Inside the Market’s roundup of some of today’s key analyst actions
ATB Capital Markets analyst Patrick O’Rourke expects first-quarter earnings season for Canadian oil producers to be “challenging” from both an operational and financial perspective, however he thinks the outlook for the remainder of 2023 appears “favourable.”
“Cold weather notably hindered operations in the early part of the quarter, while producers faced a declining oil price environment that means that diluent costs will be elevated given the logistical time lag between barrel acquisition and blending and wider heavy oil differentials,” he said. “We believe this is well understood by investors (though there is the potential for some ‘sticker shock’ as results are reported), and the focus should be on a much improved outlook on the back of a recent surprise OPEC production cut and much improved differentials, alongside a step change in market access by way of the TMX expansion that is expected to be mechanically complete in 2H/23.”
“Investing into step change in return of capital events has generally been a winning strategy for oil and gas equity investors over the past 24 months, as investors continue to search for the highest quantum of sustainable and growing capital return. Asset quality, operational success, and inventory are all in the spotlight as companies attempt to win ‘The Great Canadian Energy Return of Capital Race.’ To that end, we believe that investors will be keenly focused on commentary from management teams with respect to projections on timeframes around achieving codified return of capital frameworks, with several negatively impacted by working capital adjustments in Q1/23.
In a research report released Monday, Mr. O’Rourke largely maintained his oil price forecast, noting benchmarks have remained “unchanged with modest near-term improvement reflect in heavy oil spreads.” His 2023 WTI estimate rose by 25 US cents to US$75.25 per barrel, while his 2024, 2025 and long-term projections remain US$70, US$65 and US$60, respectively.
“Oil prices have continued to surprise to the upside, with a recent surprise production cut by OPEC+ helping to sustain a view of tightening fundamentals globally in 2H/23, despite the continued potential for recessionary forces to erode some demand,” he said. “On balance at the margin, oil supply-demand fundamentals remain robust given the very tight inventory situation. Further, heavy oil spreads have continued to improve in 2023.”
The analyst did cut his 2023 and 2024 projections for natural gas prices, seeing “tremendous” near-term pressure after “a heating demand season where frankly winter just did not show up in key heating demand regions.”
Ahead of earnings season, Mr. O’Rourke made a series of target price adjustments to stocks in his coverage universe. His changes are:
- Athabasca Oil Corp. (ATH-T, “outperform”) to $4 from $3.75. The average target on the Street is $3.80, according to Refinitiv data.
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $90 from $94. Average: $91.35.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $31 from $36. Average: $31.83.
- Imperial Oil Ltd. (IMO-T, “sector perform”) to $80 from $77. Average: $79.19.
- ARC Resources Ltd. (ARX-T, “outperform”) to $21 from $22.50. Average: $21.90.
- Whitecap Resources Inc. (WCP-T, “outperform”) to $15 from $16. Average: $14.22.
- Birchcliff Energy Ltd. (BIR-T, “outperform”) to $10.50 from $11.50. Average: $10.90.
- Tamarack Valley Energy Ltd. (TVE-T, “outperform”) to $7 from $7.50. Average: $6.63.
- Crew Energy Inc. (CR-T, “strong buy”) to $7.50 from $8. Average: $7.54
In his earnings preview titled Don’t be Blue, the Rodeo is just getting started, Desjardins Securities analyst Chris MacCulloch said he’s still “downright bullish” on energy markets at current levels after a “choppy” quarter, citing “a view toward a relatively expedient price recovery, albeit nowhere close to 2022 levels.”
“Oil prices also came under pressure following the emergence of a global banking crisis, which drove considerable volatility in risk assets more broadly,” he said. “However, the Saudis have clearly signalled their willingness to defend oil prices (and a cozy relationship with the Kremlin) in the face of decelerating global economic activity. Meanwhile, we expect Canadian producers to continue posting robust FCF in 1Q23, the lion’s share of which will ultimately be returned to shareholders via capital returns. We’re still in the bullish camp.”
Mr. MacCulloch thinks oil prices are “forward-looking,” expecting a rally “in tandem with market expectations for a potential pivot by the Federal Reserve.”
“Consequently, we are maintaining our 2023–24 WTI price forecast of US$90/bbl and US$100/bbl, respectively, which is materially above current strip prices, reflecting our continued bullishness on market fundamentals,” he added. “We have also tightened our 2023 WTI‒WCS differential forecast to US$17.50/ bbl (from US$20.00/bbl) given strong downstream demand from increased Gulf Coast refining capacity while retaining our US$15.00/bbl forecast for 2024 with TMX expected to come online early next year.”
The analyst made a series of target price changes. They are:
- ARC Resources Ltd. (ARX-T, “buy”) to $26 from $25. The average is $21.96.
- Athabasca Oil Corp. (ATH-T, “buy”) to $4.25 from $4. Average: $3.85.
- Crew Energy Inc. (CR-T, “buy”) to $7.50 from $8. Average: $7.50.
- Cenovus Energy Inc. (CVE-T, “buy”) to $34 from $35. Average: $31.43.
- Crescent Point Energy Corp. (CPG-T, “buy”) to 16.50 from $16. Average: $14.44.
- Headwater Exploration Inc. (HWX-T, “buy) to $9.50 from $10. Average: $9.33.
- Imperial Oil Ltd. (IMO-T, “hold”) to $84 from $82. Average: $79.31.
- MEG Energy Corp. (MEG-T, “hold”) to $26.50 from $25. Average: $25.88.
- NuVista Energy Ltd. (NVA-T, “buy”) to $18 from $17.50. Average: $16.08.
- Peyto Exploration & Development Corp. (PEY-T, “buy”) to $16.50 from $16. Average: $16.80.
- Vermilion Energy Inc. (VET-T, “buy”) to $31 from $30. Average: $28.58.
- Whitecap Resources Inc. (WCP-T, “buy”) to $15 from $14.50. Average: $14.25.
“We retain our near-term bias for oil-weighted producers, with a view toward rotating into natural gas–weighted names later this year given our more constructive 2024 NYMEX price outlook,” said Mr. MacCulloch. “We also continue to favour small- and mid-cap producers for maximum torque to rising commodity prices. Our preferred names are SU (integrated oil), ARX (large-cap natural gas), ERF (mid-cap oil), AAV (small-cap natural gas), TPZ (royalty) and VET (special situation).”
Pointing to slowing volumes and valuation concerns, National Bank Financial analyst Cameron Doerksen is remaining “neutral” on Canadian railroad companies prior to the release of their first-quarter financial results.
The analyst thinks both Canadian National Railway Co. (CNR-T) and the newly created Canadian Pacific Kansas City (CP-T) saw “solid” volumes in the quarter, which he expects to be “nicely positive” year-over-year, driven “mainly by grain (which is a function of the much larger crop this year) and automotive (as auto production recovers from supply chain challenges).” However, he predicts growth will “inflect more negatively” in the second quarter and through the remainder of the year.
He also warns investors that such a slowdown “may weigh on sentiment around both stocks (notwithstanding what are likely to be positive messages around long-term growth for both CN and CPKC at upcoming investor days in early May and late June, respectively).”
“We view intermodal volumes as a good reflection of broader freight trends, especially for consumer-related goods,” said Mr. Doerksen. “In March, Canadian rail intermodal carloads were down 11.7 per cent.”
The analyst “modestly” increased his first-quarter estimates for CN based on better-than-expected volumes and strong operating performance in the quarter. He also made minor adjustments for CPKC “mainly by a slightly later closing date for the CP-KCS merger.”
“We also still do not find the relative valuations of CN and CPKC attractive, especially given the context of slowing freight demand,” he said. “On consensus 2023 earnings forecasts, CN trades at 20.7 times P/E [price-to-earnings] and CPKC at 23.5 times, both premiums to the U.S. peer average of 16.3 times. Indeed, the historical FY1 P/E premium for the Canadian rails versus the U.S. peers is usually around 2.0-2.3 turns, but the gap currently is running at double that level. CN and CPKC shares have both modestly outperformed the U.S. peer group so far in 2023 with CN shares (for U.S.-listed shares) up approximately 2 per cent and CPKC shares up 4 per cent versus the U.S. Class I’s that are down low-single digits for UNP and CSX with NSC down 16 per cent (noting that NSC shares have suffered disproportionately due to the much-publicized derailment in Ohio).”
Keeping a “sector perform” recommendation for both companies’ stock, Mr. Doerksen bumped his CN target to $178 from $175. The current average on the Street is $160.43.
“We continue to be positive on CN’s longer-term growth prospects, which we expect management will highlight at the company’s upcoming investor day,” he said. “The railroad’s operational performance is also strong, which is encouraging following a period of underperformance. However, given the macroeconomic uncertainty, we remain cautious on CN’s large exposure to some more economically sensitive volumes such as intermodal, which, combined with a relative valuation that we do not find to be overly compelling, keeps us neutral on the stock.”
His target for CPKC increased by $1 to $107. The average is $116.21.
“With the full integration of the CP and KCS networks now underway and the combined company now able to pursue new business, we believe CPKC will have the most compelling growth of the Class I railroads in the coming years,” said Mr. Doerksen. “However, we also believe that much of the growth, at least in the next two years, is already reflected in most earnings estimates as well as the share price.”
Desjardins Securities’ Jerome Dubreuil does not expect Cogeco Communications Inc.’s (CCA-T) fundamentals to “significantly turn around overnight,” however he thinks its share price “remains attractive for long-term investors.”
“Indeed, the company’s FCF [free cash flow] yield of 12 per cent and dividend yield of 4.8 per cent make it easier for investors to wait for more clarity on wireless and on the potential BEAD [Broadband Equity, Access, and Deployment] opportunity,” he said.
Mr. Dubreuil was one of several equity analysts on the Street to trim their forecast and target price for shares of the Montreal-based company following last week’s release of its second-quarter financial results that fell largely in-line with expectations while featuring better-than-expected subscription growth.
“Management is adopting a more cautious tone on the pace of improvement in the cable operations in the U.S. as this market remains much more competitive than it has been historically,” he said.
“Management maintained its FY23 guidance as its focus on cost control should protect EBITDA and as the oxio acquisition should help the company reach the lower end of top-line guidance. CCA also disclosed an acquisition price for oxio of $100-million, which is higher than what we had previously estimated and is expensive for a company with uncertain profitability prospects. However, we believe oxio’s digital expertise could eventually be leveraged into CCA’s operations.”
Mr. Dubreuil thinks the looming sale by Rogers Communications Inc. (RCI.B-T) of its $1-billion stake in Cogeco Communications and parent Cogeco Inc. may continue to be an overhang, seeing “a recurrent pushback from investors on the idea.”
“The situation can change fast, but RCI not selling its Cogeco block so far could be a signal that it still sees strategic value in the shares or that it believes the shares are cheap at this point” he said. “Current levels increasingly look like a discount for a large shareholder, which we are not convinced is fair—especially since it is unclear if the block will ever hit the public market.”
“With CCA’s low share price and the Ohio operations being increasingly integrated, we believe it is easier for management to tolerate higher leverage vs a few months ago to buy back a significant portion of RCI’s block,. Moreover, the shares are trading slightly above the 52-week low and at an NTM [next 12-month] multiple of 5.7 times compared with their five-year average of 6.6 times. However, management will need to consider the capex uncertainty stemming from the potential wireless deployment and participation in the BEAD program. Given that our NAV returns a significantly higher value than the current share price, we calculate that CCA buying back 50 per cent of RCI’s block would generate 5-per-cent accretion to our NAV. This assumes no discount to the share price and that the market would be comfortable with the higher leverage, which would still be below QBR’s and RCI’s.”
After lowering his earnings projections for both fiscal 2023 and 2024, Mr. Dubreuil cut his target for Cogeco shares to $86 from $96 with a “buy” rating (unchanged), citing “the high price paid for oxio and the more cautious tone on the U.S. operations.” The average target on the Street is $82.84.
“We believe CCA’s strong FCF generation enables it to redistribute significant capital to shareholders while operating a stable business — an attractive feature in this uncertain economic environment,” he concluded.
Elsewhere, other analysts making changes include:
* Canaccord Genuity’s Aravinda Galappatthige to $66 from $67.50 with a “hold” rating.
“We view Cogeco Communications’ Q2/23 as mixed given the continued weakness in the US and some encouraging returns in Canada,” said Mr. Galappatthige. “Consolidated guidance was maintained despite a downward revision in U.S. expectations owing to sustained challenges in Ohio. We also saw a notable step up in buybacks in Q2/23 amounting to $63.8-million, essentially representing a doubling of the typical quarterly rate.”
“Despite the challenges in the U.S., we recognize the inexpensive valuations for CCA, with FCF yield (even with the substantial network expansion capex) at 13.3 per cent. We note that excluding network expansion capex, FCF yield rises to 18.5 per cent. Together with the attractive dividend yield and annual 10-per-cent increases, we believe this would make for an attractive thesis. Thus, any sign of stability in the U.S. business should be closely watched for, in our view.”
* Scotia Capital’s Maher Yaghi to $86 from $85.50 with a “sector perform” rating.
“Management indicated that the U.S. business saw higher-than-anticipated pressure in the first half, however the acquisition of Oxio should offset that pressure on the top line, and hence the company maintained its guidance for the year,” said Mr. Yaghi. “The competitive pressure CCA is witnessing in the US is similar to what we have seen with other cablecos as the industry grapples with heightened competitive and pricing pressure from FWA operators. As Verizon and T-Mobile continue to expand their FWA offering in more markets, we expect this pressure to persist for a few more quarters and hence we prefer to remain cautious until the situation stabilizes.”
* RBC’s Drew McReynolds to $93 from $94 with a “sector perform” rating.
“Despite more competitively intense operating environments in both Canada and the U.S., we believe management continues to execute on multiple growth initiatives that include rural broadband expansion, M&A, and entry into the Canadian wireless market,” said Mr. McReynolds. “Furthermore, we see growing synergies and scale benefits between Canadian Broadband and American Broadband that are helping to underpin 3-per-cent average annual NAV growth through F2025E, albeit below the 9-per-cent average for Canadian peers. While the company’s competitive position remains somewhat uncertain given the absence of wireless against the backdrop of expanding FTTH/5G/FWA footprints, we see value in the stock and look for more timely entry points with the potential for an uptick in growth in 2024/2025 driven by rural broadband expansion, wireless entry, and/or easing U.S. competition concerns.”
* BMO’s Tim Casey to $75 from $85 with a “market perform” rating
“Q2 financials were as expected. Canadian subscriber metrics were encouraging, while Breezeline metrics continue to be pressured. Loading metrics should improve sequentially as integration and marketing continues. F2023 guidance was reaffirmed. Cogeco purchased oxio, an internet reseller for $100mm in March. Share buybacks were $64mm in Q2. There are no changes to the company’s MVNO strategy, and an update is expected later this fiscal year,” said Mr. Casey.
* TD’s Vince Valentini to $105 from $110 with a “buy” rating.
* National Bank’s Adam Shine to $75 from $83 with a “sector perform” rating.
While seeing the first quarter as a “weak start” to 2023 in the precious metals sector, analysts at CIBC World Markets think the results could be “irrelevant” with gold at US$2,000 per ounce.
“Repeating a five-year trend, we expect Q1 will be the lowest production and highest-cost quarter of 2023, with most companies pointing to a slow start to the year (weather, sequencing and maintenance), a trend which we believe was well telegraphed during Q4/22 results,” the firm said. “We expect margin expansion both from the gold price (now running an early Q2/23 average of well above $2,003/oz, vs. $1,889/oz in Q1/23), and from operating cost declines as production volumes increase.”
“Gold and silver average prices increased 9.3 per cent and 6.6 per cent, respectively from Q4/22 to Q1/23, with gold notably surging above $2,000/oz post quarter. This move in the metal price was driven by central bank interest, the banking crisis in the U.S., and broader economic uncertainty, which drove investor demand for a haven. While resistance to the upside remains from the Federal Reserve’s hawkish monetary policy stance and higher inflation prints, we expect this to be partially offset by the continued uncertainty around a soft/hard landing and financial stability in the U.S., which could lead the Fed to pause its hawkish stance. Overall, we believe the precious metals will remain strong in the coming quarters after establishing considerably higher base price levels.”
With that view, the analysts raised their target prices for a group of stocks on Monday.
Their changes include:
- Alamos Gold Inc. (AGI-T, “outperformer”) to $22 from $19. The average is $15.63.
- Eldorado Gold Corp. (EGO-N/ELD-T, “outperformer”) to US$14 from US$12. Average: $13 (Canadian).
- Endeavour Silver Corp. (EDR-T, “neutral”) to $7 from $6.50. Average: $6.31.
- Fortuna Silver Mines Inc. (FVI-T, “neutral”) to $6.50 from $6. Average: $5.80.
- Franco-Nevada Corp. (FNV-T, “outperformer”) to $245 from $240. Average: $210.43.
- Iamgold Corp. (IAG-N/IMG-T, “neutral”) to US$3.30 from US$3. Average: US$2.95.
- New Gold Inc. (NGD-N/NGD-T, “neutral”) to US$1.50 from US$1.30. Average: US$1.21
- Osisko Gold Royalties Ltd. (OR-T, “outperformer”) to $27 from $23. Average: $23.42.
- Sandstorm Gold Ltd. (SSL-T, “outperformer”) to $10 from $9.50. Average: $10.20.
- Victoria Gold Corp. (VGCX-T, “neutral”) to $11.50 from $10.50. Average: $16.
“With the gold price up 9 per cent over the last month alone, we have analysed the share price performance of companies in our coverage universe and the movement in valuations as a result,” the firm said. “Pairing this analysis with our expectations for quarterly results, we recommend buying AEM, NEM and WPM into the quarter, on relative share price performance, valuation, and the positive quarterly results expectations. That said, if gold prices remain above $2,000/oz we do not expect that gold bull investors will be fussed about a challenged Q1, but rather will see it as a buying opportunity. The danger is that a dip does not occur.”
“Our longer-term top picks include companies with the highest-quality assets, such as Agnico Eagle, Barrick Gold, Franco-Nevada, Lundin Gold, Newmont Mining, Pan American Silver, SSR Mining, and Wheaton Precious Metals.”
Canaccord Genuity analyst Matthew Lee thinks Titanium Transportation Group Inc. (TTNM-T) is in “an ideal position” given the dynamics of the trucking market.
Pointing to its “track record of operational excellence and its U.S. expansion strategy offer a multi-year growth trajectory, even considering oscillations in the overarching trucking market,” he initiated coverage of the Bolton, Ont.-based company with a “buy” recommendation on Monday.
“The trucking industry is exceptionally fragmented with independent owners representing approximately 90 per cent-plus of the total operators across North America,” said Mr. Lee. “In our view, this dynamic creates a two-pronged benefit for a mid-sized company like Titanium: (1) the firm can differentiate from smaller players with its asset-based trucking service and technology investment and (2) it is small enough to achieve above-industry growth without competing directly with the larger peers. We believe this is somewhat of a “sweet spot”, balancing operating scale and diversification with growth and capital deployment opportunities.”
“The brokerage industry, which connects shippers and carriers, is becoming increasingly streamlined, with Titanium’s technological developments allowing it to compete with larger players and differentiate from smaller private brokers. Specifically, TTNM has developed Fusion, an in-house platform that allows for improved shipment visibility and optimization for customers, streamlined job management and bidding options for truck operators, invoice and payment management, as well as a suite of in-truck applications that aim to improve on-road experience.”
Calling the expansion of its U.S. brokerage business since 2019 a “lower-risk, high-reward growth opportunity” and believing its “solid” balance sheet allows it to “capitalize on market weakness, Mr. Lee set a target of $4.25 per share. The average target on the Street is $5.54.
“A key tenet of the Titanium investment thesis is its exceptionally attractive valuation,” he said. “TTNM currently trades at a very reasonable 4.7 times our EV/F23 EBITDA, which we believe reflects limited institutional investor exposure and rapid financial growth that was not necessarily matched at an equity level. While the company is likely to face rate pressure in F23, we believe the current valuation understates the growth opportunity associated with the firm’s U.S. expansion.”
In other analyst actions:
* Citing “deteriorating capital efficiency trends, pending A&D transactions and [his] updated commodity price deck,” Wells Fargo Securities’ Roger Read downgraded Ovintiv Inc. (OVV-N, OVV-T) to “equal-weight” from “overweight” with a US$40 target, down from US$64 and below the US$55 average on the Street.
* BMO Nesbitt Burns’ Andrew Mikitchook initiated coverage of Osisko Development Corp. (ODV-X) with an “outperform” rating and $10 target, touting “scalable” near-term production from its high-grade Tintic property, its “quality development asset of scale” in the Cariboo gold project, and the San Antonio heap leach project. The average is $11.70.
“ODV is distinguished as an emerging gold producer targeting a mid-tier production level of 300,000-plus ounces per year from projects in attractive North American mining jurisdictions,” he said.
* TD Securities’ Craig Hutchison moved Copper Mountain Mining Corp. (CMMC-T) to “tender” from “buy” and raised his target to $2.75 from $2.50. The average is $2.77.
* JP Morgan’s Arun Jayaram trimmed his targets for Gibson Energy Inc. (GEI-T, “neutral”) to $26 from $27, Pembina Pipeline Corp. (PPL-T, “neutral”) to $51 from $52 and Vermilion Energy Inc. (VET-T, “overweight”) to $28 from $29. The averages on the Street are $25.29, $52.27 and $28.50, respectively.
* BMO’s Rene Cartier bumped his Triple Flag Precious Metals Corp. (TFPM-T) target to $25 from $22 with an “outperform” rating. The average is $22.64.
“Triple Flag delivered Q1/23 metal sales ahead of our expectations. As such, updating for the release results in positive revisions to our estimates. Triple Flag plans to report its full quarterly financial results after market close on May 9. Given the combination with Maverix completed in the quarter, we expect additional accounting noise when the results are reported. On the stronger results, our target price increases,” said Mr. Cartier.