Inside the Market’s roundup of some of today’s key analyst actions
ATB Capital Markets analyst Nate Heywood expects Northland Power Inc. (NPI-T) to be a potential benefactor of recent “favour toward renewable power technologies,” citing its “expertise to develop highly sought-after offshore wind projects with financial partners with very competitive costs of capital.”
After a “busy month in the renewable power space with the announcements of large-scale investments, equity issuances and government support,” Mr. Heywood raised his rating for Toronto-based Northland to “outperform” from “sector perform” based on this increased capital flowing, seeing an improved outlook for its growth.
“This month, BP (BP-N) communicated its lofty renewable target of reaching positive FID on 20 GW of power generation by 2025, and further ramping up towards a 50 GW target by 2030,” he said. “Most recently, BP announced the US$1.1-billion acquisition of a 50 per cent working interest in a U.S. offshore wind project with the potential to develop 4.4 GW of renewable capacity. Royal Dutch Shell (RDS-A), among other energy producers, also commented on its intent to focus more on renewable power projects, decreasing investment in upstream oil and gas. We believe these announcements highlight the trending corporate mandates toward increased renewables that will elevate NPI to develop large offshore wind projects. The lofty renewable targets will likely need to be met through project acquisitions, of which, NPI has an impressive portfolio of early stage projects.”
Mr. Heywood said Northland views the “wall of capital” as an opportunity to create joint ventures to develop renewable projections. By partnering with large entities with a low cost of capital, he thinks NPI will be able to “thrive in the increasingly competitive offshore wind market, leveraging its technical development and operational expertise to pursue larger, more efficient facilities.”
“Northland Power has a history of successfully developing, constructing, and operating power projects and continues to actively pursue clean technology development opportunities that fit the strategic asset mix,” he said. “The Company is well positioned to be an early mover in new renewable markets through offshore wind in Asian markets and advancement of current Latin America operations. Given the Company’s recent growth, we view the development pipeline as more attainable and provides leverage for even larger-scale projects. We have estimated 2020 EBITDA of $1.188-billion, providing a 13.1 times EV/EBITDA multiple modestly above the Canadian independent power producer peer group average of 12.2 times.”
The analyst increased his target for Northland shares to $45 from $35. The average target on the Street is $38.73, according to Refinitiv data.
“Though we have increased our outlook to capture improved results in 2022 onward, the majority of the price target change is attributable to a revision in our long-term growth rate to 2 per cent from 1 per cent given the robust growth profile and additional supporting factors,” said Mr. Heywood.
“Despite the uncertain parameters of long-term offshore wind investments, we believe that a higher growth rate for NPI’s cash flows is appropriate to capture the capital flowing towards these types of offshore wind projects. Given that 80 per cent of our DCF valuation is based on our terminal value due to incremental cash flows from projects under development, the increase in our growth trajectory outlook results in a significant change to our price target.”
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Seeing the current valuation as “too cheap to ignore given the quality of the underlying asset base,” RBC Dominion Securities analyst Luke Davis raised his rating for PrairieSky Royalty Ltd. (PSK-T) to “outperform” from “sector perform” following recent discussions with CEO Andrew Philips and CFO Pam Kazeil.
The analyst cautioned that drilling activity remains “muted,” however he thinks it is starting to “show signs of life.”
“Management noted some licensing in oil-weighted plays, two rigs running on its Clearwater land, and commentary from oil-focused E&Ps highlighting US$45 per barrel as a key trigger point for incremental activity,” said Mr. Davis. “We believe the company is well positioned and capable of covering the dividend down to sub-US$30 per barrel, even if production declines to approximately 18,000 barrels of oil equivalent per day.”
“Clearwater remains a bright spot driven by strong economics, even at current commodity pricing. Management noted that Spur is currently running two rigs with an expectation of drilling up to 40 wells (on PSK land) by spring break-up in 2021. Current royalty volumes are trending above 200 boe/d, after being shut-in earlier in the year due to depressed oil pricing. Based on Spur’s expected program, management anticipates that net royalty volumes could increase to roughly 300 boe/d (up 50 per cent) in 2021.”
Mr. Davis said buybacks have been a key focus for PrairieSky, but thinks the pace of such moves are likely to slow in the near-term.
“PrairieSky repurchased $67 million in stock during Q3, which resulted in a few investors questioning whether this signaled a divergence from strategy (i.e., no leverage long-term),” he said. “We do not view this as a divergence and believe the company will be able to pay this down over the next year from post-dividend free cash flow. The team did note that it expects a slower pace going forward in order to retain optionality, with the evaluation of select acquisitions ongoing.”
With its current valuation at multi-year lows, which he thinks compares “favourably” to E&P, midstream peers, he raised his target to $12 from $10. The average on the Street is $11.77.
“We upgraded PrairieSky shares to Outperform (from Sector Perform) and raise our price target to $12 per share (from $10), driven by what we view as a strong entry point with limited downside risk,” he said. “Our valuation is based on an equal weighting between our FCF discount model and a mid-cycle EV/DACF multiple of 18 times applied to our 2021 estimate.”
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Maxar Technologies Ltd. (MAXR-N, MAXR-T) has “solid” long-term growth drivers, possesses potential upcoming catalysts and a “still attractive” valuation, according to RBC Dominion Securities analyst Steve Arthur.
Though he noted shares of the company, the successor to Macdonald Dettwiler & Associates Inc., have performed “well” thus far in 2020, Mr. Arthur said he continues to like its risk-reward profile, prompting him to remove a “speculative risk” qualifier from his “outperform” rating.
“Maxar has demonstrated solid operating performance in both segments, in particular through the COVID period with the support of a large SI [Space Infrastructure] backlog and the essential nature of its intelligence offerings,” he said. “We expect this resilient performance to continue in Q3 and beyond, and we see several near- and medium-term catalysts for the shares.
"MAXR shares have performed well year-to-date (up 62 per cent) yet in our view still trade at attractive multiples (9.0 times 2021 estimated EV/EBITDA) relative to a peer group of Aerospace, Defence, and Satellite companies (averaging 10.5 times).”
Though he acknowledged the COVID-19 pandemic “imposed operating hurdles to be sure,” Mr. Arthur is forecasting revenue for 2020 of US$432.5-million, up 5 per cent year-over-year. He noted its Earth Intelligence products and services are “essential” to many customers, while SI is working on a “solid” backlog.
“In coming quarters, we see several milestones that could impact MAXR’s risk profile and trading multiple In particular: 1. renewal/extension of the EnhancedView program with the US NRO, likely late 2020 or early 2021; 2. launch of WorldView Legion (expected through 2021), the next-generation constellation of imaging satellites with higher capacity and revenue potential; 3. completion/delivery of Jupiter 3, a large program on which Maxar has experienced cost overruns and charges,” he said.
With his “outperform” rating, Mr. Arthur raised his target for Maxar shares to US$30 from US$25. The average on the Street is US$22.25.
“Our $30 price target (was $25) is based on a target multiple of 9.0 times forward year earnings (was 8.5 times), reflecting improved risk and operating factors,” he said. “This is still a material discount to peers — we will continue to review this as further risks are retired, and we expect the valuation gap to narrow over time.”
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Skeena Resources Ltd. (SKE-T) is “reviving the heart of the Golden Triangle” in northwestern British Columbia, said Raymond James analyst Craig Stanley.
In a research report released Tuesday, he initiated coverage of the Vancouver-based mining exploration company, which is focused on restarting the Eskay Creek Gold Project, with a “strong buy” rating.
“The Eskay underground mine produced 3.3 million ounces of gold at 45 grams per ton gold and 160 million ounces silver at 2,224 grams per ton silver from 1994 to 2008,” he said. “In November 2019, Skeena announced a preliminary economic study examining an open pit operation highlighted by a 9-year mine life averaging 314,000 gold equivalent ounces per year at an all-in sustaining cost of $757 per ounce and pre-production capex of $303-million. At $1,500 per ounce gold and $18 per ounce silver, the project produces an after-tax NPV (5%) of $838-million and an IRR of 63 per cent. These increase to $1.5-billion and 89 pe cent, respectively at $1,900 per ounce gold and $23 per ounce silver.”
Mr. Stanley set a target price of $4.35 per share, which falls short of the $4.62 consensus.
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RBC Dominion Securities analyst Nelson Ng thinks methanol prices bottomed in the third quarter and are poised to trend higher, leading him to raise his financial projections for Methanol Corp. (MEOH-Q, MX-T).
“IHS made some slight upward adjustments to its North American methanol price outlook this week,” he said. “The adjustments are primarily attributed to higher spot pricing due to sustained recovery in demand, higher feedstock costs, impacts from Hurricane Laura (reduced supply), and planned and unplanned outages. We note that one key risk to demand and pricing would be a second wave of COVID-19, and the potential for re-implementing of physical distancing restrictions around the globe. We note that new COVID-19 cases in China (largest user, producer and importer of methanol) have remained very low.”
Mr. Ng said Methanex’s recent US$700-million debt issuance strengthens its liquidity and noted it also posted higher reference pricing across all three regions of its operations (North America, Europe and Asia).
Based on that improved pricing, he raised his 2020 and 2021 adjusted EBITDA estimates to US$321-million and US$456-million, respectively, from US$298-million and US$456-million.
Keeping an “outperform” rating for Methanex shares, he increased his target to US$30 from US$28. The average on the Street is US$23.31.
“We see good upside potential as the global economies and oil prices stabilize, but note that one key risk would be a potential second wave of COVID-19, and the actions that may be taken to mitigate the pandemic,” Mr. Ng said.
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After a “rare asset swap in the Midstream space,” Raymond James analyst Chris Cox raised his target price for shares of Inter Pipeline Ltd. (IPL-T).
On Monday, the Calgary-based company announced it has signed a deal to acquire the Milk River pipeline system from a subsidiary of Plains All American Pipeline LP, in exchange for its 100-per-cent ownership interest in the Empress II and 50-per-cent ownership interest in the Empress V straddle plants.
“We view the transaction as a logical trade for both parties,” said Mr. Cox. “From Inter Pipeline’s perspective, the Milk River pipeline offers natural alignment with the company’s existing Bow River system and adds a critical cross-border connection into a captive refining market for Western Canadian supply. While the financial impact from the transaction is ultimately fairly immaterial, even a modest financial accretion with improved strategic fit deserves praise in today’s market.”
Maintaining his “market perform” rating for Inter shares, he increased his target to $13 from $12. The average on the Street is $14.81.
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RBC Dominion Securities analyst Sam Crittenden thinks the operational issues at its Chapada copper-gold mine following a weekend power outage are “unlikely to be a lingering issue" for Lundin Mining Corp. (LUN-T).
However, he thinks the damage “adds near-term uncertainty and follows two guidance downgrades this year which hurts Lundin’s reputation as a steady copper producer.”
“As Lundin assesses the situation, they have yet to provide a timeline or cost to repair the 4 damaged mill motors,” said Mr. Crittenden. “Early indications are it is strictly the motors and not the mills and surrounding equipment. Chapada operates with one SAG and one ball mill, both are powered with 2 motors which are interchangeable. They have two spare motors (one on site and one expected back shortly following repairs). They could be able to operate at a reduced rate with the 2 spare motors. Lundin is currently working to either repair the 4 motors if possible, or purchase new ones. Our base case assumes zero production in Q4/20 with $20-million of repair costs. A plausible upside case is Lundin is able to find replacement motors sooner and only lose half of Q4 production, while a downside case would be if the issue continues into 2021 with zero production in Q1/21.”
Mr. Arthur’s base case of no fourth-quarter production reduced his 2020 EBITDA projection by 10 per cent to $85-million, however he maintained his 2021 estimate.
He also kept a “sector perform” rating and $9 target for Lundin shares. The average is $9.76.
“Despite the production issues this year, Lundin remains a solid copper producer with a strong balance sheet and growth potential,” the analyst said. “We currently model production growing to 301kt in 2021 from 240kt in 2020 and an expansion at Chapada remains an organic option for growth. Lundin remains under-levered with net debt to EBITDA of 0.2 times, which creates options for additional M&A, or additional capital returns to shareholders, in our view. Lundin is currently yielding 2.2 per cent (following the January dividend raise) and we forecast a FCF yield of 8.6 per cent in 2021 at spot prices.”
Elsewhere, Raymond James analyst Farooq Hamed trimmed his target for Lundin to $8.50 from $9 with a “market perform” rating (unchanged).
Mr. Hamed said: “LUN has withdrawn its full year 2020 production, cost and capex guidance at Chapada; however, its early expectation is for the issue to be resolved within 4Q20 and has not withdrawn 2021 guidance. Due to the expected impact on EBITDA in 4Q from the processing downtime, we have reduced our target price.”
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In other analyst actions:
- Cormark Securities analyst Amir Arif lowered Ensign Energy Services Inc. (ESI-T) to “market perform” from “buy” with a 90-cent target, down from $1.25. The average is currently 83 cents.
- Citing increased uncertainty surrounding its US$500-million deal to sell its plane parts manufacturing businesses to Spirit AeroSystems Holdings Inc.,, Scotia Capital’s Konark Gupta cut his target for Bombardier Inc. (BBD.B-T) shares to 43 cents from 56 cents with a “sector perform” rating. The average is currently 54 cents.
- Jefferies’s Owen Bennett lowered his target for Aurora Cannabis Inc. (ACB-T) to $6.90 from $8.70 with a “hold” rating. The average is $10.72.
- TD Securities analyst Derek Lessard cut his target for Cineplex Inc. (CGX-T) to $9 from $10.50, keeping a “hold” rating. The average is $13.81.
- TD’s Arun Lamba raised his target for Solaris Resources Inc. (SLS-X) by a loonie to $7.50. He’s currently the lone analyst on the Street covering the Vancouver-based copper company.