Inside the Market’s roundup of some of today’s key analyst actions
Canadian energy producers and royalty companies remain “attractive” despite recent share price appreciation, according to iA Capital Markets analyst Elias Foscolos.
In a research report released Tuesday, he raised his adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) estimates for 2022 for companies in his coverage universe by an average of 14 per cent in response to “substantially higher” third-quarter commodity prices and lower-than-average inventories ahead of the winter heating season.
“In addition to strengthening prices, many covered companies have hedges rolling off in the back half of this year, and into next, so we are likely to see lower hedging losses in the future impacting headline financial results and cash flow,” said Mr. Foscolos. “Our universe is now trading at a 4.2 times EV/EBITDA and 6.3 times P/AFFO multiple, which are both 0.5 times higher than our previous estimates.”
“Since last year, many companies are now keenly focused on streamlining operations, maximizing margins via lower operating costs, which reap benefits irrespective of commodity prices or high differential pricing, and minimizing downside risk as lower costs keep plays economic. As debt levels decline many of our E&P producers will be in an enviable position to make capital allocation decisions on whether to a) accelerate capital deployment, b) buy back shares, or c) increase dividends. We have seen a little of all of this within the last month as TOU announced an increased regular dividend and a special dividend while FRU deployed capital through its U.S. acquisition, and presently has a very conservative payout ratio. Our coverage universe has moved 40 per cent higher since our last update, and is trading at better multiples.”
With that view, Mr. Foscolos hiked his target prices for companies he covers by an average of 20 per cent. That led him to make three rating changes.
* Birchcliff Energy Ltd. (BIR-T) to “buy” from “speculative buy” with a $9.25 target, up from $6.75. The average on the Street is $7.38.
“With no major news from Birchcliff in recent weeks, we have elected to maintain our previous production and operating projections and have only updated commodity price estimates at this time. The effect of increased commodity prices on this gas-weighted producer with no fixed price hedges is a $2.50 increase to our target price to $9.25. We have raised our recommendation,” said Mr. Foscolos.
* Peyto Exploration & Development Corp. (PEY-T) to “hold” from “speculative buy” with an $11.50 target, up from $8.50. The average is $10.04.
“A recent run-up in Peyto’s stock price has reduced potential return; as such, we are downgrading our recommendation,” he said.
* Tourmaline Oil Corp. (TOU-T) to “buy” from “strong buy” with an $56 target, rising from $48. The average is $52.62.
“Tourmaline is positioning itself to opportunistically repurchase shares under its NCIB to enhance shareholder returns,” he said. “The NCIB was renewed as of July 20, 2021, and the board of directors has authorized repurchases of up to $1-billion over the next two years. In addition to dividends and NCIB purchases, the Company intends to invest FCF, to show modest production growth (3-5 per cent), and will likely invest $250-million of its FCF annually on smaller bolt-on type acquisitions that are within reach of company-owned and operated facilities. Tourmaline will continue investing in midstream opportunities that it believes offer high returns. The Company indicates that it has identified midstream deep cut opportunities with attractive economics at less than 4 times Capex/EBITDA. After incorporating the Company’s latest guidance and updated commodity prices into our model, we have increased our target price on Tourmaline to $56.00 from $48.00 with a potential return of 29 per cent”
Mr. Foscolos also made these target changes:
- Arc Resources Ltd. (ARX-T, “buy”) to $15 from $12.50. Average: $14.63.
- Nuvista Energy Ltd. (NVA-T, “speculative buy”) to $7.25 from $5.25. Average: $5.39.
- PrairieSky Royalty Ltd. (PSK-T, “buy”) to $17 from $16. Average: $16.88.
- Topaz Energy Corp. (TPZ-T, “buy”) to $21 from $20. Average: $20.32.
- Whitecap Resources Inc. (WCP-T, “buy”) to $8.50 from $7. Average: $8.97.
In a separate research report, Mr. Foscolos said Freehold Royalties Ltd. (FRU-T) “continues to distinguish itself from other Canadian royalty peers”
He thinks the company’s recent US$180-million acquisition of U.S. royalty assets in the Eagle Ford oil basin in Texas comes at an “attractive” multiple that “only gets better if prices continue to improve and funds are reinvested in a disciplined manner.”
“In line with its strategy of positioning itself in key basins in North America, FRU is executing on its plan to diversify its royalty land base differentiating itself from other Canadian royalty companies,” he added. “Near- and medium-term upside on the property is underpinned by the development of 500 potential drilling locations by an investment grade producer. Upon closing, the acquisition is anticipated to add 2,500 barrels of oil equivalent per day of production in 2022 at which time 35 per cent of total corporate production will be from the U.S.”
Seeing the deal positioning Freehold to be able to “modestly” increase its dividend early in 2022, Mr. Foscolos raised his target to $14 from $13 after incorporating the subsequent $173-million bought deal equity financing in which it added almost 19 million shares The average target on the Street is $13.31.
He reiterated a “strong buy” recommendation.
“While this acquisition on a stand-alone basis may not have the production and cash flow profile investors may be aiming for, it does provide exceptionally strong cash flow that can be reinvested to modestly grow despite the large proportion of equity issued,” he said.
Equity analysts at National Bank also made a series of notable target price changes to TSX-listed energy companies in their coverage universe on Tuesday.
Travis Wood’s adjustments included:
- Arc Resources Ltd. (ARX-T, “outperform”) to $18.50 from $13.50. Average: $14.63.
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $70 from $61. The average on the Street is $55.36.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $22 from $20. Average: $15.96.
- Crescent Point Energy Corp. (CPG-T, “outperform”) to $12.50 from $11. Average: $7.55.
- Enerplus Corp. (ERF-T, “outperform”) to $17 from $13.50. Average: $11.56.
- Freehold Royalties Ltd. (FRU-T, “outperform”) to $15 from $13. Average: $13.31.
- Imperial Oil Ltd. (IMO-T, N/A) to $49 from $45. Average: $41.35.
- MEG Energy Corp. (MEG-T, “sector perform”) to $14 from $14.50. Average: $11.75.
- Parex Resources Inc. (PXT-T, “outperform”) to $35 from $34. Average: $32.93.
- Peyto Exploration & Development Corp. (PEY-T, “outperform”) to $15.50 from $8.50. Average: $10.04.
- PrairieSky Royalty Ltd. (PSK-T, “sector perform”) to $20 from $16.50. Average: $16.88.
- Suncor Energy Inc. (SU-T, “sector perform”) to $39 from $39. Average: $35.39.
- Vermilion Energy Inc. (VET-T, “sector perform”) to $18 from $13.50. Average: $12.47.
- Whitecap Resources Inc. (WCP-T, “outperform”) to $11 from $10. Average: $8.97.
Dan Payne made these changes:
- Advantage Energy Ltd. (AAV-T, “outperform”) to $9 from $5.50. Average: $6.85.
- Baytex Energy Corp. (BTE-T, “sector perform”) to $4.50 from $3. Average: $3.33.
- Birchcliff Energy Ltd. (BIR-T, “outperform”) to $10 from $6.25. Average: $7.38.
- Crew Energy Inc. (CR-T, “sector perform”) to $3.50 from $2. Average: $2.79.
- Headwater Exploration Inc. (HWX-T, “outperform”) to $7 from $6.25. Average: $6.52.
- Kelt Exploration Inc. (KEL-T, “outperform”) to $7 from $5. Average: $5.48.
- Nuvista Energy Ltd. (NVA-T, “sector perform”) to $6.75 from $4.25. Average: $5.39.
- Pipestone Energy Corp. (PIPE-T, “sector perform”) to $4 from $3.25. Average: $3.17.
- Spartan Delta Corp. (SDE-T, “outperform”) to $10 from $8. Average: $8.67.
- Storm Resources Ltd. (SRX-T, “sector perform”) to $7.50 from $5. Average: $5.86.
- Tamarack Valley Energy Ltd. (TVE-T, “outperform”) to $5 from $4.50. Average: $4.36.
- Tourmaline Oil Corp. (TOU-T, “outperform”) to $57.50 from $45. Average: $52.62.
- Yangarra Resources Ltd. (YGR-T, “sector perform”) to $2.50 from $2. Average: $2.21.
As the chip shortage, supply chain issues and commodity “risks” continue to provide significant obstacles for the auto industry, Raymond James analyst Michael Glen has opted to “take a more prudent approach” to his earnings expectations for parts manufacturers.
“We believe the upcoming 3Q could represent a point of capitulation for the industry, with hopes surrounding some form of 4Q21 rebound in production increasingly challenged,” he said. “Additionally, we have read a few articles regarding chip shortages persisting into 2023, which would represent the need for additional assessment of our forecast. We recognize that this situation must be frustrating to both MGA and MRE, with North American inventories extremely low and consumers clamoring for pick-up trucks and SUVs. Instead, production can be best described as stop-and-go, with OEMs taking production up and down as the necessary parts come available.
“This has a double whammy impact on the parts suppliers, as over and above the production uncertainty, labour shortages mean that staffing adjustments are difficult as workers may simply not return when recalled. As such, decremental margins may be more severe that those seen in past downturns. Putting it together, earnings visibility remains extremely challenging.”
Also providing a warning ahead of the Oct. 19 vote by Veoneer shareholders on Magna’s $31.25 per share cash offer, he lowered his target for Magna shares to US$83 from US$92, keeping a “market perform” rating. The average on the Street is US$108.91.
“While Veoneer is a strategic acquisition for Magna, it would also add further dilution to our 2022E EPS, which we had previously estimated at 11 per cent (this estimate was also consistent with management indications),” he said. “However, we would also note that this level of dilution factors in a marked improvement in Veoneer’s results which may be more challenged given ongoing industry production headwinds. All-in-all, our view is that Magna investors need to pay closer attention to this situation as it remains far from over.”
He added: “While we believe that our current valuation is reasonable at this point, we would really like to have clarity on what the final outcome will be with respect to Veoneer. As we described above, with the vote date for the Magna bid set for October 19th, we anticipate clarity will come through the first half of October.”
For Martinrea International Inc. (MRE-T), Mr. Glen cut his EPS estimate for the second half of the year by 26 per cent and his 2022 projection by 12 per cent, leading him to cut his target for its shares by $1 to $17 with an “outperform” rating. The average is $18.25.
“The stock remains very deep-value in nature, and we believe there is a compelling opportunity for deep-value investors who are able to look past the near-term uncertainty with regard to chip shortages and other supply chain pressures,” he said.
Intact Financial Corp. (IFC-T) is a “domestic leader with a path to growth outside of the core business,” according to Credit Suisse analyst Mike Rizvanovic.
“IFC is Canada’s largest property and casualty (P&C) insurance provider with a leading position in the market across all major business lines, which we strongly believe can be scaled further in what remains a fragmented industry ripe for consolidation,” he said. “Given its added scale and non-domestic diversification following its acquisition of RSA, we expect IFC can drive net operating income per share (NOIPS) growth of 10 per cent in 2023, with upside potential to our forecasts from more acquisitions.”
Touting its “multiple growth engines” and seeing its current valuation offering “strong upside potential,” Mr. Rizvanovic initiated coverage of the Toronto-based company with an “outperform” rating.
“While we believe that growth in the core Canadian underwriting business will drive most of the upside for IFC over the medium term (organic and inorganic), we also see strong gains ahead for distribution & other, which is well positioned with: (1) BrokerLink, which management believes could double in size over the next five years; (2) Broker Financial Services, which has a unique service offering to the broker community; (3) On Side Restoration, which provides solid upside potential without any underwriting risk as a vertical integration play into claims management; and (4) newly branded Intact Public Entities that includes the 2019 purchase of Frank Cowan, a large managing general agent (MGA) that expands the company’s expertise in higher-growth specialty lines,” he said. “In addition, the U.S. specialty market is another avenue of untapped potential that we believe will benefit from its North American capabilities, while the new UK and Ireland (UK&I) segment offers interesting optionality to the much larger UK market.”
He set a Street-high target price of $215 per share, exceeding the current average of $197.46.
“We believe that IFC is inexpensive, given the company’s growth potential over the next three to five years, and the current share price offers an attractive entry point for investors,” Mr. Rizvanovic.
Though Aurora Cannabis Inc.’s (ACB-T) fourth-quarter had “a number of incremental encouraging updates,” Canaccord Genuity analyst Matt Bottomley thinks its results will “do little to re-engage investor excitement as the Canadian landscape remains troubled for many Licensed Producers.”
After the bell, the Edmonton-based company reported total revenues of $54.8-million, down 0.7 per cent quarter-over-quarter and narrowly higher than Mr. Bottomley’s $53.4-million estimate but below the $56.3-million consensus forecast. Its adjusted EBITDA loss of $19.3-million was an improvement from the third quarter (a loss of $24-million) but narrowly higher than Mr. Bottomley’s estimate of a $18.7-million loss.
“As part of its earnings release, the company reiterated its plan to implement $60-million to $80-million of cost savings over the next year and a half,” the analyst said. “A majority of savings (60 per cent) are expected to result from its recently right-sized infrastructure in addition to lowered SG&A.”
“The company currently has a healthy unrestricted cash balance of $421-million. However, we note that this came at no small cost considering that during FY2021 the company has raised C$666-million of equity with its basic share count up 63 per cent over this time period (however with no ATM share issuances in FQ4/21). As the company reiterated its expectation of reaching positive adj. EBITDA in the next two quarters, we believe additional share issuances via its ATM will likely be limited to strategic opportunities over the near/medium term.”
Expecting sector headwinds to “bleed” into the next fiscal year, Mr. Bottomley sliced his 2022 financial estimates, leading him to trim his target for Aurora shares to $6.50 from $7 and reiterated a “sell” recommendation. The average is $7.85.
Elsewhere, MKM Partners analyst William Kirk raised Aurora to “neutral” from “sell” with a fair value of $7, up from $6.
Expecting it to garner significant interest from larger peers, iA Capital Markets analyst George Topping initiated coverage of Integra Resources Corp. (ITR-X) with a “buy” recommendation on Tuesday.
The Vancouver-based development-stage company is focused on the past producing DeLamar Gold-Silver Project in Idaho.
“Integra’s resource is already large enough to be of interest to multiple mid-tier acquirers,” said Mr. Topping. “Idaho is a low-risk jurisdiction, with excellent infrastructure and nearby labour, water, power, and roads. Permitting is very likely given that DeLamar stands on previously disturbed grounds, the private landowners are supportive, and Idaho, a major phosphate producer, is pro-mining. Management also has a track record of selling assets at a premium.”
Saying Integra “ticks all our M&A boxes,” he set a target of $7. The current average on the Street is $7.47.
“Since the PEA, the scale of the mine has already increased by 50 per cent-plus and recent exploration success has identified high grade below the pit at Florida Mountain (FM). An updated resource estimate and PFS are due in Q4/21. We estimate commissioning in late 2026, but that a mid-tier producer will likely purchase it well before then,” said Mr. Topping.
Citing its “solid” operating record and foundation at its Segovia underground complex in Colombia, Canaccord Genuity analyst Carey MacRury initiated coverage of Gran Colombia Gold Corp. (GCM-T) with a “buy” rating, seeing it “on the path to becoming a LatAm mid-tier producer.”
He thinks gains are likely to be seen quite quickly at its recently acquired Toroparu project in Guyana, where he believes the Toronto-based company has the potential to approximately double its production to 400,000 ounces in the next few years.
“With the pullback in the gold price in 2021 (down 8 per cent year-to-date), share price performance has reflected market cap size with the larger, more liquid names outperforming YTD,” said Mr. MacRury. “The smaller names have been the worst-performing group, and we believe they are oversold and well positioned to snap back on a turn in the gold price. Gran Colombia’s shares are down 41 per cent YTD, vs. its small producer peers down 35 per cent on average.”
“Gran Colombia’s shares have underperformed following the recent acquisition of Gold X; we note that Gran Colombia is trading at 0.5 times NAV on the basis of Segovia alone, suggesting to us that the market is not currently pricing in a lot of value for Toroparu. We expect that to start to change once the company releases its plan and economics for the project and as the project advances.”
He set a $9.50 target. The average is currently $11.21.
“We see the potential for the company’s valuation to rerate higher as Toroparu advances into production and the company transitions into a more diversified, mid-tier producer,” he said.
In other analyst actions:
* In response to its US$50-million acquisition of a gold stream from an affiliate of Auramet International LLC, Raymond James analyst Brian MacArthur raised his target for Maverix Metals Inc. (MMX-T) to $8.50 from $8.25, keeping an “outperform” rating. The average is $8.39.
“Given its smaller market capitalization and lower trading liquidity, Maverix may not be a suitable investment for all investors. However, for smaller-cap investors, we believe Maverix offers a gold-focused royalty/streaming company with growth, as well as a flexible balance sheet,” he said.
* TD Securities analyst Greg Barnes upgraded Cameco Corp. (CCO-T) to “buy” from “hold” with a $35 target, exceeding the $30.43 consensus on the Street.
* TD’s Tim James resumed coverage of Chorus Aviation Inc. (CHR-T) with a “buy” rating and $6 target. The average is $5.20.