Inside the Market’s roundup of some of today’s key analyst actions
Citing “recent softness in the stock on the back of macro headwinds,” Desjardins Securities analyst Chris MacCulloch raised his recommendation for Athabasca Oil Corp. (ATH-T) to “buy” from “hold” following the release of its 2024 capital budget.
He was one of three analysts on the Street to upgrade the Calgary-based company after it revealed a plan to spend $175-million in the next fiscal year of which $135-million will be focused on its Thermal Oil business unit with the remaining $40-million allocated to the Duvernay. It came in narrowly higher than Mr. MacCulloch’s $170-million forecast.
“Not surprisingly, the lion’s share of the capital program is focused on Leismer, where eight additional wells are planned for 2024, including four planned redrills on Pad 4 in January that are expected to achieve highly attractive capital efficiencies of $6,500/bbl/d [barrel per day], in conjunction with additional well pairs on Pad 10 in 2H24,” he said in a research note titled Turning the Corner. “While Leismer production is expected to reach 28,000 bbl/d by mid-2024, total approved regulatory capacity of 40,000 bbl/d could be achieved by 2027; however, future growth remains contingent on a material reduction in volatility in WTI–WCS differentials, which could be forthcoming next year after commissioning of TMX.
“Meanwhile, ATH plans to accelerate development of the Duvernay, bringing a previously drilled two-well pad (100-per-cent WI) online in 2Q24 and drilling two multi-well pads (30-per-cent WI) at Kaybob East and West. The resulting 2024 production guidance was pegged at 35,000–36,000 boe/d (98-per-cent oil & liquids), the upper end of which matched our forecast.”
He emphasized a “improved return potential” to his unchanged $4.75 target for Athabasca shares. The average target on the Street is $4.84.
Elsewhere, others raising their recommendations are:
* RBC’s Luke Davis to “outperform” from “sector perform” with a $5 target.
“We upgrade Athabasca shares to Outperform given a favourable outlook into 2024, both on updated guidance and a continued focus on shareholder returns,” said Mr. Davis. “The company now plans to allocate 100 per cent of FCF to shareholders through its share buyback, which we expect will enhance per share metrics. Despite ongoing volatility in commodity prices, we believe the company is in a strong financial position to weather potential near-term downside and view the recent pullback as a buying opportunity.”
* TD Securities’ Menno Hulshof to “buy” from “hold” with a $4.50 target.
“Despite its relatively smaller size and torque to heavy oil, ATH is fundamentally one of the strongest companies we cover,” he said. “The balance sheet is pristine (expects to exit 2023 with $155-million net cash) and 2024 shareholder capital returns are ramping to 100 per cent of FCF. Further, ATH does not expect to become cash taxable until 2030, or graduate to the next royalty tier (i.e., post-payout) until 2027. Its shares are down 19 per cent since we launched coverage in late-September. With an intact $4.50 target price and 34-per-cent target return, we are confidently upgrading to BUY.”
Analysts making target tweaks include:
* BMO’s Mike Murphy to $4.50 from $4.75 with a “market perform” rating.
“Although oil prices have retreated recently, Athabasca remains a strong free cash flow story, with meaningful share buybacks on tap for 2024. On current strip pricing, we forecast free cash flow of $220 million next year, for a FCF yield of 12 per cent,” said Mr. Murphy.
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National Bank Financial analyst Dan Payne saw Baytex Energy Corp.’s (BTE-T) 2024 budget as “a stout outlook,” pointing to “augmented returns being emphasized through its renewed asset base, which should continue to emphasize a long-duration of solid shareholder returns through FCF [free cash flow].”
While investors reacted negatively to Wednesday release, sending its shares down 7.4 per cent, Mr. Payne thinks the Calgary-based company is “set to deliver augmented returns through its renewed asset base, and is set to generally maintain volumes within the context of a 70-per-cent payout ratio to imply an associated FCF yield of 10-15 per cent on leverage of 1.0 times D/CF [debt to cash flow] (generally at strip pricing).”
“In sum, the company anticipates deploying about $1.2-billion in capex to drive average production towards 155 mboe/d [thousand barrels of oil equivalent per day] (84-per-cent liquids), and notably given its recent expansion in the Eagle Ford, will see about 2/3rd of capital deployed there,” he said “On that basis, the totality of the program will see about 62 net wells brought on-stream in the Eagle Ford (up by a factor of 4 times vs. prior year base budget), with a further 190 net wells to be targeted in Canada (50-per-cent split between heavy and light) where a continued emphasis on play development will also be noted (14 strat tests). This cadence of spending continues to emphasize a decade-long duration of inventory, which we expect to continue to be complemented as development progresses.”
Mr. Payne sees the company’s “strength” of free cash flow allowing it to target both de-leveraging and shareholder returns and “should see its net debt trend towards $2.0-billion at year-end in support of its next inflection to returns at $1.5-billion in 2025.”
“Notably, its return of capital has recently accelerated with about 4.5 per cent of its shares outstanding repurchased under its NCIB since June 2023,” he added.
Maintaining an “outperform” recommendation for Baytex shares, Mr. Payne trimmed his target to $8.25 from $9.25 after revisions to his projections for 2023 and 2024. The average target on the Street is $7.96.
“BTE is poised for a 31-per-cent return profile (vs. peers 22 per cent) on leverage of 0.7 times (vs. peers 0.2 times), while trading at 2.2 times 2024 estimated EV/DACF [enterprise value to debt-adjusted cash flow] (vs. peers 2.3 times),” he said.
Other analysts making target adjustments include:
* ATB Capital Markets’ Amir Arif to $7 from $7.50 with an “outperform” rating.
“The 2024 capital guidance is inline. 2024 production guidance range is inline, with the midpoint slightly below ATB and consensus estimates,” said Mr. Arif. “ATB estimates reflected the recently announced asset sale while the consensus estimates did not fully reflect the 4 mboe/d late-November asset sale. Our 2024 production estimate reduces slightly to move towards the midpoint of the guidance range. The five-year outlook is fairly neutral and reflects an average annual absolute production growth rate of 1-4 per cent with an average per share growth rate of 7 per cent while also reducing net debt levels towards $1-billion by 2028 from current levels of $2.6-billion based on strip pricing. The insurance purchase, while adding a near-term cost, removes a meaningful uncertain tax liability ($245-million potential liability, 3 years out). The $60-million insurance cost will show up in Q4/23, with this amounting to 7 cents per share and accounting for approximately 1 per cent of the drop in the stock [Wednesday]. The stock has been weaker than the group following its earnings release on November 2, with a drop of 30 per cent versus 13 per cent for the energy index.”
* Stifel’s Cody Kwong to $7 from $8.25 with a “buy” rating.
“The roll-out of BTE’s 2024 outlook held no surprises as the budget generally targeted modest production growth that allowed the company to return a meaningful 50 per cent of its FCF to shareholders, while retaining the other half for continued debt repayment. Unfortunately this release ran smack dab into a crude oil price collapse, which has spooked investors from this traditionally torquey name. We believe that the fundamentals do not support crude oil prices below $70/bbl for a significant amount of time, so while BTE does remain one of the more levered companies in our universe, picking away at this stock at current levels could be fortuitous for when oil price momentum swings the other way,” said Mr. Kwong.
* Canaccord Genuity’s Mike Mueller to $7.75 from $8 with a “buy” rating.
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While he reduced his forecast for Tamarack Valley Energy Ltd. (TVE-T) in response to its 2024 corporate budget, Desjardins Securities analyst Chris MacCulloch continues to see it as his top pick in the Canadian small-cap oil space, citing “its discounted valuation and attractive Clearwater and Charlie Lake asset base,” which he sees as “highly defensive in a downward commodity price environment.”
“That said, we acknowledge that elevated debt levels remain a point of caution, even with an expanded hedge book,” he added.
Shares of the Calgary-based company dropped 8.6 per cent on Wednesday following the premarket release that set a budget of $410-million to $460-million with oil-weighted production averaging 61,000 to 63,000 barrels of oil equivalent per day.
Mr. MacCulloch said the plan largely fell in line with his forecast, however he cut his cash flow per share estimates for both 2024 and 2025 by approximately 5 per cent to reflect elevated natural gas weighting. He also increased his royalty and operating cost assumptions to 21 per cent and his capital expenditure projections.
“With the benefit of hindsight, [Wednesday’s] negative market reaction to the update is less surprising, although we still believe it was largely overdone,” he said. “In particular, the Canadian heavy oil complex (of which we consider TVE an honorary member) came under renewed pressure following indications of yet another TMX delay, not to mention the broader pullback in global oil prices. It was a tough day to release 2024 guidance, or much of anything, for that matter.
“We still believe the stock is attractively valued to the extent that it has one of the softest 2025 strip EV/DACF multiples in the Desjardins E&P coverage universe at 3.4 times while sporting a respectable 11.8-per-cent FCF yield. Elevated debt levels remain our primary point of caution, particularly within the context of softening commodity prices, although we still see the company making gradual progress toward its net debt targets in 2024–25. Don’t stray far.”
Maintaining a “buy” recommendation for Tamarack shares, Mr. MacCulloch lowered his target to $5.50 from $6. The average is $5.69.
Elsewhere, RBC’s Luke Davis added a “speculative risk” qualifier to his “outperform” recommendation and cut his target to $4.50 from $5.50.
“Tamarack’s 2024 budget was underwhelming given mixed messaging (i.e. dual budget) combined with a lighter-than-anticipated production outlook,” said Mr. Davis. “The company’s operational execution has been challenged for the majority of 2023, which we expect will weigh on investor sentiment for the foreseeable future. While management remains focused on improving operational sustainability, we believe aggressively entering early-stage resource plays has proven more challenging to operate and continues to command higher non-productive capital spend than initially anticipated. As such, we have trimmed our estimates and target price, adding a Speculative Risk qualifier to our OP recommendation.”
Others making target adjustments include:
* Stifel’s Cody Kwong to $5 from $6.25 with a “buy” rating.
“The emergence of TVE’s 2024 budget was unfortunately met with some macro headwinds that meaningfully undercut spot crude oil prices while also delaying the anticipated narrowing of heavy oil differentials,” said Mr. Kwong. “While our estimates do observe a modest downdraft, the share price overreaction to the downside is a buying opportunity, in our view, for a company that is ready to begin offering enhanced return of capital for shareholders, while still paying down meaningful debt y/y, all while harboring one of the highest quality asset bases in our coverage universe. As crude oil prices gain traction once again, so too with the ‘torquey’ fortunes of TVE.”
* National Bank’s Dan Payne to $6 from $7 with an “outperform” rating.
“A solid budget outlook by the company, with discipline continuing to lever high-graded returns towards maximizing free cash and continued momentum to shareholder value through de-leveraging and return of capital,” said Mr. Payne.
* BMO’s Mike Murphy to $4.25 from $4.50 with a “market perform” rating.
“Capital spending for 2024 was within expectations, however production guidance came in slightly lower. That said, infrastructure initiatives this year should position the company for modest growth in 2025 and beyond,” said Mr. Murphy.
* ATB Capital Markets’ Patrick O’Rourke to $6 from $7 with an “outperform” rating.
* CIBC’s Jamie Kubik to $5.25 from $5.75 with an “outperformer” rating.
* Canaccord Genuity’s Mike Mueller to $5 from $5.75 with a “buy” rating.
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Touting its “smooth execution,” National Bank Financial analyst John Shao sees the risk-reward profile for D2L Inc. (DTOL-T) as “attractive” following better-than-expected third-quarter results.
Shares of the Kitchener, Ont.-based online learning company jumped 12.2 per cent on Wednesday after it reported revenue of $46.1-million, up 8.1 per cent year over year and exceeding both Mr. Shao’s $45.9-million estimate and the consensus projection on the Street of $45.7-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $2.1-million also topped expectations ($1.8-million and $1.7-million, respectively).
“In our view, the two important takeaways are the accelerated organic growth in the core SaaS [software as a service] business which now accounts for 90 per cent of the revenue base; and the announcement of Walmart Canada as a corporate customer which we consider a milestone in capturing enterprise opportunities,” he said. “When it comes to profitability, the continued cost optimization and positive operating leverage suggest there is further upside to margin expansions. For a company with a reasonable valuation (1.4 times EV/NTM [next 12-month] Sales), strong balance sheet and what’s now double-digit SaaS growth, we see D2L’s risk-to-reward profile getting incrementally attractive.”
Emphasizing the company’s recent deal with Walmart as well as multiple contract wins with higher-education institutions in both North America and internationally, Mr. Shao sees D2L’s balance sheet as “strong” after it exited the quarter with $123-million in cash and no debt. That will allow it to support its newly announced normal course issuer bid to repurchase almost 1.3 million shares.
“Looking out, we expect hybrid learning to continue to drive organic growth beyond the near term and D2L is set to benefit from that trend as the education space is embracing new technology to replace the legacy ones,” he said.
Maintaining an “outperform” rating for D2L shares, Mr. Shao raised his target to $12 from $11 after increasing his earnings forecast through fiscal 2025. The average target on the Street is $12.50.
Elsewhere, others making target adjustments include:
* Eight Capital’s Christian Sgro to $12 from $11 with a “buy” rating.
“D2L’s FQ3 report met all expectations with a broad-based beat-and-raise,” he said. “The guide implies continued execution on subscription growth, GM expansion, and opex containment. As we look to C2024 (F2025) and D2L’s mid-term targets, we model performance at the lower end of management’s guided ranges. These conservative assumptions still suggest impressive margin expansion and an inexpensive software valuation, all following a year of execution and strong share price performance.”
* BMO’s Thanos Moschopoulos to $11.50 from $9.50 with a “market perform” rating.
“We remain Market Perform on D2L and have raised our target price following Q3/24 results that were slightly ahead of consensus on both revenue and EBITDA, and reflective of better year-over-year subscription revenue growth relative to recent quarters,” he said. “While we prefer other stocks in our coverage universe, we see more upside than downside to the stock given D2L’s valuation, competitive position in higher-ed, and improving profitability. We’ve modestly raised our estimates.”
* TD Securities’ Daniel Chan to $13.50 from $11 with a “buy” rating.
“Continued revenue growth acceleration and margin expansion could be supported by the contribution of new products. We remain positive, given D2L’s momentum and low relative valuation,” said Mr. Chan.
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Three Canadian companies were added to RBC’s “Global Energy Best Ideas” list for December on Thursday.
The group, which now consists of 21 stocks, is meant to highlight the firm’s “highest conviction names” across the global energy sector with the expectation of outperforming m the iShares Global Energy ETF (IXC-A) and a hybrid benchmark with a weighting towards the iShares Global Utilities ETF (JXI-A).
“In November the RBC Global Energy Best Ideas List was down 0.3 per cent compared to the iShares S&P Global Energy Sector ETF (IXC) up 0.5 per cent and a hybrid benchmark (75-per-cent IXC, 25-per-cent JXI – iShares Global Utilities ETF) that was up 2.1 per cent on a sequential basis,” it said. “Since its inception in February 2013, the RBC Global Energy Best Ideas List is up 157.6 per cent compared to the S&P Global Energy Sector ETF up 30.1 per cent.”
Additions to the list included:
* MEG Energy Corp. (MEG-T) with an “outperform” rating and $33 target. Average: $31.04.
Analyst Greg Pardy: “We are adding MEG Energy to the Energy Best Ideas list following its significant progress when it comes to balance sheet deleveraging, with direct implications on increasing shareholder returns. Additionally, the company’s strong operating performance, coupled with its multi-year growth strategy and the benefits TMX should afford oil sands producers, make MEG our favorite intermediate producer.”
* Northland Power Inc. (NPI-T) with an “outperform” rating and $28 target. Average: $31.75.
Analyst Nelson Ng: “We are adding Northland Power to the Energy Best Ideas as we believe the company is in an advantaged position relative to peers, with three fully funded projects under construction that should generate EBITDA equivalent to 50 per cent of 2023 levels. With financial close achieved on all three projects, the developments are fully funded, significantly de-risked, with fixed interest rates, hedged currency exposure, and the vast majority of construction costs are fixed. Pursuing incremental growth opportunities would be entirely discretionary.”
* Pason Systems Inc. (PSI-T) with an “outperform” rating and $19 target. Average: $16.43.
Analyst Keith Mackey: “We are adding PSI to the Energy Best Ideas list following its announcement to acquire the remaining outstanding shares in Intelligent Wellhead Systems (IWS), which provides a differentiated growth opportunity and an opportunity for Pason to apply its competencies in land drilling to well completions.”
Canadian companies remaining on the list are:
- AltaGas Ltd. (ALA-T) with an “outperform” rating and $32 target. Average: $32.
- ARC Resources Ltd. (ARX-T) with an “outperform” rating and $28 target. Average: $27.48.
- Canadian Natural Resources Ltd. (CNQ-T) with an “outperform” rating and $96 target. Average: $99.24.
- Obsidian Energy Ltd. (OBE-T) with an “outperform” rating and $15 target. Average: $13.55.
- Pembina Pipeline Corp. (PPL-T) with an “outperform” rating and $58 target. Average: $51.
- Suncor Energy Inc. (SU-T) with an “outperform” rating and $53 target. Average: $54.86.
- Superior Plus Corp. (SPB-T) with an “outperform” rating and $15 target. Average: $13.23.
- Topaz Energy Corp. (TPZ-T) with an “outperform” rating and $26 target. Average: $27.89.
- Tourmaline Oil Corp. (TOU-T) with an “outperform” rating and $86 target. Average: $84.03.
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In other analyst actions:
* In a research note reviewing fourth-quarter earnings season for Canadian banks, CIBC’s Paul Holden raised his Bank of Montreal (BMO-T) target to $117 from $115 with a “neutral” recommendation. The average target on the Street is $126.94.
“Banks have rallied significantly since early November,” he said. “The rally has been fueled by the peak rate narrative and expectations for a U.S. soft landing. The banks are now trading at a 5-per-cent discount to 5-year average P/Es, with consensus EPS reflecting a soft landing. We do not find the discount compelling considering potential downside risk to EPS if the Canadian economy does not perform so well next year. We only have one Outperformer in the sector, National Bank, premised on its defensive characteristics.”
* In a report titled Pack More Protein for Strong 2024 Returns, PI Financial’s Ben Jekic initiated coverage of Premium Brands Holdings Corp. (PBH-T) with a “buy” rating and $111 target. The average is $155.44.
“Premium Brands has grown over the years by accumulating exposure to emerging consumer trends that underpinned its growth trajectory since 2000,” he said. “PBH’s acquisitive expansion of a diverse specialty food product platform have enabled it to capture value from the focus on wholesome ingredients, shift from processed foods, convenience-oriented foods, awareness of diet and health, search for a sophisticated food experience, lower sugar & increase protein consumption. These trends feed on favourable social and demographic factors of aging population and immigration, greater access to food related information and busier lifestyles. PBH’s well regarded leadership positions the company to generate 4-6-per-cent organic growth (6-8 per cent with inflation) and capture more share via acquisitions & capacity investments due to resulting visibility.”
“PBH is on pace for a four-year adjusted EBITDA CAGR [compound annual growth rate] of 16.9 per cent through 2023, but easing cost pressures & demand backdrop in 2024 can restore both the EBITDA CAGR pace at 20-per-cent-plus level, and with it stock upside. High margin SF [Specialty Foods] segment will be the value driver through our 2025 estimates, while growing FCF & deleveraging bring re-rate of stock multiples to match 26-per-cent upside.”
* Following a second-quarter 2024 revenue and earnings beat from Evertz Technologies Ltd. (ET-T), Raymond James’ Steven Li bumped his target for its shares to $16 from $15.50, reaffirming an “outperform” rating, while BMO’s Thanos Moschopoulos raised his target to $16 from $15.50 with an “outperform” rating. The average is $17.
“Evertz shares are flat year-to-date, underperforming the TSX (up 4 per cent YTD) which we believe is unwarranted given another quarter beat (third beat in a row) and record backlog,” Mr. Li said. “In April, ET announced its largest ever purchase order from a major U.S. based media company in excess of $152-million over 5 years. The race for video content continues to bode very well for ET.”
* With the close of its merger with Consolidated Uranium Inc., Eight Capital’s Puneet Singh raised his target for IsoEnergy Ltd. (ISO-X), a Toronto-based exploration company, to $7.50 from $7.10 with a “buy” rating. The average is $6.15.
“We see the newly merged entity as a potential near-term producer out of the U.S., with its Canadian asset base led by Larocque East/Hurricane still anchoring the portfolio, and other assets, including Coles Hill, representing option value,” he said.
* In response to a “positive” outlook alongside “strong” quarterly results, ATB Capital Markets’ Chris Murray increased his Mainstreet Equity Corp. (MEQ-T) target to $170 from $160 with an “outperform” rating. The average is $171.67.
“Strong Q4/23 results were driven by lower vacancy rates, M&A activity, and operating leverage, which led to significant NOI growth, notably ahead of ATB estimates,” he said. “M&A has continued in H2/23, with MEQ acquiring 466 doors in Q4/FY23 and Q1/FY24. While MEQ announced its first-ever dividend with results, it is nominal and intended to broaden its investor base with the growth-by-acquisition strategy firmly intact. Management issued a constructive outlook for FY2024, highlighted by strong rental conditions in core markets, mark-to-market adjustments, improving stabilization rates, and ongoing consolidation, which we expect to underpin continued NOI growth.”
* Seeing its Canadian business “firing on all cylinders,” TD Securities’ Michael Van Aelst raised his North West Company Inc. (NWC-T) target to $44 from $41 with a “buy” rating after better-than-expected quarterly results, while CIBC’s Mark Petrie increased his target to $41 from $38 with a “neutral” rating. The average is $40.75.
“With earnings growth having resumed and significant settlement payments expected to be received by northern residents/communities and spent over the next few years, we still see an attractive buying opportunity. That said, investors should prepare for uneven quarterly growth rates, given uncertain and lumpy timing of settlement payments and continuing inflationary pressure,” Mr. Van Aelst said.
* Canaccord Genuity’s Yuri Lynk raised his Stantec Inc. (STN-T) target to $110 from $97 with a “hold” rating, while RBC’s Sabahat Khan bumped his target to $118 from $106 with an “outperform” rating. The average is $133.64.
“Stantec’s Investor Day outlined the company’s 2024-2026 Strategic Plan/targets that were largely in line with our expectations (MSD%-HSD% [mid-to-high-single-digits percentage] organic growth + margin expansion) heading into the event,” said Mr. Khan. “The targets and management commentary on demand drivers also reaffirmed our view that Stantec remains well positioned to capitalize on the secular tailwinds driving the industry.”
* In response to negative estimate revisions following its 2024 guidance release, Desjardins Securities’ Chris MacCulloch lowered his Suncor Energy Inc. (SU-T) target to $49 from $51. The average is $54.86.
“Although the stock lagged following the release, we believe that was partially attributable to weakness across the broader Canadian heavy oil complex on the back of another potential delay in the TMX project, not to mention a sharp pullback in global oil prices,” said Mr. MacCulloch. “However, we maintain our Hold rating as we continue awaiting a more attractive entry point for the stock.”
* JP Morgan’s Bill Peterson lowered his Teck Resources Ltd. (TECK.B-T) target to $63 from $70 with an “overweight” rating. The average is $63.99.
David Leeder