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

Desjardins Securities trimmed its oil and natural gas price decks on Wednesday ahead of the start of third-quarter earnings season in Canada’s energy sector, although the impact of the changes was partially offset by both narrower differentials and the “softer” loonie.

“Investor apathy will continue to be the key challenge for most stocks this quarter as Canadian oil & gas equitIes stare down the barrel of a fifth year of significant losses in the past six!,” said analysts Justin Bouchard and Chris MacCulloch in a research note.

“The damage to investor confidence has been severe and there is minimal relief in sight, with all signs pointing to a slowdown in global economic growth. This would result in a headwind for oil prices, which in turn could drive further rotation of equity capital from cyclical sectors, including energy, into defensives. Monday’s indecisive federal election results have added a fresh batch of uncertainties from Ottawa with the governing Liberal party now scrambling to find a dance partner for confidence and supply votes in the House of Commons, a high-stakes exercise that could involve some degree of trade-off on major energy policy files, including the Trans Mountain pipeline expansion project. That said, there are limits to further downside, with valuations already scraping near the bottom of decade lows, while most Canadian producers have already fortified their balance sheets in recent years ahead of any potential commodity price turbulence, particularly among the oil-weighted names.”

The firm reduced its WTI price forecast for both the fourth-quarter of 2019 and 2020 to US$55.00 per barrel from US$57.50 and US$60.00l, respectively). For heavy crude, it “tightened” its 2020 WCS differential assumption by US$5 per barrel in order to reflect the impact of the Alberta curtailment program.

For natural gas, its 4Q19 and 2020 NYMEX price deck fell to US$2.25 per thousand cubic feet from US$2.60 and US$2.50, respectively, in order to “better reflect the oversupplied U.S. market.” It maintained its AECO price forecast.

With those changes, the analyst reduced their target prices for several stocks.

Mr. Bouchard lowered his target for Husky Energy Inc. (HSE-T, “hold”) to $12 from $15. The average on the Street is currently $12.25.

Mr. MacCulloch made the following changes:

Advantage Oil & Gas Ltd. (AAV-T, “buy”) to $3.50 from $3.75. Average: $3.51.

Leucrotta Exploration Inc. (LXE-X, “buy”) to $1.50 from $1.75. Average: $1.23.

Nuvista Energy Ltd. (NVA-T, “buy”) to $5 from $5.50. Average: $4.89.

Pine Cliff Energy Ltd. (PNE-T, “hold”) to 15 cents from 20 cents. Average: 19 cents.

Painted Pony Energy Ltd. (PONY-T, “hold”) to $1 from $1.25. Average: $1.23.

Tamarack Valley Energy Ltd. (TVE-T, “buy”) to $4 from $4.25. Average: $3.60.

The firm’s “best ideas” remained untouched.

For large caps, Mr. Bouchard remains partially to Canadian Natural Resources Ltd. (CNQ-T, “buy” and $44 target) and Suncor Energy Inc. (SU-T, “buy” and $54 target), noting: “The production mix of both companies is weighted toward high-netback, upgraded synthetic crude, which we believe will provide a cash flow lift on the heels of the global adoption of the IMO 2020 regulations. From an integration perspective, SU has significant insulation from commodity price volatility while CNQ has unmatched capital allocation optionality given its diverse production portfolio. Most importantly, both companies have implemented healthy stock buyback plans. When considering FCF yield across the entire coverage universe, both CNQ and SU remain within the top tier. While many of the small- and midcap producers in our coverage universe may have higher FCF yields, we believe that CNQ and SU are generally better positioned to manage the underlying volatility in oil prices and differentials..”


Though Canadian National Railway Co.'s (CNI-N, CNR-T) third-quarter results exceeded expectations on the Street, Citi analyst Christian Wetherbee called the results “lower quality,” emphasizing both volume and profit headwinds “appear to be intensifying.”

After the bell on Tuesday, CN reported adjusted earnings per share for the quarter of $1.66, up 11 per cent year-over-year and topping the consensus estimate of $1.62.

At the same time, management sliced its fiscal 2019 financial guidance. It now expects “high single-digit” adjusted EPS growth (down from a previous “low double-digit” estimate) as well as “slightly negative” volume growth (from “mid-single-digit” growth).

“CN’s revised 2019 guidance ... implies 4Q19 EPS of C$1.33-C$1.44 (down 3-11 per cent year-over-year), which falls well below our recently lowered and sub-consensus estimate," said Mr. Wetherbee. "The variance in 4Q is partially due to a $40-million tailwind in 3Q from incentive comp reversals which will not repeat, but also due to a relatively quick and meaningful deterioration in the volume outlook. We do believe there is some optionality in 4Q from crude, as the company is targeting a conservative sequential trend in spite of apparent curtailment progress in Alberta, and the outlook for intermodal remains solid. Nevertheless, with estimates falling post results, we’d expect pressure on shares.

Based on that new outlook, Mr. Wetherbee lowered his fourth-quarter EPS estimate to $1.45 from $1.53, pointing to lower volumes and a higher operating ratio (OR). He also reduced his 2020 expectation to $6.60 from $6.70 “with most of the cut taking place in 1H20 and being driven by lower volume.”

Maintaining a “buy” rating for the stock, he cut his target to US$102 from US$103. The average on the Street is US$94.79.

“We rate Canadian National Buy given network upgrades and one of the best ORs [operating ratios] in the industry,” he said. “We believe CN should be able to sustain above-average levels of revenue growth through 2020 driven by multiple opportunities in coal, grain & fertilizers, intermodal and crude-by-rail."

Elsewhere, RBC Dominion Securities analyst Walter Spracklin cut his target to $127 (Canadian) from $137 with a “sector perform” rating.

Mr. Spracklin said: “While core results were in line, we expect a negative reaction today on the back of an unexpected reduction in guidance and the uncertainty that prevails in the overall demand environment.”

Despite reducing his 2019 and 2020 earnings projections on the guidance update, Desjardins Securities analyst Benoit Poirier called CN “a well-run train navigating through uncertain times.”

Maintaining a “hold” rating and $126 target, Mr. Poirier said: “We continue to like CNR for its long-term growth opportunities and the breath of its tri-coastal network. We continue to believe the stock is fairly valued considering current uncertainties in relation to key commodities (eg intermodal and CBR) and the limited potential return (9 per cent) to our target price.”


“Relatively” moderate weather conditions during the third quarter are likely to cause a slowdown in Hydro One Ltd.'s (H-T) growth trajectory, according to Laurentian Bank Securities analyst Nauman Satti.

In a research note ahead of the Nov. 7 release of its financial results for the period, Mr. Satti said he’s projecting electricity demand to dip 7 per cent from the same period a year ago. He also expects expenses to remain “inflated from increased vegetation-related activity,” though offset by lower operating costs.

For the quarter, he is estimating revenue of $1.65-billion, meeting the consensus, with earnings per share of 38 cents, which sits 1 cent above the Street’s view.

“After undergoing a maelstrom of changes, including a new board and management, Hydro One has successfully transitioned into a stable utility with a focus on organic growth and operational efficiencies," said Mr. Satti. “The stabilization and reduced uncertainty were also reflective in the stock performance that has rallied 19 per cent year-to-date, partially helped by the inflows to the defensive sector. While still in the early stages, the new leadership is devising a medium to long term strategy, which is likely to be Ontario focused with a push towards infrastructure improvements. We do not foresee any potential large acquisitions in the near to medium term as new management rebuilds its relationships with stakeholders, including regulators

”In our view, following the cancellation of the Avista deal, expansion into the U.S in the near term is very unlikely. Amidst a lack of M&A appetite, the focus should remain towards organic growth via reinvesting in the current infrastructure and focusing on the Ontario market. The projected 5-per-cent CAGR [compound annual growth rate] for the ‘rate base’ and modernizing of the grid should provide an avenue for organic growth. The recent announcements relating to a new grid control center in Orillia and a $16-million investment in new technologies to improve the reliability in the Muskoka area are some of the initiatives towards generating operational efficiencies."

Mr. Satti maintained a “hold” rating and $24 target, which sits 30 cents lower than the current consensus


Aecon Group Inc.'s (ARE-T) “already compelling growth outlook has improved over the last five months,” according to Canaccord Genuity analyst Yuri Lynk.

In a research note previewing the firm’s third-quarter results, which are scheduled for a Oct. 31 release, Mr. Lynk said he expects Aecon to benefit from SNC-Lavalin Group Inc.'s (SNC-T) decision to pull out of the Canadian infrastructure construction market.

“For example, Aecon has been invited to join/form consortia pursuing the $1.3-billion Pattullo Bridge project in B.C. and the $1.0-billion La Fontaine Tunnel upgrade in QC,” he said. “All told, our work calculates Aecon is shortlisted on over $10.0-billion of infrastructure projects that could add $1.6 billion to backlog on a risk-adjusted basis by the end of next year.”

For the third quarter, Mr. Lynk is projecting adjusted EBITDA of $82-million, which would be flat year-over-year when excluding $7-million from its contracting mining business that has been sold. The consensus estimate is $86-million.

“Q3/2018 represents a tough comparator; even after excluding the contract mining EBITDA, it was a record quarter and the consensus has Aecon exceeding it by 5 per cent,” he said. “Recall, Q3/2018 included $125-million of book-and-burn revenue associated with the Line 3 Replacement Phase 2 project and substantial revenue at OPG’s Darlington Nuclear Generating Station in excess of the $140-million of annual base-load revenue under the RFR contract. Thus, our model has less year-over-year EBITDA growth in Q3/2019 but more in the following quarter, where we are 10 per cent above consensus.”

Mr. Lynk maintained a “buy” rating and $27 target for Aecon shares. The average is currently $25.14.

“Aecon is a company firmly in growth mode with trailing twelve months (TTM) free cash flow (FCF) per share increasing by 29 per cent year-over-year in Q2/2019,” he said. “This reflects Aecon’s strong competitive position in the robust Canadian infrastructure market that has allowed it to build a near-record backlog providing visibility into the mid-2020′s. Other attractive investment traits of Aecon include $188-million of net cash on the balance sheet, ‘hidden value’ potential in its diverse portfolio of concession assets, and a 3.2-per-cent dividend yield.”


RBC Dominion Securities analyst Greg Pardy said Enerplus Corp. (ERF-T) remains his favourite intermediate producer, pointing to “its consistent operating and financial track record, best-in-class balance sheet, and capable management team.”

Ahead of the Nov. 8 release of its quarterly results, Mr. Pardy said: "Inspection of Enerplus’ actual results since 2016 points towards a producer that consistently meets or exceeds street consensus estimates on a quarterly basis.

“Consider the following: By our count, since the beginning of 2016, Enerplus has met or exceeded street consensus FFO in all but one of the thirteen quarters in which it conducted a formal sell-side analyst survey. On the production front, Enerplus has met or exceeded street expectations in twelve of the thirteen quarters — or 92 per cent of the time, missing just once by a margin of less than 2 per cent (1,500 boe/d). Enerplus has a less pristine track record with respect to capital spending, with investment levels exceeding market expectations in six of twelve quarters since 2016. However, the company has hit the bulls-eye on capital during the first-half of 2019 — and when it did miss in the past, capital spending was 8% higher on average vis-à-vis the street.”

Mr. Pardy maintained his “outperform” rating and $13 target. The average on the Street is $14.80.

“At current levels, Enerplus is trading at a debt-adjusted cash flow multiple of 3.3 times in 2019 estimates (vs. our North American peer group average of 3.6 times), and 3.1 times (vs. peers at 3.9 times) in 2020,” he said. “We believe Enerplus should trade at an average/above average multiple given its operating consistency, solid execution, strong management team, and best in class balance sheet.”


In other analyst actions:

Scotiabank analyst Vladislav Vlad cut Ensign Energy Services Inc. (ESI-T) to “sector underperform” from “sector perform” with a target of $2.50, falling from $4.50 and below the $5.06 average.

Mr. Vlad also downgraded Precision Drilling Corp. (PD-T) to “sector underperform” from “sector perform” with a $1.50 target, down from $2.75. The average is $3.10.

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