What do rising bond yields mean for midstream companies?
Also: Athabasca Oil has taken a beating of late, but one portfolio manager thinks its assets could be worth multiples of where its shares are trading today
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
Canaccord has taken a somewhat bearish view of the Canadian natural gas sector, downgrading its price forecast for the commodity based on higher than expected production in the U.S. In a research note, it observed that “Supply/demand fundamentals could support a $5.25/Mcf outlook in the 2015-and-beyond period. However, for now, we are conservatively lowering our 2015 forecast from $5.25/Mcf to $4.50/Mcf and our long-term forecast from $5.25/Mcf to $4.75/Mcf.” As a result, it bumped ARC Resources (TSE:ARX) and Peyto Exploration and Development (TSE:PEY) down a notch, from “buy” to “hold,” and clipped its price targed by $0.50 on ARC (down to $29 from $29.50) and a dollar on Peyto (down from $33 to $32).
And because of rising bond yields, RBC Securities analyst Robert Kwan thinks it might be time for investors to be choosier when it comes to the income-yielding securities they have in their portfolio. As the Globe and Mail reported, he thinks investors ought to be looking for companies with solid growth prospects, long-term contracts and the ability to pass on rising rates to ratepayers rather than merely ones with generous payouts. “Overall,” the paper said, “Mr. Kwan believes price-to-earnings valuations in the sector may compress 10 per cent to 15 per cent over the next 18 months.”
As a result, RBC downgraded AltaGas (TSE:ALA) and Keyera (TSE:KEY) from “outperform” to “sector perform,” and tabbed Enbridge (TSE:ENB), Pembina Pipeline (TSE:PPL) and Canadian Utilities (TSE:CU) as its favourites in the space. “The increased ranking for Canadian Utilities is driven by our view that regulated utility assets provide a relative measure of defensiveness against rising interest rates due to an assumed increase in regulated return on equity along with the ability to pass through higher interest expense in customer rates over time,” RBC’s note said. “Further, we see the shares as delivering an above average dividend growth profile along with benefiting from near-term strength in Alberta power prices.”
Meanwhile, a couple of Alberta companies received the coveted “top pick” designation on BNN’s Market Call last week. On Thursday, John Zechner tabbed Athabasca Oil (TSE:ATH) as one of his top picks, noting that the company’s light oil properties alone are worth $7 to $8 a share (more than where the entire company is trading at present) while the whole enchilada could be worth $20. Lots of upside there, to be sure, if he’s right. And on Friday, Jaime Carrasco selected the patch’s newest darling, Whitecap Resources (TSE:WCP) as one of his top picks.