The MoneyLetter recently surveyed security analyst reports on the oil and gas industry and found some very mixed feelings about the prospects for the near-term future of the industry. A ‘hold’, a ‘buy’ at a lowered target price, an ‘outperform’ (which is sort of an uncertain ‘buy’) and a ‘buy’ suggest the street’s a long way from cheer-leading this sector.
After a 26-month hiatus, Calgary-based Desjardins Capital Markets analysts Justin Bouchard and Petur Radevski claim that Husky Energy Inc.’s (TSX—HSE) dividend is officially back.
“Hopefully, this is a sign of things to come,” the analysts state. “The dividend has ample room to grow, particularly if its 2018 funds from operation (FFO) guidance (over $4 billion) pans out.
“Husky should be in a mode that generates free cash flow (FCF)—with a focus on lower-cost projects—given that oil prices have settled in the US$55 to $60 per barrel West Texas Intermediate (WTI) range.”
They continue: “Based on our estimates, we calculate that Husky can sustain the dividend, and support $2.5 billion of capital spending at roughly US$45 per barrel of WTI. At the strip, we forecast FFO of roughly $3.68 billion in 2018 and $3.92 billion for 2019, up from $3.31 billion in 2017. After factoring in a capital expenditure budget of about $3 billion, and dividend commitments of around $254 million, we can see Husky generating FCF of approximately $650 million.”
The analysts give a ‘hold’ rating and $19 target share price for Calgary-headquartered Husky.
Husky Energy Inc is an integrated oil and gas company. It operates in both upstream and downstream segments. The company operates in Western Canada, the United States, the Asia Pacific Region and the Atlantic Region.
‘Buy’ Painted Pony Energy—but at a reduced price
Calgary-headquartered Painted Pony Energy Ltd. (TSX—PONY) is a natural gas producer operating in the Montney formation in Northeast British Columbia. The company posted solid fourth-quarter 2017 results, achieving a record annual production rate. It achieved record rates, despite various voluntary production shut-ins caused by low pricing of Alberta Energy Co. gas.
However, Calgary-based IA Securities equity research analyst Michael Charlton continues to argue that the discounted multiples seen on natural gas stocks cannot last forever. Given substantial reserve additions in 2017 (and more on the 2018 horizon) he sees tremendous upside potential in Painted Pony for investors with a longer time horizon.
Based on the latest commodity prices and reserve levels, Mr. Charlton reiterates his ‘buy’ recommendation but reduces his target price to $3.75 per share from $5.
Management announced fourth-quarter production of 52,544 barrels of oil equivalent (BOE) per day (nine per cent liquids), which is in line with their guided range. This rate includes the impact of about 8,000 BOE per day of voluntary shut-ins due to commodity pricing. Full-year volumes averaged a record 42,882 BOE per day, with annual liquids volumes increasing to 3,587 BOE per day (8.4 per cent liquids).
Painted Pony’s realized commodity price increased nine per cent sequentially quarter-over-quarter, to $14.04 per BOE before roughly $4.98 per BOE in hedging gains, to drive net-backs of $7.28 per BOE, ultimately fuelling cash flow of $35.6 million or $0.21 per share.
Mr. Charlton obviously likes PONY’s stock, especially since it trades at a discount to its proved developing producing (PDP) per share value of $5.62. He says: “We believe current share prices reflect a deep discount to its proven and probable (2P) reserve value and anticipated production growth profile, making this an attractive investment opportunity for those investors seeking dry gas weighted Montney production.
“Reserve additions in 2017 reflected the success of the $303-million capital program that drilled a total of 52 wells and completed 51—of which seven were drilled and 15 completed in the fourth quarter. The company spent around $12 million less than the $74 million the company guided to.”
PDP reserves increased 36 per cent year-over-year to 132.8 million BOE. Total proved reserves are now 518.4 million BOE, and total 2P reserves were flat at 1,148.8 million BOE, compared to 2016 pro-forma reserves.
The associated pre-tax net present values, discounted at 10 per cent, are $905.4 million ($5.62 per share), $1.6 billion, and $3.3 billion on a PDP, total proven, and 2P basis, respectively.
Looking forward, 14 wells are planned for the first quarter of 2018, including four in the liquids-rich area of northeast British Columbia’s Townsend, and nine in the Blair area with one well in the liquids-rich Beg area. As of the last company update, four of the fourteen wells have already been drilled and rig released, and seven of the planned thirteen completions have been finished.
Painted Pony Energy is a growth-oriented producer, operating in northeast British Columbia. Its philosophy is to grow production through development drilling for natural gas and natural gas liquids.
BMO analyst says ShawCor will ‘outperform’
The stronger-than-expected fourth quarter 2017 financial results reported by ShawCor Ltd. (TSX—SCL) were a nice surprise for BMO Capital Markets Calgary-based analyst Michael Mazar.
Toronto-headquartered ShawCor is a global energy services company specializing in products and services for the pipeline and pipe services, petrochemical, and industrial segments of the oil and gas industry and other industrial markets. ShawCor operates through several wholly owned business units, with operations in more than 20 countries around the world.
The strong Q4 financials were, however, overshadowed by a bigger-than-expected drop in the backlog and 2018 earnings before interest, taxes, depreciation and amortization (EBITDA) guidance. If realized, that would be about 20 per cent below current consensus estimates.
The analyst still gives the stock an ‘outperform’ rating and $32 target share price.
“ShawCor generated EBITDA of $66 million on revenue of $426 million, both ahead of our estimates of $60.6 million and $402.8 million, respectively, and comfortably ahead of consensus. EMAR (Emerging Markets) and Latin America drove most of the delta relative to our numbers as North America and Asia Pacific were in line. EBITDA margins essentially matched our estimates and were consistent with the very strong third quarter 2017 numbers.
“The bad news follows. The solid fourth quarter financial performance was nice, but really just provides window dressing for an otherwise tepid release. Backlog fell to $385 million, the second-lowest reading since 2011, and the budget log edged lower as well. Guidance was also weak, with ShawCor suggesting a 2018 run-rate similar to the fourth quarter of 2016. The broader outlook actually seems somewhat optimistic, but most of the optimism seems centred on large projects in the bid/budget figures for which an award is likely in the second half of 2018 or later.
“Despite the strong sales and margin performance in the fourth quarter, we are reducing our estimates considerably to reflect the larger drop in the backlog and the updated guidance. Our 2018 EBITDA estimate falls to $156 million from $216 million while our 2019 estimate is reduced to $180 million from $233 million.
“With the decline in the backlog, ShawCor’s valuation has crept up to nearly 4.5 times backlog. While this isn’t ideal (historically we’ve recommended at four times or lower), we continue to believe patience will be rewarded as global infrastructure spending resumes and regulatory headwinds abate later in 2018.”
TORC Oil & Gas gets a ‘buy’ rating
According to Calgary-based Desjardins Capital Markets analysts Kristopher Zack and Hammad Shah, you can set your watch to the consistent returns of TORC Oil & Gas Ltd. (TSX—TOG).
Calgary-headquartered TORC is engaged in the exploration for and production of petroleum and natural gas in the Western Canadian Sedimentary Basin.
The company’s guidance is unchanged, while the analysts suggest its fourth-quarter results were slightly better than expected.
Fourth-quarter 2017 cash flow per share of $0.31 was slightly ahead of consensus estimate of $0.29; quarterly production of 21,886 barrels of oil equivalent per day was also a bit above consensus; and the company’s proved and probable reserves are up seven per cent per share year-over-year (or 7.4 per cent on a debt-adjusted basis).
“We like the stock at current levels, noting the strong sustainability metrics, solid balance sheet and consistent operational performance quarter-to-quarter,” say Messrs. Zack and Shah. They continue their belief that TORC is well positioned to manage oil price volatility, with “achievable growth targets and a manageable decline rate of less than 25 per cent”.
The analysts maintain their ‘buy’ recommendation, $9.50 per share target price, and average risk rating.
This is an edited version of an article that was originally published for subscribers in the April 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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