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Look for buying opportunity in Suncor and Canadian Natural, Citigroup says
) ]: t% X* d8 n7 K; z2 vThe 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. & A; t' E2 E! r: ?
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He 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.
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5 q& i& D- V% K" m( h, f% ]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., }' |' W u) h/ d& Q) }4 ~0 }
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At 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.
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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$60. 2 B4 L. `$ N( p9 y
7 S3 Y, y8 O* y( S“...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.
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' s' B0 S0 |% z1 l: y- Q3 ?' |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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