Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO Capital Markets analyst Randy Ollenberger first described energy sector earnings as listless but then unveils some extremely positive cash flow expectations for next year,
“Second quarter results have come and gone and the Canadian oil and gas group has delivered relatively listless share price performance since, largely due to range-bound oil prices. Q2 results were generally in line (or slightly better) than expectations and debt levels continued to fall, translating to more cash in shareholders pockets. The outlook for Q3 is generally positive, with most companies having completed major turnarounds during Q2. However, oil markets continue to grapple with the competing narratives of weakening demand and Middle East unrest. We are not expecting oil prices to move higher anytime soon, but that is OK; we think the group could generate roughly $21 billion of free cash flow in H2/24 compared to $15.2 billion in H1/24. This could grow to $42.3 billion in 2025, with the majority of that ($36.7 billion) being returned to shareholders. That translates to a compelling delivered yield of 10% … At the current strip, we anticipate our coverage group will generate $27.6 billion of free cash flow in 2025 (7.4% yield), returning $26.3 billion of that to shareholders (7% yield). We expect Athabasca, Canadian Natural, Cenovus, and MEG as being the best-suited for returning cash to shareholders amongst the oil-weighted producers in 2025, with the natural gas levered equivalents being ARC and Tourmaline”
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Scotiabank strategist Simon Fitzgerald-Carrier highlights a topic I think we’ll revisit frequently for the rest of the year – China – and its effect on the copper price,
“Although fears of a broad economic slowdown have eased, it hasn’t been enough yet to reignite copper prices. In fact, the metal is now trading at $4.21/lb, down 18% from its peak in May. Our colleague covering metals and mining companies, Orest Wowkodaw, has recently lowered his copper spot price forecast for 2024 and 2025 by around 8% to $4.15/lb and $4.50/lb, respectively from $4.50/lb and $5.00/lb. The downward revision is due to lower global demand, particularly in China. As we mentioned in a recent report, aggregate loans to households and businesses registered their first drop since the series inception in 2005, indicating that more debt was repaid than taken out. That, along with negative residential buildings sales and contracting official and private PMIs, can certainly explain why China has been importing copper at a slower pace this year … Nonetheless, we would remain long-term buyers of copper, as we continue to believe in the metal’s strong demand outlook (energy transition, AI-related data center, EVs, etc.) and modest production growth profile. However, unless China managed to rekindle economic growth soon, it could take longer for copper to regain its footing”
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BofA Securities investment strategist Michael Hartnett is still listed as an author in the weekly Flow Show report but ETF strategist Jared Woodard’s name is above his. Nonethless the report’s style remains punchy,
“Zeitgeist: “We present at the trade shows because customers want to see you using AI. Can’t figure out how to make any money with it, though.” The Price is Right: big support levels held in August … 3.8% GT10 [ten year Treasury yield], 4.0% GT30, 100 DXY [U.S. dollar trade weighted index] 140, USDJPY, $70 oil, $60k Bitcoin; reversal higher in bond yields likely on positioning (big UST inflow this wk), policy (Fed = priced in), seasonality (big Sep supply), geopolitics (no oil risk premium), protectionism; if ISM >49 then GT30 >4.3%..better Q4 opportunity … the last 6 times private sector share fell <40%, recession followed … From the 2% to the 5% world: 20th c. inflation averaged 5%; globalization, low debt, demographics, tech disruption brought 20 years of 2% CPI; reversal of those forces means a structural shift back to 5% …the commodity bull market’s just starting”
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Diversion: “Why is a 34-year-old Nirvana song back on the charts?” – A Journal of Musical Things