Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Chris MacCulloch thinks Canadian Natural Resources Ltd.’s (CNQ-T) agreement to buy a swath of Chevron Canada Ltd. (CVX-N) oil and gas assets in Alberta brings “an attractive entry point” for what he continues to view as “the highest-quality producer in the Canadian oil & gas sector.”
“Seize the opportunity,” he advised in a research report in which he raised his rating for the Calgary-based company to “buy” from “hold” based on “a more attractive return profile.”
Andrew Willis: opinion Big money puts its trust in Canadian Natural Resources’ Murray Edwards
He was one of several equity analysts on the Street to applaud the deal, announced Monday before the bell and sending the Calgary-based company’s shares higher by 3.3 per cent.
“Although the sticker shock of the acquisition’s price tag may have turned some heads, we highlight that it was accretive on all key financial metrics,” said Mr. MacCulloch. “For reference, we expect the newly acquired AOSP [Athabasca Oil Sands Project] and Duvernay assets to generate $1.5-billion of DACF [debt-adjusted cash flow] in 2025 at current strip prices, or $1.1-billion of incremental FCF. By extension, we calculate that the transaction was completed at a 5.7 times 2025 strip EV/DACF multiple, which is highly accretive vs Friday’s (October 4) trading multiple of 7.3 times, although it added considerable balance sheet leverage which necessitated a temporary moderation in FCF allocation to capital returns.
“While acknowledging that the stock’s valuation remains rich vs peers, we believe a premium is warranted given CNQ’s strong track record of operational execution and disciplined capital allocation. We also believe that it provides defensive protection in the event of a sharper deterioration in oil prices given its deep inventory of short- and long-cycle development assets, which was further expanded by yesterday’s transaction —providing flexibility to reallocate capital in response to changing commodity prices.”
In response to the acquisition, which will be funded entirely with cash and includes Chevron’s remaining working interest in the AOSP, the Scotford Upgrader as well as the 70-per-cent working interest in its Duvernay asset, the analyst raised his 2025 cash flow projections as well as his production assumptions, believing “it appears accretive on all key metrics at the cost of increased financial leverage.”
That led him to increase his target for Canadian Natural shares to $59 from $56. The average target on the Street is $55.06, according to LSEG data.
Other analysts making target adjustments include:
* National Bank’s Travis Wood to $53 from $52 with a “sector perform” rating.
“Pro forma, the deal further enhances CNQ’s asset for sustainable FCF [free cash flow] out of the oil sands portfolio as well as the short-cycle, high-impact inventory out of the Duvernay and leaves our revised cash flow estimates 9-10 per cent higher over our forecast period (similar to our FCF forecast),” said Mr. Wood. “Although we do not doubt the company’s ability to capture medium term value through operational effectiveness, we do caution the return of capital profile timelines under forward strip (we do expect this earlier than 2029) and inherently increases the risk around the return of capital outlook in our view. Overall, we have raised our capital spending outlook to include the disclosed $400 million of sustaining capital as well as new project spending.”
* RBC’s Greg Pardy to $62 from $59 with an “outperform” rating.
“Our decidedly bullish stance towards CNQ reflects its strong leadership, shareholder alignment, free cash flow generation, best-in-class operating performance and abundant shareholder returns. We are reaffirming an Outperform recommendation on CNQ and raising our one-year price target by $3 (5 per cent) to $62 per share. CNQ is our favorite senior producer and on both our Top 30 Global Ideas and Energy Best Ideas (published October 1, 2024) lists,” said Mr. Pardy.
* BMO’s Randy Ollenberger to $60 from $57.50 with an “outperform” rating.
“Canadian Natural announced that it is acquiring Chevron’s remaining interests in the WCSB,” he said. “CNQ is the natural buyer of Chevron’s Athabasca Oil Sands (AOSP) stake and was able to consolidate the interest at an attractive price, in our opinion. The Duvernay asset is an added bonus given recent improvements in well productivity and close proximity to the company’s Montney assets. That said, Canadian Natural’s near-term shareholder return potential could be constrained until it reaches its new net debt targets.”
* TD Cowen’s Menno Hulshof to $58 from $56 with a “buy” rating.
“While this deal temporarily increases leverage and triggers a retreat to 60-per-cent return of FCF from 100 per cent, it was well-received by investors given an attractive price tag, strong industrial logic (AOSP in particular, where we expected long-term consolidation) and long history of adding value,” he said.
“Longer-term AOSP consolidation was something that we and many investors had been contemplating for some time. However, while we understand that CNQ kicks the tires on most available marketed assets, we underestimated its interest in CVX’s Kaybob Duvernay. We consider AOSP consolidation at a reasonable price tag a positive (almost inevitable) development and are confident in CNQ’s ability to accelerate Duvernay commercialization. Further, there may be undisclosed items like tax pools that represent upside beyond what is currently understood. We estimate 5-per-cent accretion on 2025 CFPS and 3 per cent on FCFPS, where positive incretion was expected as a balance sheet financed transaction. While a return to 100 per cent of FCF extends beyond 2026 on a backwardated WTI strip, RoC in absolute dollar terms is expected to be similar on a pre-and-post-deal basis given the divi hike and FCF generation from the acquired assets. Our target price increases to $58/share on revised financial and NAV estimates.”
* Raymond James’ Michael Barth to $51 from $48 with a “market perform” rating.
“In our view, this is another large and accretive transaction that adds clear value to shareholders; it reinforces our view that CNQ is one of the best capital allocators in Canadian energy,” he said. “We’ve adjusted our estimates and our target increases to $51.00/share. Despite the increase to our target, we still believe the stock is fairly valued at strip pricing, and therefore maintain our Market Perform rating. The market ‘gets it’.”
* ATB Capital Markets’ Patrick O’Rourke to $60 from $58 with an “outperform” rating.
“Overall, we view the event as positive, adding both cash flow accretion (total deal estimated at 4.8 times CF relative to 2025 estimated strip EV/DACF [enterprise value to debt-adjusted cash flow] of 6.4 times prior to the deal announcement; we model 5.3 per cent per share 2025 cash flow accretion after accounting for increased interest costs and G&A associated with the asset acquisition), as well as the strategic capture of long-term undeveloped resource synergistically adjacent to current operations at AOSP and Horizon,” he said. “The announcement and management call were well-received, with CNQ shares up 3.3 per cent relative to also strong performance from the TSX Capped Energy Index at up 1.9 per cent.”
=====
TD Cowen analyst Aaron MacNeil thinks Canada’s Energy Services sector “lacks positive momentum” after reducing his activity forecasts for the third quarter.
“Canadian gas inventories remain high and the LNGC consortium is ready to meet commitments,” he said. “Despite first cargoes expected in mid-25, a full ramp is not likely until year-end, implying limited near-term upside to activity. We do not believe that the recent geopolitical risk premium embedded in crude will translate to an increase in drilling. As such, Canadian/U.S. 2025 rig count forecasts decrease by 2 per cent/3 per cent.”
With those changes, Mr. MacNeil made a series of target price adjustments to stocks in his coverage universe. His changes are:
* Enerflex Ltd. (EFX-T, “buy”) to $12 from $11. The average is $10.58.
Analyst: “Enerflex is expected to report a strong, uneventful Q3/24 supported by its contracted/recurring Energy Infrastructure and After-market Services segments and continued strength in Engineered Systems segment bookings. Enerflex moves to the top of our pecking order given its contracted cash flows and defensive attributes, with enhanced shareholder returns expected in 2025.”
* Ensign Energy Services Inc. (ESI-T, “buy”) to $3.25 from $3.50. Average: $3.63.
Analyst: “We are reducing our estimates, alongside a reduction to our activity forecasts.”
* Pason Systems Inc. (PSI-T, “buy”) to $18 from $20. Average: $19.80.
Analyst: “We are reducing our estimates, alongside a reduction to our activity forecasts. We are modeling flat IWS revenues and limited near-term growth.”
* Precision Drilling Corp. (PD-T, “buy”) to $120 from $140. Average: $133.48.
Analyst: “We are reducing our estimates, alongside a reduction to our activity forecasts and expect it will miss its Q3/24 Canadian gross margin/day guidance (rig mix, reactivation costs), with Canadian activity in Aug./Sept. also at the low end of its 75-80 Aug. range.”
* Trican Well Service Ltd. (TCW-T, “hold”) to $4.75 from $5. Average: $5.84.
Analyst: “We are reducing our estimates, alongside a reduction to our activity forecasts. Recall that Q2/24 was unseasonably strong as producers pulled forward activity to avoid potential drought/fire conditions.”
=====
National Bank Financial analyst Maxim Sytchev said structural improvements made by RB Global Inc. (RBA-N, RBA-T) to the legacy operations at IAA reinforce his confidence in a “multiple expansion thesis.”
Vancouver-based RB Global, formerly known as Ritchie Bros. Auctioneers Inc., acquired U.S. auto retailer IAA Inc. in a US$7-billion deal in March of 2023 after overcoming criticism from two proxy advisory firms.
“Tough construction equipment comps are generally well understood by the market when it comes to the short-term, but the ultimate upside resides within the IAA business at the moment,” said Mr. Sytchev. “We are actually positively surprised by the speed/magnitude of IAA’s progress; as a result, the multiple expansion dynamic does not hinge on FUTURE improvements but should reflect current advancements. With RBA having traded historically at close to 30 times NTM [next 12-month] P/E and Copart at 34 times 2025 estimates, there is still material upside in this defensive name.”
Mr. Sytchev said recent conversations with North American insurance carriers and consultants point to IAA “closing the gap” on rival Copart Inc. (CPRT-Q).
“We held a number of due-diligence calls on the back of recent marketing where we heard management reiterate its strategic initiatives to improve IAA’s market share vs. Copart in the salvage auction oligopoly,” he said. “Our purpose was to gauge if insurance customers are seeing the same improvements in IAA vs. a year ago.”
“Improvements are tangible. While nature of the calls was more qualitative contextually, insurance carrier feedback has been uniformly consistent regarding improvements. While challenging to quantify, our sense is that the Copart/IAA gap in terms of cycle time (delta between an event and the vehicle ending up on auction block) has moved from negative 25 per cent/negative 30 per cent before the transaction to somewhere in negative 5/negative 10-per-cent range now; title management, tech investments (hence VIN-level data), better utilizing towing capacity and alignment of KPIs at the yard level with compensation are all leading to tangible improvements. As a result, these improvements have been well-received by customers who see IAA on a much more equal footing with Copart on the value proposition they can offer to insurance carriers.”
The analyst reaffirmed an “outperform” rating and US$90 target for RB Global shares. The average is US$90.90.
=====
Scotia Capital analysts Orest Wowkodaw and Eric Winmill expect Canadian miners to post ”relatively mixed” third-quarter financial results as “improved operating performance is likely to be largely offset by weaker commodity prices” sequentially.
“However, with cost pressures stabilizing and capex spending easing, we forecast cash margins to expand,” they said. “Of concern, our estimates appear well below current consensus expectations for most companies, and we expect material negative consensus revisions over the coming weeks. In addition, we anticipate the market to focus on potential negative guidance revisions and select project ramp-up updates. The large and mid-cap producers continue to trade at relatively elevated valuations (we estimate an average implied Cu price of $5.60/lb or 26 per cent above spot), reflecting improved market sentiment on Chinese demand.”
In a research report released Tuesday, the analysts said their EBITDA estimates for mid-cap and large-cap companies now sit 17per cent below consensus.
“We forecast CIA-T, CS-T, ERO-T, HBM-T, IVN-T, LUN-T, NEXA-N, and TECK.B-T to miss consensus EBITDA expectations, CCO-T and FM-T to beat, with FCX-N in-line,” they said. “On an EPS basis, we forecast below-consensus results for all companies. We profile our quarterly EPS, EBITDA, and guidance performance vs. consensus tracker and note that CCO-T and FCX-N have the best track record of meeting EBITDA expectations over the past four and eight quarters; ERO-T and FM-T have the weakest.”
In response to the impact of a weaker Canadian dollar and “minor” commodity price changes, they made a series of target price changes:
- Altius Minerals Corp. (ALS-T, “sector perform”) to $26 from $24. The average on the Street is $26.64.
- First Quantum Minerals Ltd. (FM-T, “sector perform”) to $18.50 from $17. Average: $20.41.
- Hudbay Minerals Inc. (HBM-T, “sector outperform”) to $15 from $14.50. Average: $15.91.
- Ivanhoe Mines Ltd. (IVN-T, “sector outperform”) to $22 from $21. Average: $24.85.
- Labrador Iron Ore Royalty Corp. (LIF-T, “sector perform”) to $32 from $31. Average: $33.50.
- Teck Resources Ltd. (TECK.B-T, “sector outperform”) to $79 from $78. Average: $74.32.
“In our view, CCO-T, FCX-N, and FM-T, all appear relatively well positioned heading into Q3/24 reporting season,” they said. “Conversely, we believe CIA-T, CS-T, ERO-T, HBM-T, LUN-T, and TECK.B-T could all disappoint expectations. Looking beyond Q3, TECK.B-T, CS-T, and CCO-T remain our Top Picks. We also highly recommend ERO-T, HBM-T, IE-N, IVN-T, LUN-T, and MTAL-N for Cu exposure, along with NXE-T and DML-T for U308.”
=====
Jefferies analyst Anthony Linton said he likes South Bow Corp.’s (SOBO-T) stability “with 88 per cent of EBITDA underpinned by long-term contracts (average term: 8.5 yrs) and yield proposition (9-per-cent yield).”
However, pointing to its “higher leverage profile and lower EBITDA/dividend growth versus peers,” he initiated coverage of the spinoff of TC Energy Corp.’s (TRP-T) crude oil pipelines business, which began trading on the TSX last Wednesday, with a “hold” recommendation.
Berman: TC Energy spun off South Bow last week. Its dividend is hard to ignore
“We expect valuation to be a key debate owing to SOBO’s higher dividend yield, lower growth rate, concentrated asset base, highly contracted cash flow profile, and higher leverage,” said Mr. Linton.
Seeing its shares as “fairly valued,” he set a target of $32. The average is $34.
=====
In other analyst actions:
* National Bank’s Dan Payne downgraded Advantage Energy Ltd. (AAV-T) to “sector perform” from “outperform” with an $11.50 target. The average on the Street is $13.60.
* CIBC’s Mark Jarvi lowered his target for Algonquin Power and Utilities Corp. (AQN-N, AQN-T) to US$5.75 from US$6 with a “neutral” recommendation. The average target is US$6.03.
* JP Morgan’s Brian Ossenbeck cut his Canadian National Railway Co. (CNR-T, “neutral”) target to $169 from $176 and raised his Canadian Pacific Kansas City Ltd. (CP-T, “overweight”) target to $137 from $136. Mr. Ossenbeck also lowered his TFI International Inc. (TFII-N/TFII-T, “overweight”) target to US$181 from US$184. The averages are $175.67, $126.43 and US$172.92, respectively.
* Scotia’s George Farmer raised his DRI Healthcare Trust (DHT.UN-T) target to US$22 from US$21 with a “sector outperform” rating. The average is $19.17 (Canadian).
* JP Morgan’s John Royall raised his Imperial Oil Ltd. (IMO-T) target to $97 from $94, while he lowered his TC Energy Corp. (TRP-T) target to $60 from $66 with a “neutral” rating for both. The averages are $98.91 and $59.16, respectively.
* CIBC’s Christopher Thompson cut his Logan Energy Corp. (LGN-X) target to $1.50 from $1.75 with an “outperformer” rating. The average is $1.58.
* Stifel’s Stephen Soock cut his target for Montage Gold Corp. (MAU-X) to $2.20 from $2.60 with a “buy” rating. The average is $2.79.
* Raymond James’ Steven Li increased his Real Matters Inc. (REAL-T) target to $10.50, above the $9.18 average, from $8 with an “outperform” rating.
“With the Fed’s first rate cut in Sept and recent data on mortgage applications trending more positively, we are revising our model higher for F2025 and introducing F2026 forecasts. Our target moves up as a result,” said Mr. Li.