Inside the Market’s roundup of some of today’s key analyst actions
ATB Capital Markets analyst Amir Arif sees Saturn Oil & Gas Inc. (SOIL-T) as a “value play for long-term oil exposure.”
In a research report released Monday, he initiated coverage of the Calgary-based company with an “outperform” recommendation, touting the potential from a “transformative” $525-million acquisition of light oil weighted assets in Southeast and Southwest Saskatchewan earlier this year along with a “significant” refinancing of its debt structure.
“The acquisition improved the size, liquids weighting, decline rate, and inventory life, resulting in an improved and more sustainable free cashflow profile for the Company that we believe is not factored in the stock,” he said. “At the same time, the debt refinancing significantly lowered the interest expense from 16 pr cent to 9.6 per cent, brought $81-million gross cash onto the balance sheet, and the Company established an undrawn $150-million revolver for tuck-in acquisitions.
“Finally, the acquisition has improved the PDP NAV value meaningfully with the stock now trading below PDP strip NAV. While the corporate assets are mostly conventional and relatively mature, the low decline rate, oil weighting, and inventory results in a more visible free cashflow profile compared to most of its peers.”
While the announcement of the acquisition received a lukewarm reaction from the Street with shares dropping 8 per cent immediately, Mr. Arif emphasized the stock has performed “slightly better than its peer group before the recent downdraft related to the correction in WTI.” since then.
“Given the current share price, we believe the positive impact of the acquisition on the production base and reduced financing costs are not currently priced into the stock,” he said. “As the full impact of the acquisition is reflected with quarterly results in the next few quarters, we believe SOIL is in position to move higher, especially in the event of a potential upswing in WTI prices given its oil weighting. Even without a change in the oil outlook, the free cashflow generation alone should reduce debt and improve the equity valuation. .... Since the announcement, Saturn has had periods of outperformance relative to the broader E&P space. Since the announcement, Saturn is down 7 per cent relative to E&P stocks being down 11 per cent.”
Believing its increased size should improve its “market relevance,” the analyst now sees Saturn as “attractive for value investors and those with a positive bias on the long-term outlook for WTI relative to the strip which indicates a drop to US$66/bbl by late 2026.”
“While the corporate outlook is for modest production growth with a conventional and mature asset base, the PDP NAV valuation of 0.7 times provides a margin of safety which cannot be found in many other E&P names, in our view,” he said. “t the same time, the 2P NAV [net asset value] relative to the stock price indicates meaningful longer-term upside relative to peers. The 2025 estimated free cashflow yield of 31 per cent relative to its peers also reflects its mispricing. As this free cashflow generation brings leverage down from 1.5 times D/CF annualized post the deal to 1.3 times by year-end 2025 and 1.0 times by YE26 (at strip pricing), we believe the stock will respond positively. Additionally, the start of a buyback program (announced in late August) should also provide incremental support to the stock.”
Mr. Arif set a 12-month price target of $3.80. The average target on the Street is $5.58, according to LSEG data.
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Metals equity analysts at Raymond James raised their increased their gold and silver price estimates on Monday, citing “the strong year-to-date performance, interest rates starting to decline, cost structures continuing to increase (based on embedded inflation and our expectation that cut-off grades and reserve/resource pricing will likely be adjusted to capitalize on higher prices) and continued geopolitical instability.”
Their full-year gold price projection for 2024 rose to US$2,342 per ounce from US$2,253 previously. Their 2025 and long-term forecasts rose to US$2,500 and US$2,200, respectively, from US$2,100 and US$1,900.
For silver, the firm’s 2024 projection rose by 30 US cents to US$27.36 per ounce. Their 2025 and long-term estimates are US$29 and US$26, rising from US$25 and US$23.
“We have adjusted our gold:silver price ratio to 86 times for 2024 (previously, 84 times), 86 times for 2025 (previously, 84 times), and 85 times on a long-term basis (previously, 83 times),” they said. “As a result of the gold and silver price forecast increases we are broadly raising price targets across the precious metals producers under coverage (see below for details).
“In precious metals, we prefer AEM amongst the senior gold producers for its lower jurisdictional risk profile and growing pipeline of brownfield/greenfield development opportunities. Among intermediate producers, we favour OGC as we expect production to increase starting in the current quarter with growth over the next few years. We also favour CXB with the Valentine project progressing well and upside opportunities at the project. We prefer WPM amongst the royalty companies and SKE and MAU in the gold developer space.”
Analyst Craig Stanley made a pair of rating changes in response to their price deck update:
He lowered Lundin Gold Inc. (LUG-T) to “market perform” from “outperform” in response to the stock price doubling since he initiated coverage in late January. His target rose to $29, exceeding the $28.19 average on the Street, from $25.
Mr. Stanley downgraded Meridian Mining UK Societas (MNO-T) to “outperform” from “strong buy” to “in-line with non-financed, development stage companies that we have a positive bias.” His target remains $1.50, below the $1.75 average.
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Citi analyst Spiro Dounis thinks Keyera Corp. (KEY-T) is poised to benefit from a “a wave of impending capital efficient growth ahead, namely the filling of spare capacity on existing assets and downstream expansions across the current asset base.”
“We impute an unlevered 15-per-cent capex return and estimate these opportunities will drive a 7-per-cent fee-based EBITDA CAGR [compound annual growth rate] through ‘28, which could be the low-end of KEY’s updated guidance range (potential announcement coming in December),” he said in a research note released Monday titled Filling Up the Pipe.
“Accretive M&A and projects beyond Zone 4, KFSII/III present upside, in our view. We expect KEY to generate $0.3-billion of excess cash flow annually through ‘28, some of which may be returned in the form of a buyback. At 10.3 times, KEY now trades roughly inline with U.S. G&P peers compared to a historical 1.0 times premium since ‘22. We believe the tighter valuation spread and capital efficient growth outlook retains the compelling valuation offering.”
Reiterating a “buy” recommendation for Keyera shares, Mr. Dounis raised his target to $46 from $40 following an updated to his net present value (NPV) methodology. The average on the Street is $41.
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Expecting shareholders Osisko Mining Inc. (OSK-T) to support its definitive agreement to be acquired by South Africa’s Gold Fields Ltd. (GFI-N) in an all-cash deal worth $2.16-billion at a meeting on Oct. 17, National Bank Financial analyst Don DeMarco moved his recommendation for the Toronto-based company’s shares to “tender” from “outperform” previously.
“We expect proxy advisors to support the deal as well as other OSK shareholders, including largest and only shareholder Blackrock (16.75 per cent of outstanding shares) above 10 per cent,” he said.
Mr. DeMarco’s target slid to $4.90 from $5 to reflect the offer price. The current average is $5.20.
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In a separate report, Mr. DeMarco said a tour of B2Gold Corp.’s (BTO-T) Goose Project in the 100-per-cent-owned Back River Gold District in Nunavut last week provided “modest de-risking, adding more colour on the reasons behind the capex increases (many of which were out of BTO’s control), a first-hand glimpse at development, showing significant progress since the tour last year, and construction to a world-class/BTO standard, by an experienced owner-build team.”
At the tour, which included 10 sell-side analysts and two buy-side portfolio managers, the Vancouver-based company reaffirmed first pour at the mine is likely to be on time in the second quarter of 2025 and will be fully funded, tracking an updated budget released last week.
“Overall, we ascribe a neutral bias to the site tour given limited new and material information and our thesis considers BTO’s next leg of growth on the order of 600k oz/yr via regional Goose ramp-up, regional production Fekola, potentially development of Gramalote, NAV-accretive exploration opportunities, strong balance sheet and peer-leading dividend yield, tempered de-risking Goose in the development homestretch,” said Mr. DeMarco.
“We also tweaked our model to align with the updated 2023 Mali Mining code and revised Goose capex. After model changes, our company NAVPS eased 6 per cent to $4.44 (was $4.72).”
Maintaining an “outperform” recommendation for B2Gold shares, he cut his target to $6.25 from $6.50. The average is $5.62.
Elsewhere, RBC Capital Markets’ Wayne Lam reaffirmed a “sector perform” rating and $3.75 target following the tour.
“The company showcased enhancements to design and operations to upgrade the project to B2Gold’s standards, along with its improvement in logistics given lessons to date. Overall, we viewed the updates constructively, with investor focus ahead on completion of construction and the LOM [life-of-mine] update in Q1/25,” he said.
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ATB Capital Markets’ Waqar Syed lowered his forecast for Precision Drilling Corp. (PD-T) on Monday, seeing its Canadian rig mix shift to lower margin heavy oil rigs with a resulting impact on quarterly margins.
Also seeing its overall rig count falling below his prior forecast, the analyst lowered his third-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) estimate by 10 per cent to $130.4-million from $144.4-million. That led to a 4-per-cent drop in his full-year 2024 projection and a 7-per-cent slid in his 2025 expectation.
“The key reasons for the earnings downgrade are as follows: (1) PD’s U.S. and Canadian rig count has been running 3 per cent to 5 per cent below the previous rig count forecast. Still, we expect PD’s Canadian rig count to increase a solid 25 per cent year-over-year, showing market share gains. (2) However, the Canadian rig count increase is coming at the cost of margins, as most of the increase is associated with heavy oil rigs, where super-single rigs and tele-double rigs operate, which carry lower drilling margins than the super-triple rigs,” he said.
“As a result, we lower our Canadian drilling margin forecast from $13,824/rig-day previously to $12,724/rig-day, while also trimming our U.S. drilling margin forecast slightly from US$10,500/rig-day to US$10,300/rig-day. These cuts have a follow-on impact on 2025/2026 EBITDA estimates also. We have also trimmed our two-year outlook for PD’s U.S. rig activity. Despite the cuts, our FCF forecast remains solid, and we project $265-million in FCF in 2024 and $240-million in 2025, equaling 21 per cent and 19 per cent of the current market capitalization. We expect PD to return 25-35 per cent of its pre-debt repayment FCF to shareholders through share buybacks.”
Maintaining an “outperform” rating for Precision Drilling, Mr. Syed lowered his target for its shares to $113 from $123. The average is currently $133.48.
“PD stock has outperformed its peers year-to-date and we maintain our positive outlook, despite the price target reduction,” he said. “PD has a robust FCF, high levels of debt paydown, and rising cash return to shareholders. We estimate FCF yield on market capitalization of 21 per cent for 2024 and 19 per cent for 2025. The Company has plans to reduce debt by $150-million to $200-million in 2024 and to allocate 25 per cent to 35 per cent of FCF before debt repayments to share repurchases. We expect the Company to further raise its shareholder capital allocation, likely reaching 50 per cent of FCF target in 2025. PD is likely to initiate a dividend in 2025 as well. We expect PD to achieve under-1.0 times net debt/EBITDA ratio by mid-year 2025, and at that stage the Company may increase it shareholder capital allocation further.
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In other analyst actions:
* After sponsoring a non-deal roadshow in Montreal on Sept. 19, Canaccord Genuity’s Yuri Lynk raised his Aecon Group Inc. (ARE-T) target to $28 from $25 with a “buy” rating. The average is $21.27.
“Despite its shares delivering a total return of over 55 per cent year-to-date, we continue to see compelling upside potential,” he said. “Firstly, Aecon’s financial results are poised to inflect as legacy lump sum turnkey (LSTK) loss-making contracts roll off over the next year and five progressive design-build contracts, which carry less risk than LSTK, come into, and potentially double, backlog in 2025. Secondly, Aecon Construction’s underlying TTM [trailing 12-month] EBITDA margin (after corporate costs) of 6.7 per cent is above most peers and should attract a higher EV/EBITDA valuation multiple once financial performance improves versus the 5.0 times EV/EBITDA (2025E) the market presently assigns. Lastly, we see the opportunity for Aecon’s successful concessions team to add significant value given the new awards profile of that business.”
* Ahead of Wednesday’s release of its third-quarter results, BMO’s Tom MacKinnon raised his AGF Management Ltd. (AGF.B-T) target to $10 from $9 with a “market perform” rating. The average is $11.38.
“We look for Q3/24E EBITDA of $37.4-million ($37-million consensus), and EPS of $0.35 (consensus $0.36),” he said. “We expect net inflows of $50-million, reflecting the improving environment in the mutual fund industry. Our 2024E/2025E EPS estimates increase 3 per cent/5 per cent, respectively, reflecting better-than-expected Q3/24 AUM and the incremental impact of Q3/24 share buybacks, and target price increases accordingly.”
* Canaccord Genuity’s Mark Rothschild raised his targets for Allied Properties REIT (AP.UN-T) to $18.50 from $17.50, Dream Office REIT (D.UN-T) to $19.50 from $17.25 and True North Commercial REIT (TNT.UN-T) to $12 from $9 with “hold” ratings for each. The averages are $19.39, $18.92 and $11.25, respectively.
* Canaccord Genuity’s Tania Armstrong-Whitworth initiated coverage of Vancouver-based Satellos Bioscience Inc. (MSCL-T) with a “speculative buy” rating and $1 target. The average is $1.10
“MSCL’s lead drug candidate, SAT-3247, is initially being developed for the treatment of Duchenne Muscular Dystrophy (DMD),” she said. “Today, DMD remains incurable. Standard of care treatments only manage symptoms and slow disease progression. In preclinical animal studies, SAT-3247 demonstrated the ability to regenerate skeletal muscle lost in DMD. In September 2024, MSCL initiated its first in-human study, a Phase 1 trial in healthy volunteers assessing safety. It plans to conduct two Phase 1 studies in DMD patients in 2025, before beginning a Phase 2a proof-of-concept trial later in the year. It is fully funded to execute its clinical development plan through the end of 2025. We believe the stock will move in response to data readouts from these trials.”
* Desjardins Securities’ Frederic Tremblay raised his Savaria Corp. (SIS-T) target by $1 to $26 with a “buy” rating.
“We held institutional marketing meetings with CEO Sebastien Bourassa, CFO Steve Reitknecht and VP, Corporate Development Nicolas Rimbert,” said Mr. Tremblay. “The meetings underscored the roaring start of Savaria One and that this program still has lots of gas left in the tank to bring the company to the 2025 margin target of 20 per cent.”
He added: “SIS is not just a 2024–25 story; our scenario analysis for 2026–27 shows a potential share price of over $40. With the Savaria One program on track to be completed in 2025, we believe that management could share details on its next multi-year plan/ ambitions in late 2025 or early 2026. In this note, we are taking a first stab at it by presenting two-year scenarios for 2026–27. With or without M&A, we believe that SIS would remain an attractive investment proposition based on the company building on a solid foundation and our scenarios supporting a share price potentially exceeding $40.”