Inside the Market’s roundup of some of today’s key analyst actions
Obsidian Energy Ltd.'s (OBE-T, OBE-N) debt levels are likely to continue to be “an overhang on the story” without a significant rebound in commodity prices, according to Canaccord Genuity analyst Anthony Petrucci, who cut his rating for its stock to “hold” from “speculative buy.”
On Thursday before market open, Obsidian reported largely in-line fourth-quarter and 2018 results. Production of 29,903 barrels of oil equivalent per day for the quarter exceeded Mr. Petrucci's estimate (28,364 boe/d), while cash flow of $92-million for the year met his projection ($94-million).
However, Mr. Petrucci expressed concern over the company's estimate debt-to-cash flow ratio in 2019 of 6.5 times.
"On the back of our reduced cashflow expectations for 2019, and it’s impact on relative debt levels, we are reducing our target to $0.40 (from $0.75) and changing our rating," he said.
"The change in target is the result of further risking its booked reserves given the uncertainty the debt level has created in capturing that reserve value. This yields a new C-NAV of $0.39 (from $0.89), which is the basis for our updated target that now maps to a 2019E EV/DACF of 8.4x. (vs. 8.8x previously)."
His 40-cent target sits below the current average target on the Street of 88 cents, according to Thomson Reuters Eikon data.
Meanwhile, Raymond James' Jeremy McCrea lowered his rating to "market perform" from "outperform" with a 75-cent target, down from $1.
Mr. McCrea said: “It appears Obsidian continues to find new ways to distract investor attention from their prolific Cardium play. When we had previously upgraded the stock, the company was seeing substantial improvements in type-curves (among some of the best in the Cardium). Combined with declining debt (from higher WTI prices and growth) and with a starting valuation at 1.0 times EV/PDP, speculative investors had good reason to look at the stock. Unfortunately, as these investors have seen in the prior year, sustained ‘one-time events’ continue to keep debt elevated and despite strong efforts from management to navigate the downturn, investors have clearly lost patience. Since mid-2013, OBE has now seen its 4th CEO, 3rd CFO, and with the prior Chairman (Jay Thornton) also recently stepping down last month, investors likely can’t help but wonder why. The Released YE report does provide some disclosure .... however, now at this time, we will take a wait-and-see approach with regards to Obsidian. Although investors potentially have some of the highest torque with this name, we believe the unknown risks in this type of market will likely leave investors on the side-lines until better clarity emerges.”
AltaCorp Capital's Thomas Matthews moved Obsidian to "sector perform" from "outperform" with a target price of 70 cents, down from 90 cents.
Mr. Matthews said: “We are downgrading Obsidian based on our belief that at the current capitalization and cost structure, The Company will struggle to show meaningful PDP NAV growth over the next 3-years. In addition, we believe the market will be concerned that the appointment of a new CEO (which will be the third CEO in 5 years) will be an indication that something is amiss inside The Company. To be perfectly clear, this is not our view. We believe in the long term asset potential of Obsidian’s Willesden Green Cardium acreage and see the NAV upside from allocating capital to the play, however with the next material drilling cycle not until after spring breakup, and first production likely to come on in August, we believe that Obsidian will not be the marginal investment dollar in this challenging Canadian environment, and will be subject to commodity prices swings until that time.”
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Recipe Unlimited Corp. (RECP-T) appears set for long-term growth, said Laurentian Bank Securities analyst Elizabeth Johnston, who upgraded her rating to “buy” from “hold.”
"Post-Q4 results, our forecast is largely unchanged with the largest increase coming from the central segment," she said. "We have opted to remain conservative in our forecast, but have calculated a downside and upside scenario which demonstrates a far greater upside potential. In our downside scenario, we calculate a $25.00 target price based on negative 2-per-cent SSSG [same-store sales growth], 0.5-per-cent decline in corporate contribution margin (approx. continuation of current levels, with no additional improvement), a decline in franchise margin to the level seen in 2016 and 2017 (when franchisee rent assistance represented a larger offset to franchise revenues), and net closures of 5 restaurants. In our upside scenario, we calculate a target price of $39.00 based on improving SSSG (1 per cent in H1/19, increasing by 1 per cent every 6 months to 4 per cent in H2/20), small improvement in corporate margin, a small but further improvement in franchise margin, and net openings of 10 restaurants. As part of our calculation, we also adjusted our valuation multiples which would reflect the lower/higher growth profile.
"Part of this focus on internal operations is improving the overall network, which we believe will include additional store closures (removing underperforming locations from the network). While this would represent a near term headwind (at least in terms of location count), longer term the closures would improve the health of the overall network. In some cases, the stores get reopened elsewhere. Furthermore, renovation activity is ongoing (there were 74 renovations in 2018) and with the renovation incentive program (in place for Swiss Chalet and Harvey’s, the largest 2 banners), this will encourage franchisees to refresh their restaurants (which typically yields a positive impact on sales)."
Ms. Johnston raised her target for Recipe Unlimited, formerly known as Cara Operations Ltd., to $32.50 from $30. The average on the Street is $31.56.
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Desjardins Securities analyst Chris MacCulloch feels Painted Pony Energy Ltd.'s (PONY-T) 20.27-per-cent jump in share price on Thursday was warranted “given the significant reduction in net debt stemming from the cash flow beat and the favourable 2018 reserves report.”
Calling the company's fourth-quarter results "extremely strong," Mr. MacCulloch feels its diversified gas exposure sets it up for "solid" first-quarter results.
"The diversification strategy clearly paid dividends for PONY in 4Q18, particularly with respect to the Sumas and Dawn exposure," he said. "While some additional hedges have been layered in that will limit cash flow upside from robust pricing in recent weeks, particularly at Sumas, we note that the company still retains significant exposure to both markets (17 per cent of total volumes in 2019 combined).
"Following our estimate revisions, we now see debt-to-cash flow tracking between 3.0–3.5 times for PONY in 2019 and 2020 based on current strip prices, which is a marked improvement from previous levels. Meanwhile, capital spending would also remain fully funded in both years, generating additional free cash flow to continue gradually trimming debt levels."
Keeping a "hold" rating for Painted Pony shares, Mr. MacCulloch bumped up his target to $2.25 from $2, which falls just short of the $2.33 average.
“We could see further near-term strength through additional short covering,” he said. “The company is clearly on the right track now following a series of strong quarterly results and with a disciplined 2019 capex plan. That said, elevated debt levels are still a major headwind in the current environment and the valuation is not particularly compelling at this point, at least on a cash flow basis.”
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RBC Dominion Securities analyst Greg Pardy said Canadian Natural Resources Ltd.'s (CNQ-T) fourth-quarter results “reinforced our confidence in the resiliency of its long-life-low-decline portfolio.”
“In our minds, CNQ is playing the waiting game when it comes to Alberta’s oil egress conditions and has the fortitude to do so,” said Pardy, calling the results a “strong finish” to the fiscal year. "Its 10-per-cent corporate decline rate and sustaining capital of circa $3.1-billion means that CNQ can throttle back its growth capital initiatives, but still generate free cash flow—and capture per share production growth via share buybacks. This would not be a bad thing in our books, even though buybacks are perhaps less sexy than bringing new projects on-stream.
"CNQ anticipates that Alberta’s oil production could undergo production declines of 45,000 bbl/d or more over the course of 2019 amid reduced drilling activity. The company also noted that the Sturgeon refinery is expected to switch from processing synthetic crude oil to some 50,000 bbl/d of bitumen once commissioning is completed. As such, Alberta’s current curtailments of 225,000 bbl/d should subside over the year due to these factors, as well as additional crude-by-rail coming on-line, despite L3R being delayed. The company is fully utilizing its 14,000 bbl/d of crude-by-rail capacity, and is open to expanding its capacity under the right terms."
Mr. Pardy maintained an "outperform" rating and $45 target for CNQ shares. The average on the Street is currently $46.33.
"CNQ is trading at a debt-adjusted cash flow multiple of 6.6 times (vs. 5.5 times for our North American Senior E&P peer group) in 2019, and 4.8 times (vs. peers at 4.2 times) in 2020," he said. "We believe that CNQ should command a premium cash flow multiple vs. peers given its long-life, low decline portfolio, substantial free cash flow generation, and improving balance sheet."
Elsewhere, Raymond James' Chris Cox also maintained a $45 target with an "outperform" rating.
Mr. Cox said: “Canadian Natural’s 4Q18 results were short of surprises, with the core story remaining largely unchanged - a welcome reprieve from an otherwise noisy earnings season in the North American E&P sector. In a market in which investors are clamoring for greater visibility on free cash flow from producers, CNQ is already delivering in spades. Free cash flow in 2018 came in at $4.8-billion - by all means an impressive measure. What’s even more impressive is that, despite a lower oil price environment year-over-year, free cash flow will actually increase in 2019. This in turn is supporting a robust cash return story, highlighted by the 12-per-cent bump in the dividend this quarter, marking the extension of an impressive 19-year track record of dividend increases.”
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Possessing “ample” liquidity to expand its portfolio, Granite Real Estate Investment Trust (GRT.UN-T) is “executing on [its] plan,” said Canaccord Genuity analyst Mark Rothschild in the wake of better-than-anticipated fourth-quarter results despite “significant” asset dispositions.
"Following a material change in Granite’s board in 2017 and the appointment of Kevan Gorrie as CEO in 2018, the implementation of the REIT’s strategic plan is now in full force," the analyst said. "A key component of this plan includes optimizing Granite’s under-levered balance sheet. To this end, during 2018, Granite acquired $544-million in assets, including $86.3-million in Q4/18. In addition, subsequent to year-end, Granite signed agreements to acquire or develop an additional $628-million of properties.
"Looking forward, Granite has significant capacity to grow its portfolio further given its under-levered balance sheet. Currently, Granite’s net leverage ratio is 19 per cent, which translates to more than $1.2-billion of acquisition capacity at the REIT’s target net leverage ratio of below 40 per cent."
Maintaining a “hold” rating for Granite stock, Mr. Rothschild raised his target to $65 from $58 after increasing his cash flow estimates. The average on the Street is $64.41.
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Barclays analyst Jeffrey Bernstein initiated coverage of Restaurant Brands International Inc. (QSR-N, QSR-T) with an “overweight” rating, believing its fundamental growth is “among the strongest in the industry.”
“We view fundamentals as worthy of a premium, with the combination of outsized unit & steady comp growth, coupled with outsized free cash, and potential to further expand the portfolio and/or accelerate the return of cash,” he said.
Mr. Bernstein set a target of $73, which exceeds the average of US$69.
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In other analyst actions:
RBC Dominion Securities cut Canadian Western Bank (CWB-T) to “sector perform” from “outperform” with a $32 target, down from $38. The average is $32.92.
Elsewhere, BMO Nesbitt Burns’ Sohrab Movahedi raised her rating for CWB to “outperform” from “market perform” with a $34 target, citing a “favorable risk/reward outlook.”
CIBC World Markets analyst Sumayya Hussain raised Cominar Real Estate Investment Trust (CUF.UN-T) to “outperformer” from “neutral,” citing “increasing signs of stabilization in the portfolio, including greater visibility to occupancy improvement, consistent SP-NOI growth and a discounted valuation.” Ms. Hussain’s target rose to $14 from $13.50. The average is $13.17.
Beacon Securities analyst Russell Stanley initiated coverage of Harvest Health & Recreation Inc. (HARV-CN) with a “buy” rating and $23 target.
Mr. Stanley said: “What stands Harvest apart from many of its peers is its demonstrated success in winning merit-based licenses in highly competitive markets, having obtained licenses in over 90 per cent of the states where the company has applied. This was most recently demonstrated in Pennsylvania, where HARV won all 6 of the dispensary licenses it applied for, representing the largest allocation of the 23 licenses issued in total. We believe investors should prioritize companies that are strong in this regard. While acquisitions may grab headlines (and HARV pursues them too), de novo licensing wins can generate vastly superior returns on capital.”
David Leeder