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

Canaccord Genuity analyst Anthony Petrucci said it’s a “challenging” time for Canadian junior and intermediate energy companies, pointing to range-bound oil prices and a share price drop that has seen stocks in his coverage universe plummet by almost 30 per cent thus far in 2019.

However, in a research report released Wednesday, Mr. Petrucci took a more positive stance.

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Post the bump following the drone bombings in Saudi Arabia, the fall in share prices has been particularly pronounced, as the oil price slipped back below $55/bbl. Why would anyone invest in this market?,” he said.

“Quite simply, to generate potentially significant returns. As stock prices fall, and oil and gas prices remain relatively range-bound, the risk/reward profile is enhanced, in our view. The key to riding out the uncertainty is selecting companies with strong balance sheets, ample financial liquidity, and projects that can generate a return at these levels.”

Mr. Petrucci initiated coverage of a trio of companies that he thinks fit that criteria - Arc Resources Ltd. (ARX-T), Seven Generations Energy Ltd. (VII-T) and Tourmaline Oil Corp. (TOU-T).

“They are not reliant on capital markets in the near term to fund their programs, and can therefore operate largely independent of investor sentiment,” he said. “Considering the extreme pullback in each of these names over the last year, we believe each can provide healthy returns to investors in the context of current commodity prices, with the potential for significant share price appreciation should conditions improve.”

Giving each stock a “buy” rating, Mr. Petrucci said all three have shown “strong” debt-adjusted production per share growth over the last five years, and all three continue to trade near their all-time lows.

“Our bottom-up sustainability analysis suggests all three can generate meaningful free cash flow (post sustaining costs) at current pricing levels, and all three have strong balance sheets with ample available borrowing capacity," he said. "That said, we do believe each offers something different for investors.”

Mr. Petrucci said Arc is his top pick in the group. He set a target price of $10, which matches the current average target on the Street, according to Bloomberg data.

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“With its more measured pace of development in recent years, ARX’s decline rate (25 per cent) is significantly below its peers, and as such it has lower sustaining cost requirements,” he said. “This is reflected in its superior free cash flow yield (12-per-cent pre-dividend) and its ability to fund its robust dividend (11-per-cent yield) within run-rate cash flow. ARX also has the strongest balance sheet of the three (1.1 times 2020 debt-to-cash flow).”

Calling it “the condensate king,” Mr. Petrucci set an $11 target for Seven Generations. The average is currently $12.73.

“As the largest condensate producer in Canada, Seven Generations provides investors with the greatest exposure to liquids pricing of the three (and the least exposure to AECO gas prices),” he said. “With its superior netbacks, VII’s 2020 estimated EV/DACF [enterprise value to debt-adjusted cash flow] of 3.2 times is the most attractive in the group and well below its historical average of 8.0 times."

Emphasizing the strength of its “proven” management team, Mr. Petrucci gave Tourmaline a $17 target, which falls below the average of $21.83.

“If you invest with management, then you invest with Tourmaline,” he said. “CEO Mike Rose has a long history of providing strong investor returns (Duvernay, Berkley), and as a 6-per-cent holder of the stock his interests are very much aligned with investors. In our view, Tourmaline also represents the best way of the three to play natural gas prices (80 per cent natural gas), with the company shrewdly diversified across markets, including PG&E in California where gas is trading at a significant premium to Nymex.”


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Raymond James analyst Farooq Hamed remains optimistic about a positive resolution to OceanGold Corp.'s (OGC-T) dispute with the local government that has forced it to suspend production at its Didipio gold and copper mine in the Philippines.

However, with Tuesday’s announcement of the stoppage and a concurrent cut to its production guidance, Mr. Hamed lowered his financial estimates and target price for shares of the Australian miner.

OceanaGold lowered its full-year output guidance to 460,000-480,000 ounces of gold and 10,000-11,000 tonnes of copper from 500,000-550,000 ounces of gold and 14,000-15,000 tonnes, respectively, for its four mines - Didipio, Haile in South Carolina, and Macraes and Waihi in New Zealand.

It also increased its all-in sustaining cost guidance to US$1,040 to US$1,090 from a range of US$850 to US$900.

“The negative update to operating expectations comes primarily from Didipio where OGC announced a suspension of processing following the depletion of consumables and is now guiding for no further production/sales from Didipio in 2019,” said Mr. Hamed.

“OGC also pre-released its 3Q19 operational results. Overall, the results are weaker than expected with production from Macraes lower and cash costs from Haile higher than expected. Importantly, Haile costs did not demonstrate the sequential reduction we expected to commence in 3Q. The company indicated that some of the cost escalation was due to recovery issues at the end of the quarter which have since been remedied.”

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With the announcement, the analyst lowered his 2019 and 2020 earnings per share projections to 8 cents (Canadian) and 24 cents, respectively, from 15 cents and 20 cents.

He kept a “strong buy” rating for OceanaGold shares with a $5 target, falling from $5.75. The average is $4.90.

“We maintain our Strong Buy rating as we continue to expect a positive resolution at Didipio given the support of the DENR and MGB and stronger operations in 4Q19,” said Mr. Hamed. “We believe both of these events will support a re-rating of OGC back to a premium valuation versus mid-tier peers as opposed to its current position of trading at a discount (on our numbers OGC is currently trading at a 0.8 times P/NAV and 5.2 times P/2020 CFPS, which is a discount to its mid-tier peers trading at an average 0.9 times P/NAV and 5.4 times P/2020 CFPS.”


Ahead of the release of its third-quarter results, AltaCorp Capital analyst Nick Lupick sliced his target price for shares of Husky Energy Inc. (HSE-T), pointing to the impact of near-term cash flow concerns.

“Husky is fighting a tide of sentiment headwinds from investors which has been building in the recent memory of investors due to some operational and strategic missteps (some uncontrollable, others not) – all in front of a backdrop of general apathy from generalist investors in the Energy sector,” said Mr. Lupick in a report after coming off research restriction.

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“While we do not believe that any of the individual missteps in isolation are enough to ‘discount’ an entity for a prolonged period of time, we do believe that the combination of events, sentiment and the current backdrop of generalist investor apathy in the Energy sector, means that operational results from the Company’s growth projects will likely be required before an out performance materializes for investors.”

Mr. Lupick said a “vital” difference between Husky its peers, is the fact that many competitors are generating “substantial” near-term free cash flow through the completion of major projects. At the same time, Husky sits “in the midst of a capital intensive growth phase which will bear fruit in the form of free cash flow once incremental production ramps up."

“Included in this growth investment is, South White Rose (68.875-per-cent WI for 52,500 bbl/d net beginning in 2022), Liuhua 29-1 (75-per-cent WI for 9,300 boe/d net beginning in late 2020), five Lloydminster thermal projects (totaling 50,000 bbl/d net in 2020-2023), and upgrades/enhancements at both the Lloydminster Upgrader and the Superior refinery (outside of insurance rebuild costs),” the analyst said. “As a result, the Company has been pricing in a material discount on a cash flow multiple basis relative to its Large Cap and Integrated peers, at 2.1 times. However, on a Free Cash Flow yield basis the Company is also materially below most of its peers and, given that investor sentiment is greatly focused on FCF generation and returning cash to shareholders via share repurchases, we believe that this lack of FCF will continue to weigh on investor interest in the story over the near term.”

After adjusting his commodity and operational forecasts, Mr. Lupick dropped is target for Husky shares to $15.50 from $20, keeping a “sector perform” rating. The average on the Street is $12.64.

“We do believe that this combination of sentiment and the current backdrop of generalist investor apathy in the Energy sector, means that operational results from the Company’s major growth projects may be required before an out performance materializes for investors,” he said. "As such, based on conversations with investors, we believe that investors looking for oil weighted price improvements are likely to prefer investment in Cenovus or Canadian Natural, while those looking for defensive integration are most likely to choose investment in Suncor.

“With these sentiment headwinds in mind, we acknowledge that the Company’s portfolio of growth investments will generate significant NAV value for shareholders over the longer term; as exhibited by our target price total return of 74.7 per cent. However we believe that it is going to take longer than our 12-month rating horizon for the recognition necessary to achieve an out performance relative to its peers. As such, while we do believe that investment in Husky at today’s share price will generate positive returns for longer term investors in the 2021-2022 timeframe once the strategy bears fruit. We also acknowledge that more nimble investors are likely to wait elsewhere for the next 12-18 months.”

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Both poor weather in its key growing regions and the impact of the global trade war are likely to weigh on the second-half results for Ag Growth International Inc. (AFN-T), according to Desjardins Securities analyst David Newman.

In a research note released Wednesday, he lowered his third-quarter EBITDA projection for the Winnipeg-based company to $35-million from $38-million based on that “tempered” outlook.

“In 2Q19, AGI struck a more cautious tone on 2H19 results and expected adjusted EBITDA in line with 2018, which given the poor weather in 3Q19 (delayed harvest, lower crop quality) could be further challenged,” said Mr. Newman. "AGI also anticipated that 2H19 Commercial sales would approximate 2018 levels, which we believe has been borne out given the erosion in global trade and confidence amid the U.S.–China trade war. While the potential signing of Phase 1 of a trade deal between the U.S. and China, expected in November, could ease tensions, the back end of the year should continue to be marked by reduced confidence and deferred commitments.

“We have further reduced our estimates across the board, but recognize next year’s forecast should remain relatively intact and could even potentially benefit from several key drivers: (1) potential for a strong recovery in planted acreage for corn and other crops in the U.S., coupled with better growing conditions, which should boost demand for portable grain-handling equipment and grain storage systems, supported by a potential recovery in crop prices and farmer optimism as the US–China trade dispute is slowly resolved; (2) improved results from Brazil due to production efficiencies and market share gains; (3) greater conversion and monetization of AGI’s backlogs in the North American and international markets; (4) the rollover of steel prices in 2019; and (5) the contribution from recent acquisitions.”

With a “buy” rating (unchanged), he reduced his target to $57.50 from $60. The average is $61.25.

“AGI offers a potential total return of 51 per cent, with an attractive growth profile (18-per-cent EBITDA CAGR over the last five years) and healthy financial position,” said Mr. Newman.


With market activity “a little softer” than expected, CIBC World Markets analyst Paul Holden lowered his financial forecast for TMX Group Ltd. (X-T) ahead of the release of its third-quarter results.

“It was another soft quarter for equity trading volumes with total industry level volumes down 8 per cent year-over-year,” he said. “TMX trading venues fared somewhat better as estimated market share improved by roughly 50 basis points from a year ago. Trading volumes on the TSX were up 2 per cent year-over-year, but were still lower than our forecast. On the other hand volumes on the Venture were down significantly (down 23 per cent from the previous year) and were worse than expected. Overall, total trading was 2 per cent below our prior forecast and we have revised our Equity and Fixed Income Trading revenue from $47-million to $46-million.”

Mr. Holden also reduced his revenue projections for the company’s Capital Formation segment based on a “modest” decline in activity.

Overall. his revenue estimate for the quarter dipped to $198-million from $201-million with his earnings per share expectation falling to $1.26 from $1.32, which is the current consensus.

“EBITDA (up 1 per cent) and Adjusted EPS (down 1 per cent) growth over the first two quarters of 2019 has hardly been impressive,” he said. “However, that has not stopped the stock from climbing to new highs. TMX is now trading at 14.4 times EV/EBITDA (2020E), a premium to NDAQ at 13.7 times and modestly below an average of 15.0 times for international comps. Further multiple expansion may be harder to justify without supporting fundamentals.”

Maintaining a “neutral” rating, Mr. Holden’s target for TMX shares slid to $115 from $123, which falls short of the $124.14 average.

“While reported market volumes are resulting in downward revisions to Q3/19 estimates, that was also the case with Q1/19 and Q2/19, and yet the stock has climbed 65 per cent year-to-date, all on multiple expansion,” the analyst said. “In our view the multiple re-rate story is largely played out, which means further outperformance will have to come from positive earnings revisions. 2020 consensus looks reasonable to us and we maintain our Neutral rating.”


After reporting better-than-anticipated quarterly results on Tuesday after the bell, Aritzia Inc. (ATZ-T) lost its final hold-equivalent rating as TD Securities analyst Brian Morrison raised its stock to “buy” from “hold.”

Mr. Morrison pointed to its “solid” second quarter and the potential for accelerated earnings growth through fiscal 2021.

He said the company’s strong same-store-sales growth and better-than-expected gross margins “illustrate ongoing affinity with the brand, especially in the U.S. market, that represents a material long-term growth opportunity.”

The analyst increased his target from $19 to $21. The average is $22.71.


In other analyst actions:

Cormark Securities analyst Jesse Pytlak cut Aphria Inc. (APHA-T) to “market perform” from “buy” with an $8 target. The average on the Street is $10.46.

Bank of America Merrill Lynch raised Canadian National Railway Co. (CNI-N, CNR-T) to “buy” from “neutral” with a US$100 target. The average is US$95.31.

The firm cut Canadian Pacific Railway Ltd. (CP-N, CP-T) to “neutral” from “buy” with a US$240 target, which falls short of the average of US$250.90.

National Bank Financial analyst John Sclodnick initiated coverage of Lundin Gold Inc. (LUG-T) with a “sector perform” rating and target price of $9.50. The average is $9.02.

Scotiabank analyst Robert Hope resumed coverage of Algonquin Power & Utilities Corp. (AQN-N, AQN-T) with a “sector outperform” rating and US$14 target. The average is US$14.06.

TD’s Craig Hutchison initiated coverage of Trilogy Metals Inc. (TMQ-T) with a “speculative buy” rating and $3.75 target. The average is $5.08.

Cormark’s Garett Ursu cut Granite Oil Corp. (GXO-T) to “market perform” from “buy” with an 90-cent target, which tops the 83-cent target.

With a file from Bloomberg News

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