A recent MoneyLetter roundup of analysts’ reviews revealed a positive outlook for these three oil and gas stocks that should outperform their peers in the energy sector.
Ensign Energy Services Inc. (TSX—ESI)
Oil and gas stock Ensign Energy Services Inc. reported results for first-quarter 2021 with an earnings per share loss of $0.27 per share and included $1.8 million net non-recurring gains.
Revenue in the first quarter was $218.5 million, which was 8.6 per cent higher sequentially, although slightly lower than ATB Capital Markets analyst Waqar Syed’s estimate of $238.1 million. Revenues were a touch lighter than the analyst’s forecast in all regions (Canada, US and international). Earnings before interest, taxes, depreciation and amortization (EBITDA) margins were slightly better than expected at 22.4 per cent versus Mr. Syed’s estimate of 21.2 per cent. The company recognized $6 million of standby revenue and $1.2 million of early termination revenue during the quarter.
“We estimate free cash flow was relatively neutral during the quarter and the company lowered its total debt by $21 million, while net debt decreased by $10 million. Its net debt to capital ratio increased slightly from 48.7 per cent at fourth-quarter 2020-end to 49.7 per cent. Total liquidity at the end of first-quarter 2021 was $117.8 million, down from $136.5 million at fourth-quarter 2020-end,” says the analyst.
Moreover, Ensign didn’t provide any concrete forward guidance but nonetheless, the analyst still highlights the following key takeaways. For Canada, the company expects typical seasonal weakness in second-quarter 2021 but expects activity to be higher year-over-year, and then increase further in third-quarter 2021. Nearly 19 rigs are working under term contracts, of which 13 have contracts with a duration of six months or longer.
In the US, Ensign expects activity to modestly improve in second-quarter 2021, and then expects more meaningful improvement in the back half of the year. It has 40 rigs contracted, with 16 having contracts with a duration of six months or longer.
The company expects steady activity in its international operations, with a slight improvement forecast for the second half of 2021. Roughly 11 rigs are currently contracted internationally, with eight having a contract duration of six months or longer.
“We think the relatively in-line quarter is neutral-to-negative for the stock, as the bias to 2021 estimates may be slightly lower, but Ensign has recently underperformed, and is down nearly seven per cent over the last three months,” comments Mr. Syed. The analyst maintains his Outperform recommendation and $3.25 target share price.
Enerplus Corporation (TSX—ERF; NYSE—ERF)
Enerplus Corp. reported strong operating and financial results for first-quarter 2021. On the back of these results it announced a 10 per cent increase in the quarterly dividend, taking the yield to 1.9 per cent.
The oil and gas stock reported first-quarter 2021 funds from operations of $0.52 per share coming in ahead of Raymond James Financial analyst Chris Cox’s estimate at $0.48 per share and consensus of $0.47 per share. This was partially driven by higher than expected production of 91,700 barrels of oil equivalent (BOE) per day versus the analyst’s estimate of 90,300 BOE per day and consensus of 89,800 BOE per day along with higher than expected oil realizations in the Bakken.
With the quarterly release, the Enerplus board approved a 10 per cent dividend increase to $0.033 per share quarterly, mapping to a 1.9 per cent yield. Mr. Cox suspects this will be the first of many for Enerplus as the company begins an increasing focus on cash return to shareholders; especially as the value of the recent consolidation activities in the Bakken begin to bear fruit.
The company’s unchanged capital plan sees average reinvestment of $500 million over the next five years. The analyst says this will support an annual liquids compound annual growth rate of three per cent to five per cent while generating between $1.2 billion to $1.8 billion in free cash flow at US$50 to US$55 West Texas Intermediate, which equates to 90 per cent of Enerplus’ current market cap. This outlook stands out amongst Mr. Cox’s exploration and production coverage universe offering a compelling total return proposition for energy investors.
“We continue to see a favourable risk-reward setup in shares of Enerplus as the company’s five-year plan outlined in April boasts a differentiated combination of free cash flow plus moderate growth vis-a-vis peers,” comments the analyst. Mr. Cox reiterates his $9.50 target share price and Outperform recommendation.
Enerplus is a Calgary-based oil and natural gas producer with assets across both Canada and the US.
Pembina Pipeline Corporation (TSX—PPL; NYSE—PBA)
Pembina Pipeline Corp. management remains optimistic for results in 2021 and reiterated the 2021 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) guidance of $3.2 billion-to-$3.4 billion for this Calgary-headquartered oil and gas stock.
Despite the flat results year-over-year, ATB Capital Markets analyst Nate Heywood says that the business is expected to benefit from the recent strengthening in commodity prices and further resurgence of demand. The analyst notes that improvements should be seen in the marketing segment, given less hedging on a forward basis and with incremental contributions from assets placed into service in the facilities segment.
In first-quarter 2021, Pembina recorded adjusted EBITDA of $835 million, in line with the first-quarter 2020 result of $830 million and below Mr. Heywood’s estimate of $862 million. Adjusted cash flow was reported at $582 million, in line with the first-quarter 2020 result of $576 million. Earnings per share was recorded at $0.51, in line with first-quarter 2020 EPS of $0.51 and below the analyst’s estimate of $0.60. In the first-quarter of 2021, the business benefited from strong performances in the facilities and marketing segments, partially offset by hedging losses and modestly weaker pipeline results.
The company previously guided towards a modest capital program of around $785 million in 2021. The program will largely focus on the phase seven Peace Expansion project; however, Mr. Heywood also expects final investment decisions to be made in the second half of 2021 for the secured and currently deferred phase seven and 11 Peace Pipeline expansions and the Prince Rupert Terminal Expansion.
“We remain confident that 2021 should be positively impacted by projects placed into service through 2020 and 2021, and the ongoing recovery in commodity markets. Looking forward, we view Pembina as well positioned to benefit from the improving market fundamentals,” comments the analyst. Mr. Heywood is increasing his target share price to $40 from $39 and reiterating his Outperform recommendation.
Pembina Pipeline owns an integrated system of pipelines that transport crude oil, natural gas and natural gas liquids produced primarily in Western Canada.
This is an edited version of an article that was originally published for subscribers in the June 2021, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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