Inside the Market’s roundup of some of today’s key analyst actions
BMO analysts downgraded several Canadian energy stocks it covers. In some cases, the actions reflected expectations that natural gas prices will be weaker than anticipated. In others, more company-specific reasons were given.
But overall, BMO is pretty cautious on the oil and gas sector in general heading into second quarter results.
“We expect to see generally weaker quarter-over-quarter results for the Canadian oil and gas group due to challenges presented by wildfires, heavy oil sands turnaround activity and weaker natural gas prices,” BMO analysts said in a note to clients. “On the crude oil side, ongoing fears of a recession and the potential impact on demand have constrained pricing while milder-than-expected weather continued to undermine North American natural gas prices. However, despite these issues, we anticipate our coverage group will generate $5.0 billion of free cash flow (6.3% annualized yield) in the second-quarter, returning roughly $5.5 billion of that to shareholders (about a 7% annualized yield).”
BMO lowered its natural gas forecast for the benchmark AECO hub in Alberta to C$2.54/mcf in 2023 (from C$3.00/mcf) and it lowered its 2024 assumption to C$2.50/mcf (from ~C$3.60/ mcf). The bank primarily cited expectations that there will be excess supply in the Western Canadian Sedimentary Basin.
Advantage Energy Ltd (AAV-T) was downgraded to “market perform” from “outperform” but with an unchanged price target of C$10.
“Although we recognize the depth and quality of the company’s Montney inventory, we view Advantage as being among the most impacted within its peer group by our weakening outlook for natural gas pricing through 2024,” said BMO analyst Mike Murphy in a note. “Until the gas macro environment improves, we prefer Montney names with production exposure weighted more to oil and condensate.”
The average analyst price target is C$11.82, according to Refinitiv Eikon data.
ARC Resources Ltd (ARX-T): BMO downgraded its rating to “market perform” from “outperform” but raised its target price to C$20 from C$19
“ARX shares have outperformed following the sanctioning of its Attachie project, and the shares have achieved our target price. We expect natural gas prices to remain relatively weak over the next 18 months, especially in Western Canada. Against this backdrop, we see limited share price upside over the next 12 months. That said, we believe ARX shares remain attractively valued for those investors prepared to look beyond the near-term weakness,” said BMO analyst Randy Ollenberger.
The average analyst price target is C$22.78.
Birchcliff Energy Ltd (BIR-T): BMO downgraded its rating to “market perform” from “outperform” but raised its target price to C$9 from C$8.75.
“Birchcliff shares have performed in-line with peers and Henry Hub natural gas prices year-to-date. ... Against a weaker gas price backdrop, we see limited share price upside over the next 12-months. That said, BIR shares offer an attractive dividend yield, essentially paying investors to wait for stronger gas prices in 2025,” said BMO’s Mr. Ollenberger.
The average analyst price target is C$10.14.
Suncor Energy Inc (SU-T): BMO cut its target price to C$44 from C$52 and downgraded its rating to “market perform” from “outperform.”
“Despite the company possessing peer-leading downstream operations, we believe it still has a lot of work to do to get back into investors’ good graces. Poor performance at Fort Hills, coupled with the looming Base Mine depletion date, has created an overhang on the share price. We believe Suncor’s shares will continue to underperform its large cap Canadian peers until these issues are resolved,” Mr. Ollenberger said.
The average analyst price target is C$50.61.
Spartan Delta Corp (SDE-T): BMO cut its target price to C$5.50 from C$6.25 and downgraded its rating to to “market perform” from “outperform.”
BMO’s Mr. Murphy said, “We view the company’s recent asset sale and exploration spinout as maximizing value for pre-distribution shareholders. However, we view the cash flow outlook of the new Spartan Delta as significantly impacted by our revised outlook for natural gas prices through 2024. While we consider its asset base to be well positioned for free cash flow generation, pricing should limit this potential in the near/medium-term.”
The average analyst price target is C$9.37.
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Laurentian Bank of Canada’s plans to conduct a strategic review that could include selling itself has several implications for Canadian Western Bank (CWB-T), said Raymond James analyst Stephen Boland.
First, given their similarity in size and business lines, Laurentian’s plans will spark speculation that CWB itself could become a potential takeover target. That indeed appeared to be happening on Wednesday, when CWB shares rose nearly 4% following the Laurentian news.
“Like LB, CWB is trading well below book value and even a transaction close to or slightly above book value could be materially accretive for one of the larger Canadian banks. The bigger banks could also unlock significant capital by moving CWB’s loan book onto the AIRB model (instead of the standard approach currently used by the bank). In addition, there are obvious funding synergies for any larger buyer as CWB’s higher cost funding sources (e.g. broker deposits) could be replaced with lower-cost retail deposits. Conversely, while many of the big banks are underweight Quebec (NA excepted), making an acquisition of LB more compelling, many of these same banks already have significant exposure to the Alberta and BC provinces (CWB’s focus areas). This could make a transaction involving CWB less appealing from a strategic perspective,” Mr. Boland said
Secondly, speculation may arise whether CWB could be a potential buyer of Laurentian Bank. “Ultimately, we believe this is unlikely for several reasons,” said Mr. Boland. “From a financial perspective, CWB’s current valuation would make it difficult to deliver an accretive transaction from both a book value and EPS perspective. Having run some quick back-of-the-envelope math, we believe there are extremely limited scenarios in which CWB could deliver a transaction that avoids dilution to current 2023 and 2024 EPS. In addition, the additional synergies available to a larger peer (e.g. AIRB capital unlock, funding enhancements) would likely make it challenging for CWB to match a competing bid.”
Thirdly, the analyst pointed out there are competitive concerns. “Both Laurentian and CWB are top 10 banks in Canada. A loss of more competition in the bank system is not a positive in our opinion and regulators could be reluctant to approve further consolidation in the sector,” he said.
For now, Mr. Boland is keeping to his C$30 price target and “outperform” rating on Canadian Western Bank.
The average analyst price target on Canadian Western Bank is C$29.29, unchanged from prior to the Laurentian bank announcement.
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Meanwhile, there has been more analyst reaction to Laurentian Bank of Canada’s (LB-T) plans for a strategic review that may include selling itself, which was confirmed late Tuesday after first being reported by The Globe and Mail.
Credit Suisse raised its target price to C$44 from C$33 and upgraded rating to “neutral” from “underperform.”
“We make no changes to our core EPS estimates for F2023E and F2024E, but do switch our valuation methodology given the potential outcome of the review,” said Credit Suisse analyst Joo Ho Kim. “We now utilize LB’s current book value per share and our target P/B multiple of 0.75x (which implies ~30% premium to [Tuesday’s] close and is ~10% higher than the 5-year average) to derive our new target price of C$44 (from C$33). We believe our target multiple is justifiable in the context of the bank’s capital position and ROE. Given our view of the return to target, we now rate the shares Neutral. Key risks: 1) changes to the outcome of strategic review; 2) unexpected changes in economic conditions in Canada, particularly Quebec; 3) better-than-expected progression on the ongoing transformation.”
Elsewhere, Raymond James initiated coverage with a “market perform” rating and C$36 price target. “A sale is not a sure thing and our target is based on fundamentals and does not include speculation the bank will be sold at this time,” noted Raymond James analyst Stephen Boland.
The average price target on Laurentian Bank is now C$43.54.
See more analyst reaction to the Laurentian news here in Wednesday’s analyst upgrades and downgrades.
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Atb Capital Markets analyst Nate Heywood upgraded Gibson Energy Inc (GEI-T) to “outperform” from “sector perform” after coming off restriction from covering the stock because of Atb’s involvement in the previously announced South Texas Gateway Terminal acquisition. He also raised his target price to C$27 from C$25.
The acquisition bolsters Gibson’s storage position by more than 8 million barrels and offers global export capabilities in Ingleside, Texas, outside of the congested Corpus Christi main harbor, Mr. Heywood noted.
Consideration for the acquisition is an aggregate $1.45 billion, which GEI is funded through a $403 million equity offering, $900 million in median term notes, and $200 million in hybrid securities.
“The transaction carries an investment multiple of 10.4x TTM EBITDA, which we expect to compress to <9x in 2025e based on our outlook and management’s guidance,” the analyst said. “Despite the dilutive equity funding, we have modelled the acquisition to be immediately accretive to AFFO on a per share basis, with our modelled 11% increase to AFFO per share in 2024e. We have also modeled EBITDA to increase by ~30% in 2024e and see room for further growth in 2025e. The acquisition should also strengthen GEI’s contracted cash flow profile, with 80% of infrastructure revenues expected to be take-or-pay and >95% of revenues to be take-or-pay and fee-based.”
The average analyst price target on Gibson is C$25.68.
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Analysts are adjusting price targets on Canadian National Railway Co. (CNR-T) ahead of the company’s quarterly earnings release on July 25.
Atb Capital Markets analyst Chris Murray cut his target to $175 from C$180. Separately, CIBC cut its target price to C$177 from C$183.
“Volume trends weakened in Q2/23 (-7% y/y) and remained soft in early Q3,” Mr. Murray said in a note previewing the results. “Weakness in volumes was driven by intermodal and petroleum and chemical volumes, reflecting the ongoing inventory correction and lower demand from industrial end-markets. Despite macro pressures, CN’s operational turnaround appears intact, with key performance metrics demonstrating y/y improvement in Q2/23. Given current macro conditions, we will be looking for commentary from management around volume/yield expectations for H2/23, with the strike at the Port of Vancouver putting additional pressure on intermodal volumes in early Q3. We maintain our sector perform rating.”
The average price target on CN shares now stands at C$165.71.
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RBC analyst Irene Nattel cut her price target on Neighbourly Pharmacy Inc (NBLY-T) to C$28 from C$34 but reiterated an “outperform” rating after adjusting her assumptions on how quickly the company can grow in the higher interest rate environment.
“With NBLY credit facilities fully exposed to variable rates, we are moderating our network growth outlook to sustain leverage close to current levels. Nonetheless, revised forecast +33 stores each year could prove conservative relative to stated range 35-40 if the backdrop improves. Combination of lower financial forecasts (F24/F25 EBITDA down -6% and -10% from prior) and target multiple 14x (-1x) to reflect higher interest rates and slower pace of M&A” results in the lower price target,” she said.
Neighbourly Pharmacy operates a network of community pharmacies and the company’s growth comes mostly from making additional acquisitions.
The average analyst target is C$26.78.
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CIBC cut its price target on Cargojet Inc (CJT-T) to C$164 from C$180 but maintained an “outperformer” rating.
CIBC analysts cited challenging air freight trends, but also pointed out some positives.
“CJT’s flight activity trends have softened to up ~5%-6% Y/Y in May/June after trending up 12%-16% from February to April. CJT continues to post flight activity growth on a Y/Y basis, which makes it a relative positive outlier when looking at the broader macro air freight trends. In addition, CJT’s flight activity has stabilized (based on raw flight activity) at just over 70 flights on a rolling seven-day basis. Flights in May were hovering in the mid-60 range, highlighting a sequential improvement,” CIBC analysts led by Kevin Chiang said.
The average analyst target is C$149.42.
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In other analyst actions:
* TFI International Inc (TFII-T): Scotiabank downgrades rating to “sector perform” with a price target of C$165.
* Russel Metals Inc (RUS-T): RBC raises target price to C$40 from C$37
* Theratechnologies Inc (TH-T).National Bank of Canada cuts target to C$1.75 from C$2.25
* Atex Resources Inc (ATX-X): Haywood Securities starts with buy rating; target price C$3
* Bear Creek Mining Corp (BCM-X): Stifel Canada cuts target price to C$2.1 from C$2.7
* Alphabet Inc (GOOG-Q): TD Cowen raises target price to US$140 from US$130
* American Express Co (AXP-N): RBC raises target price to US$197 from US$181
* Domino’s Pizza Inc (DPZ-N): CFRA raises target price to US$450 from US$365; Citigroup raises price target to $405 from $349; Evercore ISI raises target price to $420 from $360
* Meta Platforms Inc (META-Q): TD Cowen raises target price to US$345 from US$220 and upgrades rating to outperform from market perform
* Netflix Inc (NFLX-Q): JP Morgan raises target price to US$495 from US$470; Macquarie raises target price to $410 from $350
* Airbnb Inc (ABNB-Q): Barclays raises target price to $136 from $112
* Expedia Inc (EXPE-Q): Barclays raises target price to $137 from $113
* GE (GE-N): RBC raises target price to $120 from $113
* Microsoft (MSFT-Q): Oppenheimer raises target price to $410 from $330