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

Despite a recent decline in commodity prices, Canaccord Genuity analyst Mike Mueller continues to see intriguing investment possibilities in the Canadian exploration and production sector heading into 2023.

“It is no secret that 2022 has marked an exceptional year for the sector, with the S&P/TSX Capped Energy Index up approximately 47 per cent year-to-date and up 53 per cent compared to the S&P/TSX 60 Composite Index,” he said. “This appears even more remarkable after noting that this comes on the back of 2021 where the energy index was up 82 per cent on the year.

“Given this backdrop, we believe that investors have an opportunity to generate alpha when looking outside the broad sector/large-cap names given our views that: most of the “easy wins” off the bottom of the pandemic lows have likely been realized; and valuations remain compelling, with our E&P coverage trading at 2.6 times 2023 estimated EV/DACF [enterprise value to debt-adjusted cash flow] relative to historic multiples of 4.6 times and despite balance sheets being in far better shape sector-wide.”

In a research report released Thursday, Mr. Mueller initiated coverage of I3 Energy (ITE-T) with a “buy” recommendation while resuming coverage of five other stocks.

For Calgary-based I3, an independent oil and gas company with assets and operations in the United Kingdom and Canada, he touted its “broad asset based with a focused strategy.”

“Since 2020, i3 has assembled a strong foothold in Canada, growing production from zero to more than 23,000 barrels of oil equivalent per day,” he said. “i3 was an aggressive consolidator through the downturn, completing $100-million of deals across Alberta in 2020/2021 at attractive multiples of 0.5-1.4 times NTM NOI [next 12-month net operating income]. i3 has now shifted its focus to developing these assets through the drill bit and selling production into stronger pricing, leading into its plan to allocate up to 30 per cent of FCF to its monthly dividend while reinvesting the balance into organic growth through development of its existing assets.”

Mr. Mueller said the company’s dividend “was, is and will be a focus” for investors.

“The rationale for i3 picking up its initial ‘starter pack’ of producing assets in 2020 was to enter the Canadian market, consolidate assets at the cycle-bottom, and position itself as a shareholder-friendly, dividend-focused company,” the analyst said. “While this has become increasingly common in the domestic E&P space, at the time this was relatively uncommon amongst its domestic small/mid-cap peers. i3 intends to distribute up to 30 per cent of annual FCF to shareholders via its monthly dividend, which currently sits at $0.0023/share, reflecting a yield of 8.2 per cent. Next year, the company has indicated plans to distribute £20.4-million ($40.3-million), or $0.034/share on an annualized basis, reflecting a yield of 10.2 per cent on Monday’s close.”

“With the company’s history as a London-based North Sea exploration company prior to its entry into the Canadian market in 2020, we believe i3 has flown under the radar of many Canadian investors. The rapid growth over the past (nearly) three years has been impressive, particularly looking back at the timing of its acquisitions, which have proven the company’s astute and measured strategy to be successful. We believe that as i3 continues to demonstrate operational acumen and garner more attention from the market, that a multiple re-rate will be justified.”

He set a target for I3 shares of 70 cents.

“We believe i3 offers investors an attractive yield at 8.2 per cent, with a strong balance sheet [0.2] times D/CF) and organic growth optionality across its Clearwater and Simonette Montney assets at an attractive 1.8 times 2023 estimated EV/DACF multiple,” he said. “In our view, the potential for a re-rate on i3′s shares is better than most, given the company is in the early innings of its development strategy.”

Mr. Mueller resumed coverage of these stocks:

* Birchcliff Energy Ltd. (BIR-T) with a “buy” rating and $14.75 target. The average is $14.35.

“With a significantly improved balance sheet and visibility to grow to 90,000 boe/d to maximize efficiencies through its 100-per-cent owned and operated Pouce Coupe gas plant, we believe Birchcliff is well positioned to capitalize on a strong outlook for natural gas, particularly given its exposure to NYMEX natural gas prices, which have seen relative strength given a stronger correlation to global gas prices (resulting from US LNG exports),” he said.

* Crew Energy Inc. (CR-T) with a “buy” rating and $9 target. Average: $8.78.

“With the company’s four-year plan expected to see CR nearly double production through 2026, all in step with the onset of LNG Canada’s Phase 1 facility (expected 2025), we believe Crew offers investors exposure to a growth-oriented, Montney operator in the heart of northeast B.C.,” he said.

* Peyto Exploration & Development Corp. (PEY-T) with a “hold” rating and $16.75 target. Average: $18.28.

“While we believe the outlook for Peyto remains robust and recognize that the company has built a resilient ‘integrated’ natural gas producer, we believe the stock will remain range-bound through early 2023 given (1) the current 3.5 times 2023 estimated EV/DACF [enterprise value to debt-adjusted cash flow] multiple is above the peer group average of 3.1 times; (2) debt levels of 1.1 times 2022 estimated D/CF [debt to cash flow] exceed our gas-weighted peer group average of 0.6 times (we find it difficult to justify a more meaningful multiple premium at this time); and (3) while the dividend yield is an eye-catcher, yielding 9.5 per cent, we do note that this reflects an all-in payout ratio of 79 per cent on our 2023 estimates, the highest across our coverage universe and well above the peer group average of 67 per cent (suggesting a limited ability to layer in additional increases based on the current outlook),” he said.

* Pine Cliff Energy Ltd. (PNE-T) with a “buy” rating and $2.10 target. Average: $2.17.

“With the company’s net cash position of $58-million at year-end and low base decline of 6 per cent, we expect PNE to have ample opportunity to allocate FCF above and beyond its 8.0-per-cent monthly dividend next year,” he said. “We believe this may come in the form of an increased base dividend, special dividends, and/or asset purchases.”

* Tamarack Valley Energy Ltd. (TVE-T) with a “buy” rating and $6 target. Average: $7.29.

“Tamarack offers investors exposure to one of the most economic oil plays in Western Canada and has provided a well-defined return of capital framework contingent on certain debt milestones. In our view, the company’s Clearwater exposure brings the potential to warrant a premium valuation on the stock, which has historically traded at a discount to its peer group,” he said.


Innergex Renewable Energy Inc.’s (INE-T) consolidation of its Idaho wind portfolio at an “attractive” multiple nets “meaningful accretion,” according to Scotia Capital’s Justin Strong.

On Wednesday afternoon, Longueuil, Que.-based Innergex announced the acquisition of the remaining 37.5-per-cent-stake it previously did not own in its 138 MW Mountain Air wind portfolio for $64.4-million from an affiliate of MetLife Investment Management.

“We estimate INE acquired these assets at an attractive multiple of 5.6 times 2023 estimated EV/EBITDA,” said Mr. Strong. “INE intends to primarily finance the acquisition through selling safe harbor solar modules that it no longer intends to use.

“We view the acquisition of the tax equity partner’s remaining interest at a fairly economic multiple as positive for Innergex given the efficient use of capital and increased cash flows. We estimate free cash flow accretion of 7 per cent in 2023.”

Mr. Strong increased his target for Innergex shares to $19.25 from $18 with a “sector perform” rating. The average is $20.48.


Northland Power Inc.’s (NPI-T) history suggests the sell down of its interest in the Hai Long offshore wind project should be applauded by investors, according to ATB Capital Markets analyst Nate Heywood.

On Wednesday after the bell, Northland announced an agreement with Gentari International Renewables Pte. Ltd. to sell 49 per cent of its ownership interest in the project in Taiwan for approximately $800-million. Upon closing, Northland will remain as the single largest shareholder of the project with 30.6 per cent and will continue to take the lead role in its construction and operation.

Mr. Heywood expects Northland’s lower ownership will reduced its equity requirement to near $700-million, versus a previous obligations of over $1.2-billion. He expects the partnership with Gentari could lead to similar joint venture structures for projects in the area.

“NPI has demonstrated its ability to sell-down its ownership in large-scale offshore wind projects to crystalize and enhance project returns ahead of ISD, while maintaining a meaningful ownership position.,” he said. “Additionally, we would note that the Hai Long asset sell-down should also be viewed favourably given the agreement has been reached ahead of the project’s financial close (2023).”

Maintaining an “outperform” recommendation for shares of Toronto-based Northland, Mr. Heywood raised his target by $1 to $52. The average is $47.73.

“Northland Power continues to actively pursue clean technology development opportunities that fit the strategic asset mix in attractive jurisdictions seeking energy security,” he said. The Company is well positioned to be an early mover in new renewable markets through offshore wind, a generation technology that NPI has significant expertise. NPI has also developed a portfolio of highly contracted onshore assets, which should continue to add supplemental cash flow to fund its robust offshore wind development pipeline, and continues to actively pursue onshore developments in Europe, the U.S. and Latin America. In the near-term, the Company is set to add incremental capacity of 366 MW; however, the full pipeline has an aggregate capacity of more than 14 GW. We have estimated 2023 estimated EBITDA of $1.34-billion, providing a 10.6 times proportional EV/EBITDA multiple, compared to the Canadian independent power producer peer group average of 11 times.”

Elsewhere, Credit Suisse’s Andrew Kuske raised his target to $52 from $49 with an ”outperform” rating.

“Notably, NPI and Gentari are seeking a broader strategic partnership’ and ‘signed an Exclusivity Agreement,’” he said. “Release details are relatively scant, however, the simple fact of a farm down announcement was made is likely to be regarded as an NPI positive. Given the nature of the offshore wind industry and the existing (broadly) inflation pressures, the monetization potential was questioned by many and with NPI’s lack of past precedent, this transaction validates (on its face) this approach. This approach to capital efficiency may be optimized and result in further value being surfaced from the stock (with more helpful disclosures) along with the potential to accelerate other development activities.”


Altius Minerals Corp. (ALS-T) is “building a diversified/low-carbon portfolio from the ground up,” according to National Bank Financial analyst Shane Nagle.

Touting its “stable, long-life asset base, transitioning of the portfolio towards lower carbon intensive commodities and leveraging Altius’ in-house expertise to provide long-term exposure to future exploration success,” he initiated coverage of St. John’s-based company with an “outperform” recommendation.

Mr. Nagle called Altius’ Project Generation division a “key differentiator” in the royalty sector, seeing it utilize the company’s “geology and exploration expertise to grow a pipeline of future royalties by originating and adding value to mineral projects.”

“Upon the sale or transfer of these assets, Altius seeks to retain a royalty interest in the project and/or equity stake in the resulting company,” he said. “To date, the business has converted 57 projects to royalties and equities, and we see a number of opportunities to be monetized in the coming months including Lithium Royalty Corporation and additional junior gold royalties.”

“As attributable revenue from renewable energy replaces thermal coal, the company also generates stable revenue from high quality iron ore used in clean steel production, potash supporting sustainable food generation and battery metals including copper, nickel, cobalt and lithium.”

Mr. Nagle set a target of $26.50 per share. The current average on the Street is $25.25.

“ALS is trading at 1.00 times NAV [net asset value], broadly in line with junior precious metal royalty peers at 0.99 times and an 1.3-times discount to senior peers,” he said. “Altius has a strong liquidity position, low-risk growth profile, strong FCF and is trading at a discount to recent royalty/stream acquisitions within the sector. We expect current market conditions and continued deal flow to ultimately drive a re-rating for the junior royalty names.”

“While we see some risks to near-term commodity prices, long-term fundamentals remain supportive and the company has an established track record of investing throughout the commodity cycle while surfacing value from its portfolio at a time when market conditions support favorable valuations.”


Echelon Partners analyst Mike Stevens sees HS GovTech Solutions Inc. (HS-CN) poised to reach an “inflection point” and set to benefit from a several secular tailwinds.

Seeing it pairing a “timely textbook defence with an offensive attack eyeing a three-year 40-per-cent CAGR,” he initiated coverage of the software-as-a service-company, which serves the state, provincial and local government market on both sides of the border, with a “speculative buy” recommendation on Thursday.

“While the Company saw a tepid 5.7-per-cent compound annual growth rate (CAGR) during its early days as a public company from 2015-2018, current CEO Silas Garrison, who helped build HS GovTech’s cloud technology, stepped into the lead role in September 2018 while revamping operations to drive an 25-per-cent organic CAGR from 2018 to our year-end 2022 forecast,” he said. “Going forward, we project another level-up in organic growth to an 40-per-cent CAGR over the next three years to 2025. Concurrently, we expect the Company to realize considerable operating leverage following a period of substantial heavy lifting in staffing up for incoming growth. We forecast EBITDA margins moving from negative 63.0 per cent in 2022 to 15.4 per cent in 2025, with an EBITDA-positive turn exiting 2023.”

Mr. Stevens said HS GovTech’s business is “littered with defensive characteristics,” noting its revenue is generated from government customers that are “less sensitive to macro swings while the majority of revenues stem from long-term contracts (i.e., five-years-plus) with annual recurring revenues (ARR).”

“Additionally, the Company owns a sizeable customer base comprised of 150 or more contracts and a 90-per-cent-plus retention rate,” he said.

“Many state, provincial, and local governments are still using obsolete systems and processes to conduct business (e.g., paper forms, telephone ‘remote’ inspections, and postal cheques), while the COVID-19 pandemic has increased the urgency (and funding) across all stakeholders toward modernizing technology.”

Seeing it as a potential take-out candidate, Mr. Stevens, currently the lone analyst covering the stock, set a target of 80 cents per share, implying upside of 175 per cent.

“As HS GovTech executes against its qualified sales pipeline (approximately $25-million-plus) and moves closer to EBITDA-positive operations, we anticipate its current trough valuation multiples inching closer to industry peers,” he said. “The Company trades at 1.2 times/1.5 times 2023 EV to revenues/gross profit on our 57-per-cent forecasted growth, which compares to the industry giant Tyler Technologies (TYL-N) at 7.3 times/16.1 times on 8-per-cent growth. Notably, the Company’s leadership team previously founded and built a software company that was later purchased by Tyler. In a consolidated space surrounded by larger players, we expect take-out considerations to escalate alongside the Company’s scale.”


Calling it an “underappreciated drug-delivery play targeting orphan opportunities,” H.C. Wainwright analyst Oren Livnat initiated coverage of Laval, Que.-based Acasti Pharma Inc. (ACST-Q, ACST-T) with a “buy” recommendation on Thursday.

“We believe the company is flying under investors’ radar after a complete strategic pivot following the 2020 failure of its legacy CaPre triglyceride lowering asset,” he said. “Acasti acquired Grace Therapeutics in mid-2021, and now has what we see as an underappreciated pipeline.”

Mr. Livnat set a target of US$2.40. The average is US$2.


In other analyst actions:

* Calling it “the machine manufacturing machine,” Raymond James’ Michael Glen initiated coverage of ATS Corp. (ATS-T) with an “outperform” rating and $53 target. The average is $56.83.

“We acknowledge in that ATS is being valued with a growth multiple, and the company is on track to deliver an EPS CAGR of 25 per cent over the past 5 years (F2019-F2023E),” he said. “From that perspective, while we anticipate generally positive organic growth across each business line, we believe that the multiple is also embedding an expectation for incremental M&A. In terms of EBITDA, we use a forward multiple of 11.5 times F2025E EBITDA which is in line with its 5-year average, and sits at a discount to the U.S. peer group. In terms of P/E, we are using a target multiple of 20x our F2025E EPS, which is in-line with the 5-year historical multiple and also in line with U.S. peers. We believe further multiple expansion will be driven by execution towards the target operating margin of 15 per cent, ATS securing additional bookings in the fast growing battery module vertical, and/or additional bookings associated with the reshoring/onshoring manufacturing theme.”

* JP Morgan’s Tien-tsin Huang lowered Telus International Inc. (TIXT-N, TIXT-T) to “neutral” from “overweight” with a $44 target, down from $45. The average target is US$32.93.

* KBW’s Jade J. Rahmani downgraded Tricon Residential Inc. (TCN-N, TCN-T) to “market perform” from “outperform” with a US$9 target, down from US$11 and below the US$10.97 average.

* TD Securities’ Daniel Chan reduced his target for BlackBerry Ltd. (BB-N, BB-T) to US$4.25 from US$4.75, below the US$5.56 average, with a “reduce” rating.

* CIBC’s Mark Jarvi trimmed his Boralex Inc. (BLX-T) target to $44 from $45 with an “outperformer” rating. The average is $46.23.

* Credit Suisse’s Andrew Kuske raised his target for Keyera Corp. (KEY-T) to $36 from $35, above the $33.45 average, with an “outperform” rating.

* Piper Sandler’s Charles Neivert cut his Lithium Americas Corp. (LAC-N, LAC-T) target to US$36 from US$38 with an “overweight” rating. The average is US$37.44.

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