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Look for buying opportunity in Suncor and Canadian Natural, Citigroup says
* d1 q6 U& ~" m5 B0 a/ h# eThe negative after-market reaction to Alberta’s proposed royalty changes for the energy sector appears overdone and may present an opportunity to buy some names in the sector, says Citigroup analyst Doug Leggate. . t+ c4 p- g- {: U% F+ A) O0 j
$ U4 F V. `" M# w% jHe recommends keeping an eye on preferred names in the sector like Suncor Energy Inc. (SU/TSX) and Canadian Natural Resources Ltd. (CNQ/TSX), but admits there will likely be a strong response to any change from the industry.% a& H( h/ B; Y, Q" Q
$ U5 Z( R5 b, m, i) _. }This view is partly a result of oil prices. Citigroup has a long-term oil price assumption of US$60 per barrel, which means the changes are not considered material enough to warrant any alterations to its earnings or target prices.6 X0 B; }; j- V" A/ C' d0 c. q
$ N* M! F, W' N! d) ]: U+ W2 h! BAt first glance, the proposed regime looks significantly less onerous than feared, Mr. Leggate said in a research note, adding that with US$55 oil, there would be no changes to his assumptions.5 j% B. Q% @0 q& ]% w
4 _. D' C; e$ }- P- `There would be an impact with prices at US$100 and the royalty rate increases on a sliding scale with a cap at US$120 for WTI crude, he said, adding that the sector is discounting prices below US$60.
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' _/ f0 U3 ?: H" S: }/ a+ o) a: I“...Versus the level of oil prices we estimate are currently being discounted in the major Canadian oil sands players, the impact on valuations looks benign,” Mr. Leggate wrote.+ H; `: H4 O; E+ I
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So while he acknowledged that the new regime gives away some upside, the analyst thinks plenty of core value remains with investors. |
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