Inside the Market’s roundup of some of today’s key analyst actions
The Street reacted favourably to Baytex Energy Corp.’s ( BTE-T , BTE-N ) proposed acquisition of rival oil producer Raging River Exploration Inc. ( RRX-T ) on Tuesday with a trio of equity analysts upgrading their rating for the Calgary-based company.
On Monday, the two companies announced their boards of directors have unanimously agreed to a strategic combination to form “a well-capitalized, oil-weighted company with an attractive growth and free cash flow profile provided by its world class assets across North America.” Baytex is offering 1.36 of its shares for each Raging River share in the friendly deal worth about $2.8-billion.
In response to the announcement, Baytex shares dropped 12.4 per cent, its biggest drop since March of 2016, while Raging River fell 10 per cent.
However, a day later, RBC Dominion Securities analyst Greg Pardy upgraded Baytex to “outperform” from “sector perform,” citing an improved balance sheet and “otherwise solid operating performance.”
Calling the merger a “sound move,” Mr. Pardy lowered his target to $6, which is the current average on the Street from $6.50.
TD Securities’ Menno Hulshof raised his rating for the stock to “buy” from “hold” with a target of $6 (unchanged), while Macquarie analyst Brian Kristjansen hiked his rating to “outperform” from “neutral,” keeping a target of $5.75.
Elsewhere, Canaccord Genuity analyst Dennis Fong expects Baytex’s share price to continue to “modestly underperform” the market until the shareholder vote on its acquisition, citing stock churn.
“There is still intrinsic NAV value the pro forma company could realize if the market can be convinced of its ability to prudently allocate capital and show organic production growth,” he said.
“Given the share price underperformance and the spread between BTE and RRX’s share price, we have been asked about the potential for risk around the deal,” said Mr. Fong. “We believe the primary reason why investors shied away from Baytex was due to its above-average leverage (debt-to-cash flow of 3.3 times versus the group at 1.6 times) and to a lesser degree the company’s exposure to heavy oil assets. We believe the combination with Raging River alleviates these two concerns (at the cost of significant share dilution).”
Mr. Fong raised his 2018 production estimate for Baytex by 11 per cent (to 76,532 barrels of oil equivalent per day) to incorporate the acquisition. His 2019 projection jumped 36 per cent (to 94,318 Boe/d.). His cash flow per share projections for 2018 and 2019 fell to $1.31 and $1.56, respectively, from $1.63 and $2.
Maintaining a “buy” rating for Baytex shares, his target price fell to $6.25 from $7.
Meanwhile, a pair of analysts took an opposing view of the deal from Raging River’s perspective.
Cormark Securities’ Garett Ursu downgraded the stock to “market perform” from “buy” with a target of $6, falling from $10 and below the average of $8.49.
AltaCorp Capital’s Thomas Matthews upgraded it to “outperform” from “sector perform” with a target of $8.85, up from $8.50.
“For Canadian investors, the BTE/RRX combination will create a better capitalized entity to delineate the East Shale Duvernay, correct the balance sheet and maintain our push as one of the highest PDP growth stories in the western Canadian basin,” said Mr. Matthews. “For U.S. investors, the combination results in a 100,000 boe/d growth company with a strong balance sheet relative to its US peers (less than 2.0 times) and two meaningful operated assets in Peace River and the Duvernay which can support 5-10-per-cent PPS growth and more importantly 10-15-per-cent CFPS growth longer term. This merger supports three key points: 1) Raging River was looking to accelerate its Duvernay development 2) it didn’t foresee a situation where the Viking generated enough free cashflow to do so, and 3) the company believed a larger entity was required to attract new investment capital outside of Canada.”
TeraGo Inc. (TGO-T) is “doing the right thing by gaining control of as much high-frequency spectrum as possible ahead of the upcoming deployment of 5G,” said Desjardins Securities analyst Maher Yaghi.
On Monday, the Toronto-based company announced the closing of its equity financing of $6.9-million to fund its acquisition of six 24 GHz spectrum licences.
Upon resuming coverage of the stock, Mr. Yaghi said he values the spectrum at a higher price than TeraGo is expected to pay, leading him to raise his target price for its shares. However, he did warn of risk to his valuation of its spectrum assets “given the government has not yet finalized its policy on millimetre wave spectrum allocation.”
“We see companies that control large spectrum positions in the U.S. being acquired by telco operators at lucrative prices,” said the analyst. “While we do not expect prices in Canada to be as elevated as those in the US, we believe TGO is well-positioned in the next few years to use this spectrum to create shareholder value.”
Keeping a “hold” rating for TeraGo shares, Mr. Yaghi’s target rose to $6, which is a penny less than the consensus, from $5.75.
“TGO operates within a very competitive environment,” he said. “Management’s focus on offering new products to larger clients could help top-line growth; however, it will likely take a few quarters before those efforts impact results. Potential upside to our target could come from the company’s spectrum holdings which, at this time, are awaiting the government’s decision on 5G millimetre wave spectrum allocation.”
Meanwhile, TD Securities analyst Bentley Cross upgraded the stock to “buy” from “hold” with a target of $7.50, rising from $6.
Arizona Mining Inc. (AZ-T</a>) currently offers investors “good exposure to zinc and lead given the quality of the Taylor project,” said Raymond James analyst Brian MacArthur in a research note.
On Monday, Perth, Australia-based South32 Ltd. announced it’s offering $1.8-billion to buy the 83-per-cent stake in Vancouver-based Arizona Mining that it doesn’t already own. Shareholders will vote on the agreement, which has been unanimously been approved by Arizona’s directors, at a meeting expected to take place in September.
Maintaining an “outperform” rating for Arizona shares, Mr. MacArthur increased his target to $6.20 from $5.50 to reflect South32’s cash offer price. The consensus target is $6.
Meanwhile, TD Securities’ Craig Hutchison downgraded Arizona Mining to “tender” from “speculative buy” with a $6.20 target, rising from $5.50.
Canccord Genuity’s Dalton Baretto lowered the stock to “hold” from “speculative buy: with a $6.20 target, up from $6.
GBH Insights analyst Dan Ives raised his target price for shares of Netflix Inc. (NFLX-Q) to a Street-high US$500 on Tuesday, believing its “competitive moat, franchise appeal, ability to increase international streaming customers through 2020, and original content build out will translate into robust profitability and growth.”
Mr. Ives projects stronger-than-expected subscriber growth for 2018 and 2019 as well an international subscriber base reaching 100 million by the middle of 2020 (from approximately 68 million currently).
“We believe Netflix remains in a unique position of iron-like strength to grow its content and distribution tentacles over the next 12 to 18 months and thus further build out its massive content and streaming footprint,” he said.
Reiterating his “highly attractive” rating, his target rose from US$400. The average target on the Street is currently US$339.97.
Meanwhile, Piper Jaffray analyst Michael Olson increased his target to US$420 from US$367 with an “overweight” rating, citing Google search trends that could lead to stronger international subscriber growth in the second quarter (48.7 per cent versus the consensus of 40 per cent).
The recent pullback in price for First Solar Inc. (FSLR-Q) captures the potential downside risk of the impact of increased U.S. tariffs, according to Credit Suisse analyst Michael Weinstein, leading him to upgrade his rating for its stock to “neutral” from “underperform.”
“Solar manufacturers and developers, including FSLR, reacted negatively on Friday June 15 (down 3-7 per cent) owing to concerns that the fresh round of 25-per-cent tariffs on Chinese imports (under Section 301) will raise module prices for developers and squeeze margins for manufacturers,” said Mr. Weinstein. “Solar cells and modules are listed in USTR’s new list under subheading 8541.10.00 (‘Diodes for semiconductor devices, other than lightemitting diodes’). However, we believe the negative reaction is overblown for the space, as c-si manufacturers are supplying solar products to the U.S. market from their Southeast Asia factories, which were set up in prior years to circumvent the 30-per-cent Antidumping (AD) and Countervailing duties (CVD) imposed by the U.S. on Chinese imports after 2014.
“The negative reaction for FSLR is even more overblown, as the company doesn’t have any Chinese factories (they are in Ohio, U.S. and Southeast Asia) and instead stands to benefit from tariffs on competing products. That said, we still embed $2.60 per share for pricing benefits that resulted from separate Section 201 solar tariffs that were announced in January; this value would be at risk should the U.S. soften or eliminate these tariffs as a negotiating strategy.”
He maintained a target of US$53, which sits below the current consensus of US$64.77.
In other analyst actions:
GMP analyst Stephen Harris upgraded AutoCanada Inc. (ACQ-T) to “hold” from “reduce” with a target price of $18.50, rising from $17. The average on the Street is $24.28.
Haywood Securities Inc. initiated coverage of Nevada Copper Corp. (NCU-T) with a “buy” rating and $1 target, which is 17 cents less than the consensus.