Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
ATB Capital Markets analysts Patrick O’Rourke and Amir Arif look ahead to energy markets in 2025 and provide top picks,
“We believe that navigating near-term policy related risks (and the potential range of outcomes for commodity pricing and volatility, and associated impact on equity returns) will be one of the most material challenges/uncertainties energy equity investors will have to navigate entering H1/25 at this time with investors grappling with the potential impacts of tariffs (both directly on commodity price and netback impacts but also global economic demand), a Canadian Federal government increasingly hawkish on industry emissions (but facing significant internal and external political challenges), and potential strengthening sanctions of Russian and Iranian crude exports ... These near-term challenges generally see our 2025 forecasts for industry FCF yields well above long-term averages but modestly lower than 2024 … and 2023 levels. Over the past year, the market has continued to clearly differentiate between higher and lower quality business models, driven by an M&A cycle that has instructively placed a premium on inventory in transaction multiples. We favour higher quality business models/strong operational executors, at opportunistic valuations and favour AAV, ARX, CNQ and TVE, inflation insulated equities (PSK, TPZ), as well as high quality outsized resource bases (KEC, KEL) at this time”
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Morgan Stanley energy analyst Devin McDermott also provided top picks, one of them Canadian, while professing his bias for natural gas over oil producers. MS’s morning research report summarized his analysis,
“Commodities Strategist Devin McDermott highlights that oil E&Ps are still down 5% YTD on roughly flat crude prices. Consistent with his view, gas producers have fared better, up 16% on average, as have more defensive Energy plays like the Majors (+7%). Looking ahead to 2025, Devin expects many in the industry to realize further efficiency gains but, despite improved valuations post recent weakness, for oil E&Ps this may continue to be outweighed by a soft macro setup for now. As a result, Devin retains his preference for US gas over oil exposure and an overall defensive positioning bias. Within oil, he is focused on selective opportunities that offer positive rate of change on FCF growth and efficiencies – XOM ($140 PT), COP ($128 PT), and FANG ($217 PT). The following valuation, FCF, and macro themes support his industry view: 1) the sector still trades at a wide discount vs. the market; 2) efficiency gains and M&A synergies to support steady FCF, even at lower oil prices; and 3) macro uncertainty likely persists, with US gas offering a better risk-reward than oil. Devin retains his defensive bias and prefer gas over oil within E&P, including OW-rated EQT ($57 PT) and AR ($42 PT). Within oil, he prefers stocks with: (1) positive rate of change on capital efficiency, (2) strong and/or improving FCF and balance sheets, and (3) scale. This includes OW-rated XOM, COP, and FANG in the US and CVE (CVE CT, C$30 PT) in Canada”
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Citi strategist Drew Pettit outlined the most promising investment themes for 2025,
“On the heels of our US Equity outlook, Expect a Volatile Bull, we call out our ten favorite themes heading into 2025 predicated on five pillars: valuation, growth, quality, revisions, and macro connections. Generally, we barbell between growth themes (Artificial Intelligence, Digital Leisure, FinTech, Video Gaming, and Wearable Technology) to manage lingering economic softness, and cyclical themes (Agricultural Demand, Fossil Fuels, Global Tourism, and Pollution Solutions) to mitigate valuation risk and inflation concerns. The lone traditional defensive theme we highlight is Value Healthcare Spend for its below market multiple, high quality, and relatively low rate connectivity. Lastly, we make changes to Citi’s Thematic 30 recommended list to reflect updated theme preferences. Darling Ingredients (DAR), Quest Diagnostics (DGX), First Solar (FSLR), Gilead Sciences (GILD), and Hormel Foods (HRL) are added to the portfolio, which post rebalance, is heavily Mid Cap tilted with a slight Value style bias”
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Diversion: “‘Unprecedented’ decline in teen drug use continues, surprising experts” – Ars Technica