Inside the Market’s roundup of some of today’s key analyst actions
While Canadian oilfield services provider reported “solid” second-quarter financial results, Canaccord Genuity analyst John Bereznicki said management commentary was unable to “shake investor fears,” noting equities are fading even with the Street’s increased financial expectations.
“Despite numerous (and some sizeable) ‘beats’ along with bullish management Q2 commentary, domestic oilfield equities have followed oil downward since early June, declining an average of 14 per cent,” he said. “The sector is now trading roughly on par with (or below) levels seen in late 2018, when WTI declined precipitously from US$75 per barrel to US$45/bbl as investors feared central bank tightening. We thus believe OFS equities largely reflect commodity pricing that is well below strip, with investor demand destruction fears weighing on growth expectations for the sector. Against this backdrop, US job market strength has led some pundits to declare ‘no recession’, just as the US aggressively draws down its SPR (to levels not seen since the mid-1980s) and parts of Europe begin to ration energy ahead of the coming winter. While the market remains focused on Chinese lockdowns and the potential lifting of Iranian sanctions, the OPEC Secretary General recently stated that the global physical oil market remains tight, and member countries have been generally challenged to meet their recent production quotas.”
In a research report released Friday, Mr. Bereznicki noted estimate revisions from analysts have generally been positive through the second quarter earnings season,” placing “further downward pressure on FTM sector EV/EBITDA multiples to levels not seen even in the 2014 and 2020 downturns.”
He said the Street now expects EBITDA to grow by an average of 65 per cent in 2022 and 30 per cent in 2023 on a year-over-year basis. However, he thinks equities in the sector “reflect a much lower growth rate next year.”
“Inflationary headwinds likely peaked in Q2, but labour remains a challenge,” he noted. “Based on OFS management commentary, it appears inflationary pressures and supply chain challenges likely peaked in Q2/22 and are moderating somewhat into 2H22. That being said, labour constraints remain a challenge for at least some OFS providers, which we believe could gate the industry’s ability to add capacity to meet operator demand. In our view, this may also favour less labour-intensive OFS companies such as SES and CEU.”
“A dearth of OFS investment since 2014 is becoming increasingly apparent. Contract drillers point to a growing scarcity of highspec triples, with PD and ESI recently suggesting strong momentum in leading-edge pricing. We also believe the market for high-spec doubles is tightening in Canada while TCW continues to expect an undersupplied WCSB pressure pumping market in 2H22. We believe this is likely to become even more pronounced as LNG Canada begins to impact domestic oilfield activity more meaningfully (we also view the BC Oil and Gas Commission’s recent resumption of well license issuance as encouraging). Against this backdrop, we believe improved OFS pricing and fixed-cost absorption (along with moderating cost inflation) should support sector margin expansion through 2H22, barring a meaningful retrenchment of commodity prices.”
After updating his projections in response to the quarterly results, Mr. Bereznicki reduced his target prices for the six stocks in his coverage universe. His changes were:
* CES Energy Solutions Corp. (CEU-T, “buy”) to $3.75 from $4.25. The average on the Street is $4.31.
* Ensign Energy Services Inc. (ESI-T, “hold”) to $3.75 from $5.25. Average: $6.11.
* Precision Drilling Corp. (PD-T, “hold”) to $100 from $115. Average: $132.73.
* Secure Energy Services Inc. (SES-T, “buy”) to $8.50 from $9.75. Average: $8.94.
* Trican Well Service Ltd. (TCW-T, “buy”) to $5.25 from $6. Average: $5.63.
* Total Energy Services Inc. (TOT-T, “buy”) to $11.50 from $13.50. Average: $13.38.
“Given current strip commodity pricing (and a weak C$), we believe it is too early to make material revisions to our 2023 expectations,” he said. “We see value in the sector but are nonetheless cognizant of market sentiment and are lowering our target prices to reflect significant multiple compression. Until early June, one could have held virtually any OFS equity and been rewarded as fundamentals recovered from a severe (pandemic-induced) downturn. At this point, we are biased to OFS providers with strong exposure to natural gas (TCW and TOT) and production (SES, CEU and TOT).”
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EQB Inc.’s (EQB-T) “superior growth trajectory and better historical returns support a rerating of the shares,” according to Keefe, Bruyette & Woods analyst Mike Rizvanovic.
Calling it “materially undervalued relative to its Big Six Canadian bank peers” and seeing “very favorable entry point for investors,” he initiated coverage of the Toronto-based firm with an “outperform” recommendation.
“We expect EQB to achieve group-higher lending growth through 2023, aided by higher spread and rapidly growing niche categories,” said Mr. Rizvanovic. “While the core Alt-A mortgage book will see headwinds from a softer Canadian housing market, rising immigration levels into Canada, strength in the broker channel, and some tightening by the large Canadian banks should help to offset the near-term slowdown.”
The analyst sees EQB’s recent acquisition of Concentra Bank, which operates under the Wyth Financial, providing “meaningful scale” and expects it to be immediately accretive to earnings per share with “upside from both cost and revenue synergies, while providing added scale through a highly complementary business with a similar digital-first strategy and a largely overlapping loan portfolio.”
“Wyth also gives EQB an entry point into the Credit Union space, and increases the capacity of its covered bond program,” he added.
Mr. Rizvanovic is expecting the bank to increase its adjusted earnings per share by a “solid” 9 per cent in 2022 and 13 per cent in 2023 as it “benefits from the added scale gained by the Wyth acquisition, an improving funding mix, and superior growth across its lending portfolio.”
“Aside from strong continued deposit inflows into EQ Bank, notable near-term catalysts supporting management’s funding strategy include: 1) the launch of the EQ Bank platform in Quebec, which provides access to the second-largest deposit market in Canada; and, 2) further issuance under its $2-billion covered bond program. Both will help drive a more diversified and lower-cost funding base,” he said.
He set a target for EQB shares of $88, which he notes implies total potential upside of approximately 56 per cent (including dividends). The average on the Street is $80.06.
“We believe EQB is well-positioned to continue generating group-high shareholder value creation over the longer term, providing a superior risk/return profile than any of its Big Six bank peers,” said Mr. Rizvanovic.
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National Bank Financial analyst Dan Payne called Crew Energy Inc.’s (CR-T) completion of the $130-million sale of 73 non-core assets in the Attachie and Portage in areas of northeast British Columbia as “unsurprisingly surprising.”
Shares of the Calgary-based company jumped 5 per cent on Thursday following the early afternoon announcement. The proceeds of the disposition will be used to fund the early redemption of $128-million of its senior notes and “successfully” completes the monetization of a non-core portion of his asset base with the aim to focus on production growth in the Greater Septimus and Groundbirch area.
“As always, expect the unexpected, and management continues to outperform in its ability to crystalize such transactions, which complements the significance of its recent Q2/22 beat,” said Mr. Payne.
“The company delivers an entirely unexpected noncore asset sale, significantly de-levering the company and compounding the value potential that was reflected through the strength of its second-quarter results.”
Seeing the move “on-brand,” Mr. Payne raised his target for Crew shares to $7.50 from $6.75, reiterating a “sector perform” recommendation. The average target on the Street is $8.48.
Elsewhere, RBC’s Dan Payne removed his “speculative risk” designation for Crew and gave it a “sector perform” rating with a $7.50 target, up from $6.50 “on improving estimates and a strengthening balance sheet, as disciplined execution on the two-year plan aided by noncore dispositions bears fruit.”
“We positively view CR’s announcement of non-core asset disposition which further improves the balance sheet and overall financial flexibility,” said Mr. Payne.
Other analysts making changes include:
* Raymond James’ Jeremy McCrea to $9 from $8 with an “outperform” rating.
“We believe Crew’s pure-play Montney story will pick up steam as speculation continues around the gas supply for LNG Canada,” said Mr. McCrea. T”he Company is one of the last remaining gas-weighted mid-cap names in B.C., and likely one of the few ways an LNG operator could secure gas molecules without contracting a multi-year / global price participation agreement with other majors in the province. We think the asset sale today of $130-million progresses this theme in a few ways (and brings in new shareholders as we highlight below). Overall, with its lean-gas Montney Groundbirch wells that continue to look exceptionally strong, where payout is under 6 months (at $5.00 gas), along with improvements in its liquids-rich Septimus field, there is a considerable amount of potential organic return aside from a takeout narrative. Overall, we are somewhat surprised at the immediate share price reaction, which shows how far Crew remains off of investor radar screens (with the share appreciation in line with most other E&P names). With leverage essentially nil come 1Q23, placing CR in a better position to negotiate with LNG operators and increasing the Company’s flexibility to expand capex further, we believe there is increasingly a lot to like with Crew.”
* Desjardins Securities’ Chris MacCulloch to $8.50 from $8 with a “buy” rating.
“From our perspective, the disposition is another strategic home run for the story as it helps fortify the corporate balance sheet while high-grading the asset portfolio,” he said.
* ATB Capital Markets’ Patrick O’Rourke to $8.75 from $8 with a “speculative buy” rating.
* Stifel’s Robert Fitzmartyn to $10 from $8 with a “buy” rating.
* RBC’s Michael Harvey to $7.50 from $8.50 with an “outperform” rating.
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IA Capital Markets analyst Matthew Weekes expects Shawcor Ltd.’s (SCL-T) new “blockbuster” contract in Mexico to drive its pipe coating division to “new cycle highs.”
After the bell on Thursday, the Toronto-based company announced it has received a contract valued at $500-million from Transportadora de Gas Natural de la Huasteca, S. de R.L. de C.V., the Mexican subsidiary of TC Energy Corp., to supply pipe coating services on the Southeast Gateway Pipeline project, an offshore natural gas pipeline in southeast Mexico.
“We expect a significant positive financial impact,” said Mr. Weekes. “The SGP contract, along with Scarborough contract, are expected to return SCL’s conventional offshore pipe coating activity to levels not seen since the 2015 oil price downturn. SCL is expected to provide further information regarding economic impact in the future. For context, SCL generated $900-million of International PL&PS revenue in 2015, with the next highest year since being2017, with $750-million. In these two years, SCL’s PL&PS division generated $150-million and$125-million of adjusted operating income, while corporate Adj. EBITDA margins were 12.5 per cent and 14.5 per cent, respectively. SCL’s leadership intends to provide further details on the expected economic impact in due course.”
Keeping a “buy” rating for Shawcor shares, Mr. Weekes hiked his target to $13 from $8.50. The current average is
“We are building in the majority of expected project revenues in 2023,” he said. “Following the restructuring of SCL’s pipe coating division, we believe that there will be a strong margin pickup on incremental pipe coating revenues. The result is our revised 2023 Adj. EBITDA of $263-million [from $156-million previously]. In our valuation, we are lowering our multiples and building in a medium-term decline in our DCF to temper the effect of positive pipe coating cyclicality. The result is our revised $13.00 target price.”
Elsewhere, BMO’s John Gibson increased his target to $12 from $8 with an “outperform” rating, saying: “We believe the shares now hold significant upside.”
“SCL’s Automotive/Industrial and Composite divisions have made great strides over the past few quarters, while its Pipecoating division should now see a significant lift in 2023. On its Q2/22 conference call, management noted that pipecoating margins could approach 20 per cent in 2023 (from negative levels over the past several years) if certain projects were to proceed. Note that SCL’s Q2/22 backlog already stood at its highest level since 2014, while bidding activity on offshore projects continues to improve,” he added.
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Canaccord Genuity analyst Matt Bottomley made “meaningful” reductions to his financial forecast for Ayr Wellness Inc. (AYR.A-CN) after the Miami-based multi-state cannabis operator reduced its forecast for the remainder of the year.
“Following a flat Q2 (although largely expected), management lowered its remaining FY2022 growth expectations due to: 1) inflationary pressures on consumer spending: 2) regional supply/demand imbalances weighing wholesale pricing; 3) lower wholesale penetration; and 4) need for stronger execution in some areas of the business,” he said.
Ayr is now expecting revenue, adjusted EBITDA and operating income to grow 10 per cent between the second and third quarters and “an acceleration in the pace of sequential growth in Q4 2022.”
“This compares to its previous guidance of Q4/22 revenue and adj. EBITDA of approximately US$200-million and more than US$60-million (31-per-cent margin), respectively,” said Mr. Bottomley. “Based on the above commentary, we expect the company to achieve Q4/22 revenues of more than US$145-million and adj. EBITDA of US$30-million-US$35-million (more than 22-per-cent margin).
“Although H2/22 growth is anticipated to have a slower ramp vs. previous guidance, we believe the core growth drivers communicated by management nonetheless remain in place, including: 1) the launch of adult-use sales in New Jersey (which contributed to only 16 days in the quarter); 2) the opening of its first two recreational stores in Massachusetts subsequent to period end; 3) sales from its 80,000 sq. ft. Arizona facility expansion; and 4) additional retail openings in Florida and Pennsylvania.”
With lower revenue and earnings expectations for 2022 and 2023, Mr. Bottomley cut his target for Ayr shares to $30 from $40, reiterating a “buy” rating. The current average on the Street is $36.40.
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In other analyst actions:
* Following Wheaton Precious Metals Corp.’s (WPM-T) late Thursday announcement of a definitive agreement with Glencore plc to terminate its silver stream on the Yauliyacu Mine in Peru for a cash payment of US$150-million, Canaccord Genuity’s Carey MacRury cut his target for its shares by $1 to $67 with a “buy” rating.
“While this is the second stream that Wheaton has terminated this year (read about the Keno Hill termination here), it is a rare occurrence. We see the transaction as an example of Wheaton acting as a partner to benefit all stakeholders to maintain strong relationships. We note that the company continues to hold a silver stream on Glencore’s Antamina mine, which we value at an NPV5% of $816-million,” he said.
* After “positive” second-quarter results, Stifel’s Stephen Soock trimmed his MAG Silver Corp. (MAG-T) target by $1 to $28.75 due to an increased cost assumption, reiterating a “buy” rating and “top pick” designation. The average on the Street is $24.55.
“We look forward to the final electrical connection at Juanicipio and exploration drill results across MAG’s portfolio as a near-term positive catalyst followed by $735-million in FCF to MAG’s account generated through 2027,” he said.
* JP Morgan’s Mark Strouse raised his target for shares of Canadian Solar Inc. (CSIQ-Q) to US$48 from US$42, exceeding the US$41.92 average, with a “neutral” rating.
* CIBC World Markets’ Anita Soni increased her Karora Resources Inc. (KRR-T) target to $4.50 from $4.25. The average is $6.15.
* Cormark Securities’ Richard Gray lowered his Millennial Precious Metals Corp. (MPM-X) to 80 cents, below the $1.09 average, from $1.40 with a “buy” rating.
* Scotia Capital’s Divya Goyal cut her Quisitive Technology Solutions Inc. (QUIS-X) target to $2 from $2.20 with a “sector outperform” rating. The average is $1.69.
“Quisitive reported Q2/22 [Thursday] evening, and beat our and consensus estimates against all key metrics,” she said. “The company reported robust year-over-year growth primarily driven by 100-per-cent growth across both lines of business Global Cloud Solutions and Global Payment Solutions, primarily driven by the two key acquisitions closed over the past few quarters – BankCard and Catapult. These two businesses collectively generated $22-million in revenues against $48-million in total revenue recorded for the quarter (with $12-million generated by BankCard alone) and the remainder attributed to the organic growth across the business from increased billings across professional services and software sales to new and existing customers.
“GCS continues to be the company’s bread-winner while LedgerPay gets ‘commercialization-ready’ in the backdrop. We believe Quisitive, bolstered by Catapult’s solutions, has the wherewithal to become one of the prominent Microsoft partners. Management indicated that the combined scale of the two businesses has created strong demand generation across both sides of the Cloud business, creating additional margin lift, as evidenced in Q2/22 results.”
* Haywood Securities’ Pierre Vaillancourt lowered his Superior Gold Inc. (SGI-X) target to 75 cents from $1 with a “hold” rating. The average is $1.15.