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

New Gold Inc.'s (NGD-T, NGD-A) announcement of a nine-month gold hedging program "greatly" derisks its financial position and removes a significant overhang for the stock, said Desjardins Securities analyst Michael Parkin.

He upgraded his rating for the Vancouver-based company to "buy" from "hold."

Under the program, announced after the markets closed on Tuesday, New Gold put options with a strike price of $1,200 (U.S.) per ounce covering 270,000 ounces of gold and sold call options with a strike price of $1,400/oz covering an equivalent 270,000 ounces. The deal covers 30,000 ounces per month for nine months beginning in April.

The option contracts cost $2-million (or $7.40/oz), which Mr. Parkin called "a modest cost for a major reduction in risk."

"NGD announced that it has entered into a hedge program for a portion of its gold production over the last nine months of 2016," he said. "In our previous comment, we had discussed our increased comfort with the company's financial position—with the caveat that we would like to see a short-term gold hedge program implemented to ensure the company is fully funded on the Rainy River construction project (see note here). We are pleased to see that NGD has taken measures to ensure receipt of needed cash flows at a gold price range that is above our base-case assumptions."

He also noted: "We model NGD spending $500-million in 2016 on the Rainy River project, with the spending partially contingent on incoming cash flows over 2016. This hedging program ensures NGD should have sufficient funding, by our estimates, to get through the construction and ramp-up of the project, which we model starting production in 2Q17."

He raised his price target for the stock to $5.50 (Canadian) from $4.50. The analyst average price target is $4.79, according to Bloomberg.


The sale of its company-owned retail stories garnered "good value" for Imperial Oil Ltd. (IMO-T, IMO-A), said Raymond James analyst Chris Cox, who suggests the move is a possible precursor for a strategic acquisition.

On Tuesday, Imperial announce the sale of 497 Esso-brand retail gas stations to five fuel distributors for $2.8-billion. Mr. Cox said the transaction price was over double the value he had projected for the assets since the company announced its intentions to move to a branded wholesaler model a year ago.

"Given the highly strategic location of the assets and the synergies likely available to the acquirers, the multiple was likely at or above the high-end of convenience store comps in North America (we estimate approximately 11 times to 12 times trailing EBITDA)," he said.

He added: "The company has not disclosed its use of proceeds from this transaction. Given the company's transition into a period of free cash flow, the historical precedent would suggest that Imperial will likely use the proceeds on share buybacks – in our view, an attractive proposition at the bottom of the cycle. That said, management had been surprisingly vocal at the start of the current downturn in suggesting that the company was interested in strategic acquisitions. While this tone appears to have softened somewhat as of late, we still believe there is an appetite for high-quality oil sands properties in the current environment. With the majority of the sale proceeds expected within the next 6 months, we believe some of the initial actions by the company could be telling as to which strategic direction the company may take."

His 2016 EBITDA projection fell to $2.479-billion from $2.646-billion, while his revenues estimate dropped to $26.031-billion from $27.968-billion. His 2017 net asset value per share projection rose to $49.66 from $46.55.

"With its two major growth projects recently completed, Imperial begins a transition from a period of elevated capex to one of noticeably reduced spending and higher production, which should noticeably improve the free cash flow profile," said Mr. Cox. "Despite this positive development, we remain cautious on the relative performance of the shares in a rising oil price environment; Imperial's business model is inherently more defensive than its peers (higher downstream weighting and a noticeable position in chemicals), while the stock's resiliency in the current downturn could also weigh on potential upside (Imperial's shares have outperformed the TSX Energy Index by 28 per cent since the start of the collapse in crude prices more than 18 months ago)."

Keeping his "market perform" rating for the stock, his target price rose to $48 from $45. The analyst average is $43.38.


Alimentation Couche-Tard Inc.'s (ATD.B-T) deal to purchase 279 retail stations from Imperial Oil Ltd. in Ontario and Quebec for almost $1.7-billion is "very attractive" based on its strategic value and the potential upside in increasing its in-store business, said CIBC World Markets analyst Mark Petrie.

He said the deal's "modest" accretion is a reflection of the company's size, noting "it takes big deals to move the needle."

Mr. Petrie estimates the company is paying about 9 times enterprise value to EBITDA before synergies of approximately $15-million.

"The price per site is well above the typical range paid by ATD, but these are premium locations; the majority of the Ontario assets are in the GTA, while all of the Quebec sites are situated in the Greater Montreal Area or on the south shore," the analyst said. "As a result, fuel volumes/site are roughly twice the average in ATD's existing Canadian network. Despite the strong traffic and good physical condition, the actual c-store volume is relatively modest at an average of $1-million per site. It will take some time to install its programs, but we believe there is significant potential for Couche-Tard to grow this in-store business. In the near term, synergies will be lower than what we've seen in ATD's recent deals (no expenses to cut), but we expect about $15-million from procurement (in-store and fuel)."

He added: "In our view, this transaction highlights two significant realities for Couche-Tard. First, we believe there are many, many highly attractive and accretive transactions available to the company. Even when paying up for premium assets with material scarcity value and relatively modest synergies, the transaction is immediately accretive to earnings and free cash flow. Debt paydown is rapid, leaving the company well positioned for the next deal; lather, rinse, repeat. We continue to believe that management is a highly disciplined acquirer and there are ample targets, predominantly, but not exclusively, in Europe. Second, even though $1.3-billion is a sizeable transaction, it still only adds 4 per cent to our EPS forecast for next year. Likewise, Topaz (at a price of $635-million U.S.) was 3-per-cent accretive, and we expect the Shell assets in Denmark – once the deal closes, which is slated for the end of this fiscal year – to be roughly 4-per-cent accretive. In other words, it is getting harder and harder for Couche-Tard to print significantly accretive deals simply as a result of its own size and success. A nice problem to have to be sure, but an important consideration for investors."

Mr. Petrie raised his 2017 EPS forecast to $2.79 from $2.68.

Keeping his "sector outperformer" rating, he also raised his price target for the stock to $82 from $76. The average is $70.50.


A higher debt load will prove to be a challenge for the equity upside of Western Energy Services Corp. (WRG-T), according to Raymond James analyst Andrew Bradford.

He downgraded his rating for the Calgary-based oilfield services company to "underperform" from "market perform."

"We believe that Western's latent rig capacity is highly marketable and should be among the first rigs to go back to work in a recovery scenario," said Mr. Bradford. "However, the issue for equity investors resides in the magnitude of that recovery. Our 2017 scenario implies insufficient upside for equity holders today. In other words, Western stock is already pricing-in a 2017 recovery and according to our estimates, is over-pricing this recovery. As such, we are compelled to reduce our rating."

Noting he is gaining "visibility" on first-quarter 2016 rig counts, Mr. Bradford said his best estimate is an average of 149, below the fourth-quarter count of 168. He expects second-quarter activity levels to sink even further to a low point.

Accordingly, he reduced the company's first-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) estimate to $6-million from $10-million. His full-year 2016 projection dropped to $23-million from $30-million, though he noted his 2017 estimate rose by $1-million to $75-million.

He also said WRG's high leverage ratios in 2016 should result in reduced liquidity only if it is unable to renegotiate covenants.

"Western holds substantially all of its $267-million debt in Sr. unsecured notes that mature in 3 years (Jan. 30, 2019), however, its debt covenants only apply to its secured operating and revolving facilities, which are undrawn (total $195-million available), and according to our numbers, will remain undrawn through 2016," said Mr. Bradford. "Western was onside with all its covenants at Dec. 31, we believe it will technically be offside with its EBITDA/Interest covenant (min 2.0 times) from March 2016 to June 2017. But, with nothing drawn on the facilities the real implication of the breach will be to reduce access to the secured facilities. This shouldn't be problematic for Western: it carried $58-million cash (at Dec. 31, 2015), has no major capital expenditures on the books for 2016, and suspended its dividend. Nevertheless, Western is currently in negotiations with its lenders for covenant relief which presumably would allow it to access the facilities without a breach. Lenders have been amenable to this type of relief for others in the Canadian drilling space over the downturn."

Mr. Bradford raised his price target for the stock to $3 from $2.50. The analyst consensus price target is $4.14, according to Thomson Reuters.


Tourmaline Oil Corp. (TOU-T) had a "solid" end to 2015 with improving capital efficiency, said BMO Nesbitt Burns analyst Randy Ollenberger.

On Monday, the Calgary-based intermediate crude oil and natural gas exploration and production company reported fourth-quarter results that were ahead of Mr. Ollenberger's expectations, including operating cash flow per share of $1.10 (topping his $1.09 estimate and the consensus of $1.04).

"Tourmaline delivered solid cost performance with operating costs of $4.23 per barrel of oil equivalent (boe), and transportation and [expense] costs of $1.94/boe and $0.33/boe, respectively, each below our estimates," he said. "Tourmaline also announced a reduction in its 2016 capital budget to $775-million from $1.1-billion, including the Deep Basin acquisition, versus our estimate of $850-million and consensus of $1.1-billion. Despite the cut, the company has maintained its 2016 production guidance of 200,000 boe/d, which implies a significant improvement in capital efficiencies."

In reaction to the quarterly results, updated guidance and better price realizations, Mr. Ollenberger raised his 2016 cash flow estimate to $3.65 per share from $3.16. His 2017 estimate jumped to $5.01/share from $4.40/share.

He projects production averages of 201,851 barrels of oil equivalent per day (boe/d) in 2016 and 220,250 boe/d in 2017.

Maintaining his "market perform" rating for the stock, he raised his target price to $37 from $27. The analyst average is $35.98.

"Tourmaline has solid track record, attractive asset base, and strong balance sheet," said Mr. Ollenberger. "The company has effectively responded to lower commodity prices by reducing its capital spending. We are maintaining our market perform rating, which reflects our caution on the natural gas backdrop, but increasing our target … in conjunction with the increase to our estimates. At current prices the shares are trading at a 2016 estimate enterprise value/EBITDA multiple of 9.6 times, which is slightly below its North American peer group average of 11.1x."


Though its fourth-quarter results were "decent," the outlook is "difficult" for Ensign Energy Services Inc. (ESI-T), said BMO Nesbitt Burns analyst Michael Mazar.

On Tuesday, Ensign reported adjusted earnings per share of a loss of 20 cents, below the estimates of both Mr. Mazar (a 17-cent loss) and the consensus (14-cent loss). Revenue of $284-million also missed expectations ($318-million and $303-million, respectively).

However, a gross margin of 31.3 per cent topped Mr. Mazar's projection of 25.8 per cent, and it was an improvement from 28.1 per cent in the fourth quarter of 2014. EBITDA of $72-million topped the analyst's $64-million estimate and the consensus of $59-million.

"Ensign remains a leader in cost management, recording further margin improvements even as pricing deteriorates," said Mr. Mazar. "The focus on costs, maintaining the balance sheet and the relative resilience of the International business provides the company with stability in a downturn but utilization continues to lag peers with better rig fleets (both Precision Drilling Corp. and Trinidad Drilling Ltd. posted considerably better utilization rates and margins than ESI in markets where they compete with each other)."

Based on the quarterly results and "further weakening" producer spending, Mr. Mazar dropped his 2016 EPS projection to a loss of $1.28 from a loss of 51 cents. His 2017 projection moved to a 90-cent loss from a 33-cent loss.

Maintaining a "market perform" rating for Ensign stock, he lowered his target price to $6.50 from $7.50 in reaction to the reduction of his estimates. The analyst average is $7.24.

"Q4 results were fairly strong given weak North American drilling activity," said Mr. Mazar. "Ensign trades essentially in line with its peer group at a discount of 70 per cent to equipment replacement value, which we believe is justified as the strong balance sheet and leaner cost structure offsets the lower rig fleet quality. While the company appears well-positioned to weather the downturn, ESI has a massive challenge to regain lost market share … when activity recovers."


In other analyst actions:

Atlantic Power Corp (ATP-T) was raised to "sector perform" from "underperform" at RBC Capital by equity analyst Nelson Ng. The 12-month target price is $3 (Canadian) per share.

BHP Billiton PLC (BBL-N) was downgraded to "hold" from "buy" at Jefferies by equity analyst Christopher Lafemina. The 12-month target price is $24 (U.S.) per share.

Casey's General Stores Inc (CASY-Q) was raised to "outperform" from "sector perform" at RBC Capital by equity analyst Irene Nattel. The 12-month target price is $129 (U.S.) per share.

CBS Corp (CBS-N) was raised to "outperform" from "market perform" at Wells Fargo by equity analyst Marci Ryvicker.

Claude Resources Inc (CRJ-T) was downgraded to "hold" from "buy" at Canaccord Genuity by equity analyst Rahul Paul. The 12-month target price is $1.50 (Canadian) per share.

FireEye Inc (FEYE-Q) was raised to "overweight" from "neutral" at Piper Jaffray by equity analyst Andrew Nowinski. The 12-month target price is $24 (U.S.) per share.

Groupon Inc (GRPN-Q) was downgraded to "sell" from "neutral" at UBS by equity analyst Eric Sheridan. The 12-month target price is $3.20 (U.S.) per share.

North West Co Inc (NWC-T) was downgraded to "hold" from "buy" at Industrial Alliance by equity analyst Neil Linsdell. The 12-month target price is $32 (Canadian) per share.

With files from Bloomberg News

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