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

In reaction to adjustments to his firm’s forward commodity price assumptions, Raymond James analyst Chris Cox made a number of rating changes to stocks in the energy sector in a research report released Tuesday.

The firm increased its assumptions for crude oil to move in-line with forward prices. Its WTI assumption for 2018 is now US$65.11 per barrel, rising from US$62.31. For 2019, its assuming US$60.54 per barrel, up from US$58.49. Its long-term assumption rose to US$65 per barrel from US$60.

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For natural gas, Raymond James is assuming US$2.76 per thousand cubic feet (mcf) versus US$2.85 previously. Its 2019 assumption rose to US$2.72 from US$2.75, while its long-term assumption fell to from US$2.50 from US$2.75.

With those moves, Mr. Cox made several rating changes, most notably in the midstream segment in which he “deliberately” lowered its valuation assumptions.

Gibson Energy Inc. (GEI-T) was moved to “market perform” from “outperform” with a target of $18.50, down from $20. The average target on the Street is now $19.32, according to Bloomberg data.

“Our core thesis on Gibson since the appointment of Steve Spaulding as CEO was that the new management team would be aggressive in cleaning up the story and focusing the company on its core infrastructure assets; our thesis was that this would unlock material value in the shares (given the steep discount to peers), while still allowing the company to pay a hefty dividend (currently yielding 7.8 per cent),” said Mr. Cox. “Strategic direction to-date has largely been on-point with this thesis, and we continue to believe the company has appropriately managed expectations for the planned $375–$475-million of targeted asset sales. However, with the limited response in the shares since the new strategy was unveiled at the January Investor Day, we have reassessed the potential upside from a market re-rating; put another way, if the market hasn’t re-rated the story yet, do we see significant enough catalysts on the horizon to change this? – in this case, we struggle to see potential asset sale announcements driving a significant enough change in sentiment toward the name. In this respect, we believe the compression in valuations across the Midstream space has largely had the effect of muting potential upside for the company, and we are adjusting our rating accordingly.”

Mr. Cox lowered Inter Pipeline Ltd. (IPL-T) to “underperform” from “market perform” with a $24 target, down from $26. The average is $28.80.

He also dropped AltaGas Ltd. (ALA-T) to “underperform” from “market perform” with a target of $25 (unchanged). The average is $28.45.

“Our downgrades to both Inter Pipeline and AltaGas are predominantly a function of our tempered outlook on valuations across the Midstream space, with both company’s elevated leverage levels resulting in a disproportionate impact to equity values,” he said. “Furthermore, we have consistently recommended a cautious approach to both names for some time now, and remain convicted in these views looking ahead over the balance of 2018. In the case of AltaGas, the near-term focus of the market remains on the potential closing of the WGL acquisition. However, we have reservations regarding the pro-forma funding outlook and leverage profile of the company. We suspect efforts to improve the company’s balance sheet will likely prove dilutive in aggregate, while still leaving the company with an above-average leverage profile. Equally as important, we struggle to see a competitive funding profile to the story and believe there is merit in the consideration of a dividend reduction, albeit the likelihood of this appears fairly small at this juncture. As for Inter Pipeline, we continue to take a cautious outlook as it pertains to the contracting outlook for the company’s $3.5-billion Heartland Petrochemical Complex. Furthermore, with the company remaining heavily reliant on the DRIP until completion of that project in late 2021, and with little growth opportunities visible in the interim, we see falling per share metrics likely weighing on the shares”

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Among producers, Mr. Cox raised his rating for Cenovus Energy Inc. (CVE-T, CV E-N) to “market perform” from “underperform” with a target of $14, rising from $10. The average is $13.99.

“Following the company’s acquisition of assets from Conoco last year, our thesis on the story largely centered on the confluence of two key concerns: 1) an upstream asset base that had above-average leverage to wider WCS and AECO differentials; and, 2) a leverage profile that we viewed as incongruent with the company’s above-average operating leverage, necessitating more aggressive action to reduce absolute debt levels,” the analyst said. “While we continue to take a somewhat cautious outlook on shares of Cenovus, the reality of a more constructive oil price environment leads us to temper our concern with respect to the balance sheet, as we believe investor focus on the company’s balance sheet will likely dissipate against this macro backdrop. At this juncture, we believe the shares have already fully priced in a US$60–US$65/bbl WTI pricing environment, suggesting upside potential is also limited, especially in the context of the elevated risk profile of the story vis-à-vis peers.”

Mr. Cox upgraded MEG Energy Corp. (MEG-T) to “outperform” from “market perform” with a $9 target, up from $6.50 and exceeding the consensus of $6.89..

“We see a very attractive set-up for MEG, owing to the combination of a more constructive oil price backdrop, coupled with a much more palatable leverage profile, following the company’s sale of the Access Pipeline,” he said. “Specifically, we see a combination of visible production growth, an improving margin profile and falling leverage metrics driving divergent share price performance going forward. While we remain cautious on the outlook for heavy oil differentials, MEG’s 50 Mbbl/d of firm capacity on the Flanagan South pipeline provides material insulation for a significant portion of the company’s production. Ultimately, with visibility to reasonable leverage metrics following the completion of the Phase 2B Brownfield expansion, we believe this has become a much more simple (and profitable) investment thesis – as long as the company can maintain strong operational performance, we struggle to see how the shares don’t materially outperform if oil prices remain strong over the balance of 2018.”

Meanwhile, Imperial Oil Ltd. (IMO-T, IMO-N) was dropped to “underperform” from “market perform” with a $38 target, down from $40. The average is $39.14.

“While our upgrades on Cenovus & MEG reflect the upside to a more constructive oil price outlook, Imperial exhibits below-average leverage to rising oil prices, while the upstream asset base continues to be weighed down by lingering operational challenges,” said Mr. Cox. “While plans are in place to rectify this underperformance, we nevertheless see a weak margin profile for its Upstream business, even in the context of our heightened oil price outlook. The good news is that even with the outlook for continued underperformance in the Upstream, the overall business still looks poised to deliver noticeable free cash flow, with our revised estimates pointing to $1.9-billion of excess free cash flow in 2018 after the current dividend. However, we no longer believe Imperial’s free cash flow profile is sufficient to differentiate the story, with the company’s closest Canadian peers exhibiting more robust free cash flow profiles under our revised commodity assumptions, and with the broader North American E&P space also looking poised to deliver more modest free cash flow in the current macro environment as well. Finally, we see valuation as a meaningful headwind to the story, with the stock trading at 8.6 times our 2019 DACF [debt-adjusted cash flow] estimate vs. the company’s peer group at 5.8 times on average – we struggle to see the company’s multiple remaining at such a large premium, especially if operational challenges and a weak margin profile in the Upstream business persist.”

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Raymond James analyst Tara Hassan resumed coverage of five mining companies focused on the “highly prospective and underexplored” region of West Africa, which she believes has evolved “significantly” over the last decade in terms of “attractiveness” as a mining region.

“Analysis of a broader group of West African-focused producers relative to a Global Intermediate Index shows that this group has underperformed over the last five years,” she said. “ While there have been political and company-specific events that have contributed to this, during this same period the region drove some of the lowest capital-intensity projects, hosted some of the highest-grade open pits globally, and contributed to the continent ranking second globally on the value of new discoveries. While it can’t be ignored that perceived increased risks drive the valuation discount, we believe these risks can be managed through investing in management and asset quality, understanding how risks vary across the region, being aware of key political events which tend to drive higher risk, and lower valuation periods, and evaluating risks in a more holistic approach against global jurisdictions.”

Ms. Hassan gave a “outperform” rating to the following companies:

B2Gold Corp. (BTO-T) with a $5 target. The average is $5.33.

“With large, long life core mines, a pipeline of high potential development projects, and a welloiled management group that has a proven track record globally, we believe B2Good should attract a premium multiple relative to its peers,” she said.

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Endeavour Mining Corp. (EDV-T) with a $31 target. The average is $32.83.

“We believe Endeavour Mining is well positioned amongst global intermediate gold producers given its production profile enhancements, track record of execution, discounted valuation, and deep portfolio of development and exploration properties,” said Ms. Hassan.

Orezone Gold Corp. (ORE-X) with a target of $1.25. The average is $1.16.

“We believe Orezone is well positioned to become one of West Africa’s next gold producers and expect that a market re-rating may accompany this given the potential for Bombore to be a low-cost mine with potential for growth through addition of oxide resources and high-grade, near-surface sulphide,” said Ms. Hassan.

Roxgold Inc. (ROXG-T) with a $2.15 target. The average is $1.98.

“We believe Roxgold’s current valuation does not accurately reflect its superior free cash flow profile relative to its junior producing peers,” the analyst said. “While we appreciate that single-asset producers can trade at a discount, we believe Roxgold’s development and operational execution coupled with the project’s demonstrated prospectivity should warrant higher multiples.”

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She gave SEMAFO Inc. (SMF-T) a “market perform” rating with a target of $4.50, which is below the consensus of $5.54.

“While we view the Boungou asset to be a high-quality addition to SEMAFO’s production base, the Company’s valuation relative to both West African and Global peers already reflects the benefit of this step change in cash flow, limiting the potential return,” said Ms. Hassan.


Hydro One Ltd. (H-T) is likely to remain range bound until the completion of its acquisition of Avista Corp. and the demonstration of benefits from it, said CIBC World Markets analyst Robert Catellier.

Accordingly, Mr. Catellier lowered his rating for its stock to “neutral” from “outperformer.”

“The company is making solid progress with its regulatory strategy, having filed settlement agreements in Washington, Idaho, and Alaska, and we continue to view the targeted H2/18 close as credible,” said Mr. Catellier in a research note previewing first-quarter earnings season in the energy infrastructure sector.

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“However, concessions made in settlements and the impact of U.S. Tax Reform have eroded much of the forecast earnings accretion; we now estimate a negligible $0.01/share in 2019, entirely attributable to the increased leverage. We continue to view a U.S. presence as strategically valuable and appreciate a modest entry into gas distribution and contracted generation; however, increasing questions regarding capital deployment are likely to overhang sentiment towards the shares.”

His target for the stock fell to $26 from $27.50, which exceeds the average of $24.17.


Desjardins Securities analyst Benoit Poirier said he’s encouraged by Canadian National Railway Co.’s (CNR-T, CNI-N) recent improvements in both volume and operating performance.

However, he lowered his target price for CN shares after it reduced 2018 guidance with the release of in-line first-quarter financial results after market close on Monday.

CN reported revenue for the quarter of $3.194-billion, meeting Mr. Poirier’s projection ($3.162-billion) and the expectation of the Street ($3.154-billion). Earnings per share of $1 also met forecasts, while an operating ratio of 67.8 per cent missed the estimates of both the analyst (66.6 per cent) and the Street (64.8 per cent).

The company lowered its full-year EPS projection to a range of $5.10 and $5.25, down from $5.25 to $5.40, which it attributed to a lower revenue ton mile (RTM) expectation. The mid-point of the guidance sits in-line with the current consensus and Mr. Poirier’s expectation of $5.15, which rose by a penny.

Though he increased his revenue expectation for both 2018 and 2019, Mr. Poirier lowered his target for CN shares to $112 from $113, which continues to exceed the consensus of $102.80. He kept a “buy” rating.

“We are pleased with management’s initiatives to address capacity issues and believe this remains the best avenue of capital deployment for CN,” said Mr. Poirier. “In addition, while 1Q18 remains challenging, we expect the company’s operational performance to improve gradually through the year, which should help support its growth opportunities. Bottom line, we recommend investors buy the shares.”

Elsewhere, RBC Dominion Securities analyst Walter Spracklin increased his target to $107 from $105 with an “outperform” rating.

Mr. Spracklin said: “We have a positive long-term view on CN, driven by the company’s strong track network and attractive competitive environment. We had been cautious on the recent service/capacity disruptions, but the Q1 call allayed some of our concerns. While we remain mindful of the near-term risks, we advise that investors remain opportunistic.”


Though he sees Vale S.A. (VALE-N) in a “robust and improving” position structurally, RBC Dominion Securities analyst Tyler Broda downgraded the Brazilian mining giant with the expectation that iron ore markets will continue to face pressure in the coming months.

“The recent pick up in Chinese steel margins is a positive sign although we think this may be fleeting,” said Mr. Broda. “We expect slower growth in Chinese steel demand as the year progresses, as slower property demand and lower state driven infrastructure see a softening vs. 2017. Steel production in March was near record levels and a high steel utilization rate is expected in April with margins having recovered. We see the potential for margins to fall from RMB 1,000 per ton, and this could bring lower grade production back into the mix … We see the main impact on Vale’s received prices through the middle of the year as premiums contract.

“With the shares trading up 40 per cent since late 2017 and implied upside on a 12 month view now sub 20 per cent in our view, we would look for improved entry points. Over the medium-term, the rising cash flow from S11-D, deleveraging, and a resilience in high grade iron ore premiums, maintains a positive outlook once we pass through what we think could be a challenging few months.”

Mr. Broda lowered his first-quarter earnings per share projection by 2 U.S. cents to 32 U.S. cents, which is 5 U.S. cents below the consensus on the Street, citing provisional iron pricing as the main reason for the decline.

Moving the stock to “sector perform” from “outperform,” he maintained a target price of US$16, which exceeds the consensus of US$14.21.

“We continue to see a positive long-term story for Vale and remain well ahead of consensus in 2019/20 on higher structural iron ore prices and quality premiums; however, with consensus EV/EBITDA at 5.5 times 2018 estimates, which is inline with sector averages, transitory weakness in iron ore (which accounts for 76 per cent of our NAV) leave the shares exposed in the near-term in our view,” he said.


Credit Suisse analyst Anita Soni said her first-quarter financial projections for Canadian metals and mining companies largely sit below the Street’s expectations due largely to her view on “seasonality.”

“Typically there are winter seasonal effects in Q1 with lower production (this was a particularly cold winter in Canada), and generally lower capex and exploration spend, though not the case for some this quarter (AEM, NGD); thus, there may be a wide dispersion in AISC [all-in sustaining costs],” said Ms. Soni.

“Q1 also saw a 4-per-cent rise in gold prices over Q4/17, while copper rose 2.3 per cent and zinc was up 6 per cent. Silver was the net loser with a 3-per-cent slide. From a concentrate pricing perspective, both copper and zinc ended Q1 lower than at the end of Q4. From a guidance perspective, Q1 tends to the least risky quarter for full year revisions.”

In a research note previewing earnings season, Ms. Soni made several target price changes to stocks in her coverage universe after slight alterations to her earnings expectations.

Her changes were:

Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$59 from US$60.50. The average target is US$51.12.

“Top picks for the quarter are AEM, GG [Goldcorp] and NEXA [Nexa Resources S.A.,” said Ms. Soni. “We like Agnico-Eagle (due to strong production growth profile and ramp-up of Nunavut projects), Goldcorp (on reestablished track record, production growth profile and attractive FCF year) and NEXA (on valuation and continued zinc performance).”

HudBay Minerals Inc. (HBM-T/HBM-N, “neutral”) to $14 from $11.50. The average is $13.24.

IAMGold Inc. (IAG-N/IMG-T, “neutral”) to US$7 from US$6.75. The average is US$7.32.

“We are neutral on IAG due to execution risk on delivering its projects. Delivery on the Westwood ramp-up and Sadiola sulphides project, both of which we view as higher execution risk, could make us more constructive.”

Lundin Mining Corp. (LUN-T, “neutral”) to $10 from $8.75. The average is $9.92.

Yamana Gold (AUY-N/YRI-T, “outperform”) to US$4 from US$4.25. The average is US$3.52.


In other analyst actions:

National Bank Financial analyst Adam Shine upgraded Thomson Reuters Corp. (TRI-T, TRI-N) to “outperform” from “sector perform” with a $60 target, which is higher than the $56.47 average.

TD Securities analyst Aaron Bilkoski downgraded PrairieSky Royalty Ltd. (PSK-T) to “hold” from “buy” with a target of $32 (unchanged), which falls below the average on the Street of $33.13.

National Bank Financial analyst Matt Kornack downgraded Canadian Apartment Properties REIT (CAR.UN-T) to “sector perform” from “outperform.” Mr. Kornack raised his target to $38 from $36.75. The average is now $38.52.

Scotia Capital analyst Vladislav Vlad downgraded ShawCor Ltd. (SCL-T) to “sector underperform” from “sector perform” with a target of $32 (unchanged), which is $1 below the consensus.

Mr. Vlad downgraded PHX Energy Services Corp. (PHX-T) to “sector perform” from “sector outperform” and lowered his target to $3.25 from $4. The average is $2.95.

Citi downgraded Alcoa Corp. (AA-N) to “neutral” from “buy” with a target of US$57, which is below the average of US$63.85.

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