1. business and industrial

EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
January 27, 2015
Ratings Revisions
! Plum Creek Timber Company
Summary
Chopping to Sector Perform
Summary
Young-Davidson expected to drive further upside
Summary
Looking past Q4 to the benefits of a lower oil price
Summary
Cheese melt is still delicious, target to $38
Summary
Bombardier monetizing non-core assets with $20MM sale of training unit
Summary
CAE acquires Bombardier’s Military Aviation Training Unit for C$20MM
Summary
Cineplex Introduces "The Rec Room"
Summary
Offshore contract win to provide EBITDAR and ROIC lift
Summary
Geismar I up and running; N. American prices down again
Summary
Modestly lower Q4 production results; 2014 guidance achieved
Summary
2015 outlook and Q4/14 preview: It's all about commodity prices
Summary
Thesis Holds – Increase Weightings to OFS in Anticipation of 1H Oil Low
Summary
So what WTIE price are the large caps discounting?
Summary
4Q Preview – Time to Lighten Up
Price Target Revisions
! AuRico Gold Inc.
! Intertape Polymer Group Inc.
! Saputo Inc.
First Glance Notes
! Bombardier Inc.
! CAE Inc.
! Cineplex Inc.
! HNZ Group Inc.
! Methanex Corp.
! Timmins Gold Corp.
Industry Comments
! Canadian Energy Infrastructure
! Global Oilfield Services
! Integrated Oil and Senior E&P
! Integrated Oil and Senior E&P
! Paper & Forest Products Weekly
! RBC International E&P Daily
Summary
Summary
PRE; MVN
! - Action-Oriented Research
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 12.
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
January 27, 2015
Ratings Revisions
! Plum Creek Timber Company
! The Hershey Company
Summary
Chopping to Sector Perform
Summary
Analyzing Hershey's US growth drivers; shifting to Sector Perform
Summary
Lowering Estimates and Price Target to Reflect Muted 2015 Leverage and Soft Consumer Sales
Summary
Q4 Preview & Cheat Sheet
Summary
Young-Davidson expected to drive further upside
Summary
4Q14: Making Progress on Chopping Through the Wood Pile
Summary
4Q EPS $0.64 – Another strong quarter driven by consistent loan growth
Summary
Here we go again; Informatica in play
Summary
Joining forces with RockTenn
Summary
4Q EPS $0.38 - Solid quarter and consistent outlook.
Summary
Distribution, Budget Reductions a Sign of Tough Times
Summary
Coal pressures, challenging mix creates near-term downside risk
Summary
PartnerRe & AXIS Capital join forces
Summary
Enterprise Ramps Offset By OPEX & Pricing Concerns.
Summary
Lowering Price Target As We Await 2015 Leverage Update. Maintain Outperform.
Summary
At or above industry growth rates, yet trading at a discount we can't explain
Summary
“Miss & Lower” a Tough Way to Start the Year
Summary
4Q14: Energy a Bit of a Wildcard in 2015 Outlook
Summary
4Q results a bit better than expected
Summary
ETP and RGP Agree to $18 Billion Merger
Summary
Q4 beat, guidance a bit light
Summary
Q4 ahead of expectations
Summary
$350M Debt Issuance Expected
Summary
First Look: One of the more solid reports we’ve seen
Summary
Earnings Preview: UTX (AMC), LMT, TDG
Summary
December '14Q Preview & Cheat Sheet
Summary
F1Q'15 Preview & Cheat Sheet
Summary
Sue did your homework: China and overheating
Summary
Scripting More OTT and International
Summary
Waiting for the owl to land: Pending acquisition by ATD to overshadow Q1 results
Price Target Revisions
! 3D Systems Corp.
! Amazon.com
! AuRico Gold Inc.
! Citizens Financial Group Inc.
! Heartland Financial USA, Inc.
! Informatica Corporation
! MeadWestvaco Corp.
! Metro Bancorp Inc.
! Mid-Con Energy Partners, LP
! Norfolk Southern Corporation
! PartnerRe, Ltd.
! Seagate Technology
! Stratasys, Ltd.
! Texas Instruments Inc.
! W.W. Grainger Inc.
! Zions Bancorporation
First Glance Notes
! Brown & Brown, Inc.
! Energy Transfer Partners, L.P.
! Plum Creek Timber Company
! RLI Corp.
! SVB Financial Group
! Texas Instruments Inc.
Earnings Preview
! Aerospace & Defense
! Alibaba Group Holding Limited
! Energizer Holdings, Inc.
! Qualcomm Incorporated
! Scripps Networks Interactive, Inc.
! The Pantry, Inc.
2
EQUITY RESEARCH
Company Comments
! Chipotle Mexican Grill, Inc.
! City Holding Company
! D.R. Horton Inc.
! IBM
! Northwest Bancshares, Inc.
! Republic First Bancorp Inc.
! Roper Industries Inc.
! Santhera Pharmaceuticals Holding
Summary
Wrapping up a strong year
Summary
4Q14: Exceeding expectations on the back of lower provision
Summary
1Q15 Earnings Review
Summary
Restructuring Likely Not as Large as Media Thinks, Given Management Comments.
Summary
4Q14: Higher earnings and higher dividend
Summary
4Q EPS $0.02 – Strong loan growth and better SBA fees drive 4Q performance
Summary
Blizzard of FCF and Healthy Guidance Among Key Positives; Reiterate Outperform
Summary
SANN reports unaudited financials; preparing for NDA filing in DMD in 1H15
!
! TE Connectivity Ltd.
Summary
4Q14 Report: Big finish but 2015 uncertainties cloud the outlook
Summary
Getting Ready To Divest Networking. We think This Is A HUGE Positive
! FDO/DLTR
! Integrated Oil and Senior E&P
! Integrated Oil and Senior E&P
! RBC European Industrials Daily
! RBC International E&P Daily
! U.S. Banks: Top 20 4Q14 Trends and
Summary
FDO's December results; small sample but encouraging for DLTR
Summary
So what WTIE price are the large caps discounting?
Summary
4Q Preview – Time to Lighten Up
Summary
Siemens Q1 miss on central items, Philips flagging 2015 headwinds
Summary
PRE; MVN
Summary
4Q results set the stage for 2015 capital return and better loan growth
!
Summary
Spot ethylene rises on tight supply; December existing home sales rebound
AG
Santos Limited
Industry Comments
Fundamentals Review
US Chemicals Weekly Watch
3
EQUITY RESEARCH
UK & European Research at a Glance
January 27, 2015
Ratings Revisions
! Royal Mail plc
Summary
Significant consensus downgrades yet to come
Summary
2015/16E set to see EPS retrench
Summary
Maintain Outperform; new CEO should reveal strategy concurrent with results
Summary
Sustainable Value Creation
! Santhera Pharmaceuticals Holding
Summary
SANN reports unaudited financials; preparing for NDA filing in DMD in 1H15
!
Summary
Getting Ready To Divest Networking. We think This Is A HUGE Positive
Price Target Revisions
! FirstGroup PLC
! GAM Holding AG
First Glance Notes
! Taylor Wimpey plc
Company Comments
AG
TE Connectivity Ltd.
Industry Comments
! Correction: Global Mining Trends &
Summary
!
Summary
Values
Integrated Oil and Senior E&P
4Q Preview – Time to Lighten Up
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
4
Ratings Revisions
Plum Creek Timber Company(NYSE: PCL; 44.89)
Paul C. Quinn (Analyst)
(604) 257-7048; [email protected]
Hamir Patel (Analyst)
(604) 257-7145; [email protected]
Rating:
Price Target:
52 WEEKS
07FEB14 - 26JAN15
Sector Perform (prev: Outperform)
46.00
Chopping to Sector Perform
We are reducing our rating to Sector Perform (from Outperform) but maintaining
our $46 price target. PCL is up 14.8% over the last four months (vs. +4.6% for
the S&P500) and now trading close to our target. With no clear catalysts for the
company in 2015, we are moving to the sidelines.
44.00
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EPS, Adj Diluted Prev.
2013A
1.39
2014A
1.19↑
1.15
2015E
1.15↓
1.26
2016E
1.58↓
1.73
P/E
32.3x
37.7x
39.0x
28.4x
All values in USD unless otherwise noted.
• Despite our downgrade, we highlight that PCL's SOTP suggests further longterm upside based on private-market comps – Our $52/share SOTP values PCL's
Southern lands at $1,900/acre, arguably a discount to recent precedents in the
$2,000+/acre "new norm" range in the South. We remain conservative with
our target, as we believe public market investors will need to see momentum
in Southern sawlog prices before they buy into the aggressive pricing and low
discount rates embedded in recent private-market deals. With PCL expecting only
~5% improvement in Southern sawlog prices this year, it's hard to get excited at
this point in the cycle. At the same time, the strong US dollar and weak ruble may
pose some downside risk to NA log exports to Asia over the near term.
• Management outlook is that "2015 will be much like 2014" with comparable
CFFO – US Housing: Plum Creek continues to expect 1.1MM starts in 2015.
Resources (Timberlands): Given its plans to maintain its Southern harvest levels
until sawlog prices materially improve (management thinks we need 1.2MM+
starts), PCL plans to harvest only 19–20MM tons in 2015. Real Estate: Sales
in 2015 guided in the $250–300MM range (~$100MM from larger timberland
dispositions). Management provided Q1 EPS guidance of $0.20–0.25/share (high
end below our prior estimate of $0.28 [now $0.22] and consensus of $0.27)
and unveiled annual guidance for 2015 at $1.05–1.30/share (midpoint below our
prior estimate of $1.26 [now $1.15] and consensus of the same).
Price Target Revisions
AuRico Gold Inc.(NYSE: AUQ; 3.90; TSX: AUQ.TO)
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
Mark Mihaljevic (Associate)
(416) 842-3804; [email protected]
52 WEEKS
Rating:
Price Target:
07FEB14 - 26JAN15
Outperform
5.00 ▲ 4.75
Young-Davidson expected to drive further upside
We expect AuRico’s fundamental positioning to improve relative to its peers driven
by the ongoing ramp-up and improving free cash flow potential of the company’s
Young-Davidson mine. With steady quarterly operational gains forecast throughout
2015 and into 2016, AuRico’s valuation is expected to significantly improve, an
aspect which is likely to become increasingly attractive to investors.
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2014E
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2015E
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2016E
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All values in USD unless otherwise noted.
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With Young-Davidson having turned free cash flow positive in Q4/14, we expect
company-wide free cash flow to improve throughout 2015 and 2016 before
ratcheting up in 2017 driven by increasing production, declining costs and waning
capital intensity.
Further operational gains forecast throughout 2015 and 2016
We expect production to increase over the next couple of years given the
ongoing ramp-up of underground operations at Young-Davidson and relatively flat
production from El Chanate. With the Young-Davidson underground expected to
5
exit 2015 at 6,000 tpd and 2016 at 8,000 tpd, quarterly production is expected
to rise given the relative grade differential between underground ore and surface
stockpiles.
Costs are expected to decline further driven by an increasing contribution from
Young-Davidson, partially offset by higher costs at El Chanate. Further gains could
be made should the Canadian dollar and Mexican peso remain weak (11% and 9%
below their respective 2014 averages).
Improving fundamentals expected to drive improved valuation
AuRico’s improving fundamentals are expected to lead to a more attractive
valuation. Although the company trades at elevated multiples on near-term
metrics, we expect AuRico’s valuation to significantly improve with the company
currently trading at 13x 2017 EV/AdjCF (sustaining cash flow) versus 24x our 2015
estimate (flat $1,250/oz gold).
Intertape Polymer Group Inc.(TSX: ITP; 17.20)
Ben Holton, CFA (Analyst)
(416) 842-9949; [email protected]
Steve Arthur, CFA (Analyst)
(416) 842-7844; [email protected]
20.00
Rating:
Price Target:
52 WEEKS
07FEB14 - 26JAN15
Outperform
23.00 ▲ 20.00
Looking past Q4 to the benefits of a lower oil price
The 15% decline in the share price following the Q4 profit warning appears
significantly overdone given the temporary nature of the issues. Looking forward,
we expect significantly lower resin prices will result in higher margins and earnings,
and believe the decline in the share price has created a very attractive entry point.
We reiterate our Outperform rating, and increase our target to $23.
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Revenue Prev.
781.5
813.0↓
813.5
786.9↓
836.5
811.6↓
865.8
All market data in CAD; all financial data in USD.
The 15% decline in the share price following the Q4 profit warning appears
significantly overdone. Looking forward, we expect significantly lower resin prices
will result in higher margins and earnings, and believe the decline in the share price
has created a very attractive entry point. We reiterate our Outperform rating, and
increase our target to $23.
Looking past the Q4/14 issues, lower resin prices should lead to higher margins
and earnings: ITP’s main raw materials have seen significant price declines in recent
months. We anticipate ITP will be able to capture some of these input cost savings
in the form of higher margins, which should lead to increased earnings.
The big picture view – Selloff creates an attractive entry point ahead of what
should be a solid 2015E: The Q4/14 profit warning had no real impact on our longterm thesis, or even on our 2015 estimates. Our forward earnings estimates would
have increased regardless of the profit warning to reflect the anticipated benefits
of lower oil prices, though the warning (and the associated 15% decline in the share
price) has created an even more attractive entry point, in our opinion.
Valuation looks very attractive: ITP shares are not pricing in our forecasted
earnings growth, and are trading at too wide of a discount on forward multiples, in
our view. The peer group is currently trading at 9.0x 2016E EBITDA and 16.7x EPS,
while ITP trades at 6.9x and 11.4x, respectively. We believe this discount should
narrow over time.
Irene Nattel (Analyst)
(514) 878-7262; [email protected]
Martin Gravel, CFA (Associate)
(514) 878-7264; [email protected]
Alex Carette (Associate)
(514) 878-7254; [email protected]
Saputo Inc.(TSX: SAP; 35.81)
Rating:
Price Target:
Outperform
38.00 ▲ 36.00
Cheese melt is still delicious, target to $38
While declining cheese markets will be a headwind in the U.S. segment, SAP's
strong and diversified platforms and recent acquisitions of WCB and Scotsburn
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52 WEEKS
07FEB14 - 26JAN15
36.00
34.00
32.00
should enable the company to generate solid earnings growth for Q3. In our view
multiple expansion since mid-2013 should be sustainable as earnings are buoyed by
strong dairy markets, the maturation of past acquisitions and market expectations
around M&A.
30.00
28.00
Forecasting Q3/F15 EPS of $0.39 (+7%), consensus $0.42
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2014A
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2015E
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1.57
2016E
1.70↓
1.71
2017E
1.94↑
1.93
P/E
24.9x
23.4x
21.1x
18.5x
• SAP will report Q3/F15 results on February 5. Forecasting Q3/F15 EPS +7%
to $0.39 reflecting tailwinds from the stronger US$ and seasonally stronger
contribution from the WCB acquisition, partly offset by declining dairy markets
in the U.S driving lower inventory realization. Our estimate is toward to low-end
of the consensus range ($0.38 - $0.44) and below the mean of $0.42.
Rolling valuation forward, target from $36 to $38
• We are rolling our valuation basis from September 2016 to March 2017 to reflect
solid execution of strategies to build shareholder value/passage of time, driving
a $2 increase in our price target to $38. We are maintaining our Outperform
ranking on SAP as management remains focused on driving growth through
acquisitions, not reflected in our financial forecasts/valuation. With a strong
balance sheet and ample opportunity to expand/extend its footprint, SAP is
willing to look at opportunities of all sizes, ranging from small ($100 MM) to very
large (up to $3.5 b).
All values in CAD unless otherwise noted.
First Glance Notes
Bombardier Inc.(TSX: BBD.B; 2.80)
Walter Spracklin, CFA (Analyst)
(416) 842-7877; [email protected]
Derek Spronck (Analyst)
(416) 842-7833; [email protected]
52 WEEKS
Rating:
Sector Perform
Bombardier monetizing non-core assets with $20MM sale of training unit
07FEB14 - 26JAN15
4.20
3.85
3.50
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2.80
• Small sale, but highlights significant actions being undertaken. Bombardier
announced it reached an agreement for the sale of its Military Aviation Training
activities to CAE. While the sale is small in size (~$20MM), it highlights the depth
that Bombardier's management is undertaking to monetize non-core assets. We
believe there could be additional asset sales as management looks to improve
liquidity levels, in particular assets that are not currently generating cash flow,
but may have patent/future market value.
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All market data in CAD; all financial data in USD; dividends paid in
CAD.
Steve Arthur, CFA (Analyst)
(416) 842-7844; [email protected]
Anthony Jin, CFA, P.Eng. (Analyst)
(416) 842-5338; [email protected]
CAE Inc.(TSX: CAE; 15.71; NYSE: CAE)
Rating:
Outperform
CAE acquires Bombardier’s Military Aviation Training Unit for C$20MM
• Our view: We view the acquisition as notionally positive, though neutral to
shares given the scale and expected modest boost to financial performance. The
acquisition enhances CAE’s core training capabilities, expanding their services
offerings into support for live training of military pilots. Furthermore, we believe
the acquisition may provide CAE another leg of business to pursue to bolster
the lagging Military segment. According to CAE’s President and CEO Marc Parent,
“We plan to expand the NFTC program, and leverage our new capabilities into
future integrated training systems programs worldwide."
• Financial details: CAE signed an agreement to acquire Bombardier's Military
Aviation Training business for approximately C$19.8 million. Revenue and
7
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07FEB14 - 26JAN15
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earnings details were not provided. Given the scale of the acquisition however,
we expect only a modest lift to the Military segment. Subject to usual conditions
and regulatory approvals, the transaction is expected to close during 2015.
• On closing, CAE will be the prime contractor responsible for the NATO Flying
Training in Canada (NFTC) program that produces qualified military pilots for
defence customers. The NFTC program operates out of Moose Jaw, Saskatchewan
and Cold Lake, Alberta and CAE will operate the NFTC base facilities, deliver the
ground-school classroom and simulator training, and support live flying training.
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All values in CAD unless otherwise noted.
Cineplex Inc.(TSX: CGX; 44.75)
Haran Posner (Analyst)
(416) 842-7832; [email protected]
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; [email protected]
46.00
52 WEEKS
Rating:
Cineplex Introduces "The Rec Room"
07FEB14 - 26JAN15
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Outperform
Offshore contract win to provide EBITDAR and ROIC lift
07FEB14 - 26JAN15
22.00
F
• Cineplex to introduce The Rec Room. Cineplex announced today plans to launch
The Rec Room, a social entertainment destination.
• Consistent with strategy and directionally positive, in our view. We believe
the announcement is consistent with the company's well articulated growth
and diversification strategies. Management has been highlighting the growth
opportunity in gaming for some time, and the possibility of expanding the
company's food service and gaming businesses outside the theatre box. We
recognize the lower barriers to entry and larger fragmentation of this market
relative to cinema exhibition, but we believe Cineplex can leverage its existing
assets and strong expertise in food service ($350MM of revenue in 2013),
gaming ($66MM of revenue including 100% of CSI), and the management
of cinema entertainment venues (industry-leading execution). Entertainment
concepts similar to The Rec Room have had good success in the US, and we are
not aware of any operator with meaningful scale in Canada. In the US market,
Dave & Busters operates a rather similar business and is targeting ~US$157MM
of adjusted EBITDA this year, with same-store-sales growth of 5.5%-6.0% at its 70
locations (D&B trades at ~9.5x FTM EV/EBITDA, and its single Canadian location
in Toronto generated ~US$10.5MM of revenue in 2013). We believe a measured
rollout of The Rec Room will be viewed positively by investors, relative to a large
scale acquisition in a new/emerging segment.
HNZ Group Inc.(TSX: HNZ.A; 21.00)
Derek Spronck (Analyst)
(416) 842-7833; [email protected]
Walter Spracklin, CFA (Analyst)
(416) 842-7877; [email protected]
52 WEEKS
Outperform
• New oil & gas contract announced. HNZ announced this morning that they have
been awarded a contract by Shell Canada Energy to provide offshore services
from Halifax, Nova Scotia. While the initial contract is short in duration (a little
less than one year), the contract comes with healthy revenues of ~$20MM and
what we believe will be EBITDAR margins of 28%-32%. To put it in perspective,
this contract would represent a lift in revenue and EBITDAR of ~10% off of 2014E
and while only one year in duration (starting in mid-2015), we believe is just the
beginning of further contract options to be awarded.
• Likely the first of many. The contract announced with Shell Canada represents
the first contract for HNZ in the Canadian east-coast offshore market. The key
here is that not only are there indications of still significant exploration activity
in Atlantic Canada, with this contract HNZ now becomes a viable competitor for
additional Canadian offshore contract tenders.
• Assessment: Offshore strategy set to provide ROIC lift. As HNZ further expands
into the offshore segment, we believe HNZ is set to see a continued lift in
ROIC. The key, in our view, is that management's strategy to focus on high
8
margin offshore business, coupled with leveraging attractive lease rates, should
represent ROIC north of ~20% on an incremental contract basis. This is higher
than the ~10%-12% HNZ is achieving today, and in our view is set to support
higher valuations in the HNZ shares.
Methanex Corp.(NASDAQ: MEOH; 46.50; TSX: MX)
Robert Kwan, CFA (Analyst)
(604) 257-7611; [email protected]
Michelle Zuliani (Associate)
604 257 7064; [email protected]
Rating:
Geismar I up and running; N. American prices down again
52 WEEKS
07FEB14 - 26JAN15
70.00
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All values in USD unless otherwise noted.
Timmins Gold Corp.(TSX: TMM; 1.33; NYSE: TGD)
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; [email protected]
Akbar Badri (Associate)
416 842 7840; [email protected]
52 WEEKS
• Geismar I start up in line with expectations. Methanex announced that the one
million tonne per year plant in Geismar, Louisiana commenced the production
of methanol over the weekend. The timing for the commissioning of the plant
relocation from Chile is in line with our financial forecast. The company noted
that it expects the plant to ramp up production over the coming weeks.
• Geismar II remains on track both for timing and costs. The company noted that
Geismar II, the second relocation from Chile, is on track to produce methanol by
late Q1/16. Further, Methanex noted that the cost estimate for the two plants
remains at roughly $1.4 billion.
• North American methanol prices decline by another 7%. Methanex posted a
7% reduction in its North American non-discounted reference price for February
2015. The new price is $416/tonne (down from $449/tonne for January 2015).
This represents the third consecutive monthly decline in methanol prices. Asia
Pacific pricing for February is expected to be released in the coming days.
European prices are released on a quarterly basis, so no update is expected this
month.
Rating:
Outperform
Modestly lower Q4 production results; 2014 guidance achieved
07FEB14 - 26JAN15
2.00
1.80
1.60
1.40
• We view this morning's release as a slight negative as Q4 production was
modestly below our estimates and down from Q3; although 2014 production
guidance was achieved. 2015 guidance is similar to 2014 results, with the mine
at steady state, although cash cost guidance was marginally higher than our
estimate.
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All market data in CAD; all financial data in USD; dividends paid in
CAD.
Industry Comments
Robert Kwan, CFA (Analyst)
(604) 257-7611; [email protected]
Canadian Energy Infrastructure
Nelson Ng, CFA (Analyst)
(604) 257-7617; [email protected]
• Tilt to the less commodity exposed names. Given pretty much every commodity
that materially impacts our coverage is going in the wrong direction (e.g., oil,
NGL prices/frac spreads, Alberta power), we believe that there is unlikely to be
a good news story for commodity exposed names coming out of Q4/14 results.
As such, on a tactical basis, we would tilt to the less commodity exposed names
(e.g., Emera, Fortis) and away from higher exposures for midstream and Alberta
power.
• Dividend increases expected. With the release of the Q4/14 results we
expect the following companies to announce dividend increases: Brookfield
Kelsey Roste (Associate)
(604) 257-7383; [email protected]
Michelle Zuliani (Associate)
604 257 7064; [email protected]
All values in CAD unless otherwise noted.
2015 outlook and Q4/14 preview: It's all about commodity prices
9
Infrastructure (+10%), Brookfield Renewable (+5%), Gibson (+8%), Innergex
Renewable (+3%), Pattern Energy (+3%) and TransCanada (+8%).
• What we like going into the quarter: We favour the regulated utilities (EMA,
FTS) for stability, U.S. dollar exposure and for Emera, New England capacity prices
(please click here).
What to expect for 2015
• Beginning on page 2, we highlight our outlook for the year, which includes our
thoughts under various oil price scenarios along with the thesis behind our two
focus stocks for the year (Emera and Enbridge).
Reporting schedule
• Reporting starts on Wednesday, January 28. A table of the reporting dates,
conference call details, and our estimates is shown in Exhibit 1 on page 2. Updates
to reporting dates and conference call details can be found in our subsequent
Energy Infrastructure Weekly Stats publications.
Kurt Hallead (Analyst)
(512) 708-6356; [email protected]
Global Oilfield Services
Dan MacDonald, CFA (Analyst)
(403) 299-2394; [email protected]
• On Dec 18th, we recommended increasing exposure to OFS in anticipation of an
oil price low during 1H15. We are maintaining that stance. Dec 18th note.
• NAM land drillers and US intensive diversified service best performers off cycle
lows
• In every cycle rebound dating back to ’97-’98, land drillers have consistently been
among the top 10 performers. The primary driver for OFS stock is the velocity of
US E&P spend once oil starts to recover.
• Oil price, not EPS reductions, drives stock perf on the rebound
• In every down-cycle, OFS stocks tend to turn anywhere between 2 weeks to 2
months before oil and about 6-12 months before EPS estimates stop going down.
Robert Pinkard (Analyst)
(512) 708-6339; [email protected]
Matthew McKellar (Associate)
403 299 5045; [email protected]
All values in CAD unless otherwise noted.
Thesis Holds – Increase Weightings to OFS in Anticipation of 1H Oil Low
Greg Pardy, CFA (Analyst)
(416) 842-7848; [email protected]
Integrated Oil and Senior E&P
Franz Hargo Muljo, CA (Associate)
416 842 8588; [email protected]
• Based on our net asset value analysis, our large cap independent and integrated
coverage universe is currently discounting a long-term escalated WTI equivalent
(WTIE) price of US$72/boe (vs. US$70/boe), up 3% from last week, and a longterm WTI price of US$86/b (vs. US$84/b), up 2% from last week.
• Current WTIE implied prices would compare with prior 2009–2014 YTD peak
and trough levels of US$84/boe and US$61/boe, respectively, while current WTI
implied prices would compare with peak and trough levels of US$102/b and US
$62/b, respectively.
• Spot WTIE prices of US$39/boe (vs. US$41/boe) were down 5% from last week.
Long-dated (2015–2018) WTIE prices of US$51/boe (vs. US$52/boe) were down
2% from last week.
• Our implied WTIE price (defined as an equivalent barrel economically weighted
approximately 75% to WTI crude oil and 25% to Henry Hub natural gas) is the
long-term price incorporated into our collective net asset value analysis, which
equates current share prices for our group to a P/NAV ratio of 100%. This analysis
incorporates an 8.5% after-tax discount rate. Please refer to Exhibit 1 for our WTI
equivalent price analysis.
All values in USD unless otherwise noted.
So what WTIE price are the large caps discounting?
Greg Pardy, CFA (Analyst)
(416) 842-7848; [email protected]
Integrated Oil and Senior E&P
Franz Hargo Muljo, CA (Associate)
416 842 8588; [email protected]
• The fourth-quarter earnings parade is set to get underway with Canadian
Oil Sands slated to release its results on January 29. Our earnings/cash flow
estimates are generally below IBES consensus estimates, but may move more
into line as corporate surveys are released. Suncor Energy, Talisman Energy, and
Canadian Oil Sands have released analyst surveys so far.
• More important is the fact that year-end releases are likely to be accompanied
by another round of 2015 capital spending reductions across the board given
All values in CAD unless otherwise noted.
4Q Preview – Time to Lighten Up
10
the severe retreat in crude oil prices. These cuts make sense as producers seek
to protect their balance sheets and stay within their debt covenant boundaries.
Capital spending reductions are also laying the foundation of an oil price recovery
in the form of Non-OPEC supply growth deceleration – and likely absolute
production declines, as we move into 2016. Given the sharp drop in WTI prices,
negative FIFO inventory adjustments are likely to weigh upon downstream results
for Cenovus Energy, Husky Energy, and Suncor Energy.
Paul C. Quinn (Analyst)
(604) 257-7048; [email protected]
Hamir Patel (Analyst)
(604) 257-7145; [email protected]
Paper & Forest Products Weekly
• Comparable valuation tables, commodity prices, and total return performance
for our North American Paper & Forest Products coverage universe.
Nathan Piper (Analyst)
+44 131 222 3649; [email protected]
RBC International E&P Daily
Al Stanton (Analyst)
+44 131 222 3638; [email protected]
PRE.TO: Potential deletion from MSCI Canada index; MVN.V: Board changes and
Apco acquisition approved
PRE; MVN
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; [email protected]
Haydn Rodgers, CA (Associate)
+44 131 222 4911; [email protected]
All values in USD unless otherwise noted.
11
Required disclosures
Non-U.S. analyst disclosure
Nathan Piper;Al Stanton;Victoria McCulloch;Haydn Rodgers;Paul C. Quinn;Hamir Patel;Dan MacDonald;Matthew McKellar;Greg
Pardy;Franz Hargo Muljo;Robert Kwan;Nelson Ng;Kelsey Roste;Michelle Zuliani;Dan Rollins;Mark Mihaljevic;Irene
Nattel;Martin Gravel;Alex Carette;Steve Arthur;Anthony Jin;Walter Spracklin;Derek Spronck;Haran Posner;Drew McReynolds;Sam
Crittenden;Akbar Badri;Ben Holton (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may
not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule
472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst
account.
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RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
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the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 31-Dec-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
897
686
112
Percent
52.92
40.47
6.61
Investment Banking
Serv./Past 12 Mos.
Count
Percent
290
32.33
137
19.97
6
5.36
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