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

Canadian integrated oil companies are facing an investing environment dominated by “distrust and uncertainty,” according to Citi analyst Prashant Rao.

“Citi’s Oil Vision 2019 notes that equity values across global oils remain discounted versus history,” said Mr. Rao in a research note released Monday. “The market has pushed up the cost of equity on companies owing to three uncertainties: Distrust, Disintermediation, and Disinvest. We focus on the first of these (Distrust), as it is an area that companies can work to address and somewhat control.

“The oil & gas industry as a whole has a poor track record on capital allocation, often destroying equity value by chasing marginal investments. Broadly speaking, the Canadian upstream is no exception to this. Add to this that takeaway capacity and stranded asset issues have compounding the problem, driving volatile and often deep commodity price discounts to global benchmarks. This was less of a concern in 2014 at $100/bbl Brent oil, but is moreso at today’s $55/bbl (also the real long-term price), as evidenced by the 500+ bp move in forward FCF yields between then and now.”

Mr. Rao said the market has “pushed up” required free cash flow yields among Canadian equities from almost 2.7 per cent at US$100 per barrel of oil in March of 2015 to 7.9 per cent currently at US$55 per barrel. He notes that is well above the average of 6.3 per cent for other global oil equities.

“Oil Vision’s ‘book-to-bill; benchmarking (post-2018 sanctions versus 4-year production rate) places most of the Canadian names in the lowest quartile of the 38 public equities examined, with higher Brent oil prices required given near-certainty of continued Canadian crude discounts,” he said. “That said there is quite a bit of dispersion: CVE’s 22-times reserve life at 4.6 times EV/DACF [enterprise value to debt-adjusted cash flow] (both on 2022) is a discount to most of the global peer set, whereas IMO (6.0 times reserves vs 7.5 times EV/DACF) is the opposite.”

He added: “Unlike U.S. shale and today’s smaller but more profitable global Offshore portfolio, Canada’s higher position on Citi’s Oil Vision 2019 Cost-Curve, lower 1P reserve life, and continued takeaway capacity issues justify higher FCF to equity and prioritization of that FCF to shareholder returns. For this reason, SU remains our top pick. CVE now looks even better long-term, given the highly discounted, higher quality Upstream versus peers, but near-term oil price volatility and persistent 2 times-plus B/S leverage keep us sidelined for now.”

After reducing his first-quarter funds from operations per share projections by almost 10 per cent on average, Mr. Rao made, in order of preference, the following target price changes:

Suncor Energy Inc. (SU-T, “buy”) to $60 from $59. The average is $55.07.

Cenovus Energy Inc. (CVE-T, “neutral”) to $13 from $12. Average: $13.63.

Husky Energy Ltd. (HSE-T, “neutral”) to $14 from $16. Average: $16.89.

Imperial Oil Ltd. (IMO-T, “buy”) to $36 from $38. Average: $40.20.


Pointing to “continued gains” to its performance metrics stemming from an overhaul in its Precision Scheduled Rail (PSR) division, Bank of America Merrill Lynch analyst Ken Hoexter upgraded Norfolk Southern Corp. (NSC-N) to “buy” from “neutral.”

“We believe Street outlooks remain too conservative versus the company’s improvement potential,” he said.

Mr. Hoexter raised his target to US$205 from US$190. The average on the Street is US$193.13.


Canaccord Genuity analyst Raveel Afzaal lowered his rating for Carmanah Technologies Corp. (CMH-T), citing recent share price appreciation and awaiting better visibility on its capital deployment strategy.

On March 27, the Victoria-based designer and manufacturer of solar lighting reported its fourth-quarter results adjusted to account for the recent divestiture of its Marine, Airfield Ground Lighting and Aviation Obstruction divisions for US$77.6-million in cash.

“Carmanah has not decided how best to deploy its cash and did not provide a timeline for its capital allocation decision. That said, the company is evaluating potential acquisition opportunities in its Traffic vertical to play on larger macro themes such as smart cities, rise of autonomous vehicles and the need for connecting with traffic signals. Further, mgmt is focused on buying cash flow positive businesses. Additionally, if unsuccessful in finding a suitable acquisition target, mgmt stated it will likely return all or a portion of the cash to shareholders. We believe privatization of the remaining business also remains an option.”

Mr. Afzaal added: “For valuation purposes, we assume the company decides to carry on with the remaining businesses and right sizes them which results in EBITDA improving to $3.2-million in 2020 ($3.6-million in upside scenario). The telematics business generated $4-million of revenues in 2018 and management intends to wind down this vertical in 2021. This is because Carmanah has been unable to secure new customers apart from GlobalStar. This should have a modest adverse impact on its Y/Y organic growth in 2021.”

Moving the stock to “hold” from “buy,” Mr. Afzaal maintained a $7.50 target for Carmanah shares. The average is currently $7.17.


Xebec Adsorption Inc. (XBC-X) has emerged as an industry leader and key player in the increasingly important quest to find low carbon alternatives for fuel and energy generation, said Paradigm Capital analyst Jason Tucker.

He initiated coverage of the Montreal-based company with a "buy" rating.

"Sometimes the gift of foresight can be a curse in itself," the analyst said. "This was the case seemingly for Xebec some 10 years ago. The company identified the trend toward environmental stewardship and completed a business combination with QuestAir in 2009. Renewable Natural Gas (RNG) was a huge opportunity but the company was having trouble capturing attention. Xebec saw what was unfolding in the Germ market but was years ahead of other governments and industry. However, the rest of the world is finally catching up. The market for RNG is growing exponentially and Xebec is at the forefront with its offerings to address this growing demand. The company’s backlog reflects the recent surge in activity and shift in minds."

Mr. Tucker set a $2 target for Xebec shares. The average on the Street is currently $2.03.

"Contracts like those signed with Sapio and Enbridge will only boost the awareness of the company on a global scale," he said. "Xebec represents an opportunity for investors to gain exposure to the renewable energy space via a small but growing entity. The company’s performance record with over 200 gas installations globally and $60-million of investments in proprietary technology give us every confidence Xebec will emerge as a leader in the growing market for RNG."


Upon assuming coverage of the U.S. broadlines and hardlines retail sector, Citi analyst Geoffrey Small adjusted the firm’s target price for shares of several big-name, large-cap companies.

“The U.S. consumer remains on solid footing given low unemployment, rising wages, declining gas prices, manageable levels of debt, and elevated consumer confidence. Nevertheless, we are in the ninth year of the current economic expansion and the possibility of a macroeconomic slowdown cannot be ignored,” said Mr. Small. “Against this backdrop, we prefer retailers operating in defensive sectors that are less susceptible to disruption by online competitors, namely auto parts, broadlines and home improvement retail.”

He assumed coverage of the following stocks with “buy” ratings:

AutoZone Inc. (AZO-N) with a US$1,206 target, up from US$1,075. Average: US$1,000.94.

Mr. Small: “AZO should benefit from the favorable sector backdrop and via commercial share gains. Furthermore, store openings, the roll-out of megahubs and delivery / inventory optimization will benefit both DIY and commercial sales. We also see potential for EBIT to accelerate on stronger comps and the eventual lapping of elevated spend in the later part of 2019.”

BJ’s Wholesale Club Holdings Inc. (BJ-N) with a US$32 target, up from US$30. Average: US$30.

Mr. Small: “BJ's SSS growth will be driven by its marketing & membership investments, price advantages, grocery focus, and positive membership trends, with further top-line benefit from an acceleration in store openings. And we see EBIT upside from procurement and private label initiatives.”

Home Depot Inc. (HD-N) with a US$218 target, falling from US$224. Average: US$202.80.

Mr. Small: “HD is a best-in-class operator in sector set to benefit from still-solid housing and macro metrics. HD is investing to maintain advantages in the space and we see opportunity for sales and margin improvement (a rarity in retail) and ongoing cash returns to shareholders.”

Lowe’s Companies Inc. (LOW-N) with a US$127 target, up from US$125. Average: US$116.72.

Mr. Small: “LOW’s new CEO has focused on improving merchandising, in-store operations, pro service, and the supply chain to drive accelerating SSS and earnings growth. The turnaround is unlikely to take place without short-term challenges (2018 evidenced this), but as LOW closes the performance gap to HD over the long term, the stock should re-rate higher.”

O’Reilly Automotive Inc. (ORLY-N) with a US$454 target, up from US$422. Average: US$389.89.

Mr. Small: “ORLY remains a best-of-breed retailer with comp momentum set to continue in 2019 via price inflation, increasing parts complexity, the support of its robust supply chain, and a favorable macro backdrop. In combination with a long runway for store growth, we expect MSD to HSD EBIT growth and upside to EPS from share repurchases.”

Walmart Inc. (WMT-N) with a US$115 target, down from US$120. Average: US$108.82.

Mr. Small: “WMT's aggressive omni-channel strategy, everyday-low-pricing, grocery offerings, and productivity initiatives should drive solid top-line growth and offer margin upside over the long term. Concerns over WMT’s international ops are reasonable, though 75 per cent or more of revenue and EBIT still come from the U.S. where WMT has emerged as a true competitor to AMZN.”


AltaCorp analyst David Kideckel initiated coverage of Cardiol Therapeutics Inc. (CRDL-T) with a “speculative buy” rating and $9 target.

“Cardiol is a medical cannabis, cannabinoid-derived pharmaceutical and biotechnology company focused on manufacturing premium medical cannabis products using pharmaceutical Cannabidiol (CBD) produced through chemical synthesis and conducting clinical trials in mass market and orphan indications,” he said. “With the positive tailwinds surrounding the entire cannabis industry, including growing consumer and physician awareness and acceptance of Cannabidiol as a medicine with proven efficacy, we view Cardiol’s entrance into the medical cannabis as well as the biotech and cannabinoid-derived pharmaceutical sectors, as timely and strategic.”


In other analyst actions:

BMO Nesbitt Burns analyst Nikolaus Priebe downgraded Fiera Capital Corp. (FSZ-T) to “market perform” from “outperform” with a target of $12.50, falling from $14 and below the consensus of $14.06.

“Our reading of the credit agreement suggests the leverage ratio is getting a bit too close for comfort,” he said. “After funding recent acquisitions, there appears to be less cushion to absorb the impact of a sustained downturn in equity and credit markets.”

“With limited financial flexibility, this could increase the risk of a dilutive equity raise or dividend reduction in the event of a market correction, in our view. In the context of an aging bull market, we feel our balance sheet concerns now outweigh the positive fundamentals, and are downgrading Fiera shares.”

Pointing to a negative free cash flow outlook, BMO’s Edward Sterck lowered Stornoway Diamond Corp. (SWY-T) to “underperform” from “market perform” without a specified target.

“With the pricing for lower quality diamonds remaining subdued, we have reduced Renard’s diamond price forecasts by 9 per cent, which leaves Stornoway in FCF negative territory and likely needing to renegotiate its debt,” he said. “Whilst we continue to like the underlying assets, delivering positive value for shareholders appears contingent on improving diamond recoveries, which the company is struggling to achieve.

“Pending this, we do not see many reasons to hold the stock and thus we are downgrading Stornoway.”


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