These cashed-in Canadian oil producers will outperform in 2023

The U.S. energy sector has made huge gains in the current year, with major oil companies setting records left, right, and center. And Wall Street says the party will continue for the next year. According to a recent Moody’s research report, US manufacturing revenues will generally stabilize in 2023, but remain relatively high. The analysts note that commodity prices have fallen from very high levels earlier in 2022, but they predict that prices are likely to remain cyclically strong through 2023. This, combined with modest volume growth, will support strong cash flow generation for oil and gas producers.

Moody’s estimates that US energy sector EBITDA will be $623 billion for 2022, but will decline to $585 billion in 2023. to support cyclical high oil prices. Meanwhile, strong export demand for US LNG will continue to support high natural gas prices.

With some of the strongest earnings in the market, US energy companies are likely to continue to make good purchases in the year ahead. But some experts now say their northern neighbors deserve a second look, too.

Related: OPEC Leaves Outlook for Global Oil Demand Untouched

After a super year of share buybacks and dividends, BMO Capital Markets Analysts have predicted that low-indebted Canadian oil and gas producers are poised to reward shareholders even more in 2023 thanks to their ability to generate ample cash combined with their diminished appetite for acquisitions.

BMO estimates that the top 35 energy companies will generate C$54 billion ($39.7 billion) in free cash flow by 2023, down 16% from this year. However, the analysts say the share of money flowing to shareholders is likely to be higher as companies will spend less on debt service.

According to the analysts, most large and medium-sized producers expect to be net debt-free in the second half of 2023. Net debt represents a company’s gross debt minus cash and cash assets

The TSX energy index is up 45.4% so far, not far off the 49.8% returns of its US brethren, the S&P 500 energy index.

S&P/TSX ENERGY

Source: S&P

Canadian energy stocks

BMO notes that Canadian energy stocks have recently taken more pressure than their US counterparts during the latest oil price sell-off due to a number of factors including discount for their heavy crude and also a $29 a barrel discount due to its distance from US refineries. The analysts have warned that the discount could worsen after the closing of the Keystone Pipeline.

BMO tapped Bonterra Energy Corp. (OTCPK: BNEFF) and Canadian natural resources (NYSE: CNQ) as good buys.

Bonterra Energy Corp., a conventional oil and gas company, is engaged in the development and production of oil and natural gas in the western Canadian sedimentary basin. The main properties are the Pembina and Willesden Green Cardium fields in central Alberta. The company faced a serious crisis in 2020 as the COVID-19 pandemic crushed oil prices. Fortunately, a government-backed loan helped Bonterra through the dark times. Bonterra has been able to repay the loan along with C$150 million in debt over the past year as of the third quarter. According to Chief Executive Officer Pat Oliver, the company expects to pay off its remaining bank debt of C$38 million by the third quarter of 2023, after which it will have new options such as initiating a dividend, increasing production or paying further. of debts.

Meanwhile, Canada’s largest oil producer Canadian Natural Resources announced last month that it will raise shareholder returns from 50% to 80% to 100% of free cash flow once net debt falls to C$8 billion. BMO says it will likely happen late next year.

We advise Arc resources (OTCPK: AETUF), Enbridge Inc. (NYSE: ENB) and Cenovus energy (NYSE: CVE).

ARC Resources Ltd. researches, develops and produces crude oil, natural gas and natural gas liquids in Canada. We like the company for its very conservative debt level and better credit rating than most of its peers. Furthermore, it is February merger with Seven Generations of Energy Ltd. for $2.7 billion in equity that made the combined entity Canada’s largest condensate producer and third-largest natural gas producer has proven profitable. Last month, Arc Resources announced a quarterly dividend of CAD 0.15/share, representing a 25% increase over the previous dividend of CAD 0.12. The shares are now yielding 3.34%.

Enbridge Inc. operates as an energy infrastructure company. The company operates in five segments: Liquids Pipelines, Gas Transmission and Midstream, Gas Distribution and Storage, Renewable Power Generation and Energy Services. Last month, Enbridge told shareholders it expects to generate strong business growth in 2023, with full-year EBITDA of C$15.9BC$16.5 billion. Enbridge attributes the gain to the $3.8 billion contribution of assets coming into use this year, as well as strong expected utilization of core assets.

Cenovus Energy Inc. develops, produces and markets crude oil, natural gas liquids and natural gas in Canada, the United States and the Asia-Pacific region. Cenovus Energy is currently returning 50% of excess free cash flow to shareholders, and has said it will increase that to 100% of excess free cash flow when net debt levels fall to C$4 billion in net debt.

Last week, Cenovus forecast production of 800,000-840,000 bpd next year, up more than 3% Y/Y, including oil sands production of 582,000-642,000 bpd and conventional production of 125,000-140,000 bpd. The company said total downstream crude throughput is forecast at 610,000-660,000 barrels per day, up nearly 28% year-on-year

By Alex Kimani for Oilprice.com

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