraded to "hold" from "buy" by Stifel analyst Mark Swartzberg. He lowered his target to $12 (U.S.) from $16. The average is $17.11.