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Inside the Market’s roundup of some of today’s key analyst actions

Seeing “compressed upside” in Pembina Pipeline Corp. (PPL-T) following a period of price appreciation, Industrial Alliance Securities analyst Elias Foscolos lowered his rating for the stock on Friday.

Noting the Calgary-based company has risen by 8 per cent in price since an upgrade on Oct. 4, Mr. Foscolos moved it back to “buy” from “strong buy” a day after it jumped 4.4 per cent on a Kinder Morgan Inc. (KMI-N) announcement that it sold the 25 million shares that it received when Pembina bought Kinder Morgan Canada.

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“Since our move to Strong Buy in late October, PPL has been delivering positive news,” said the analyst. “With the Company’s Q3/19 results, it increased the bottom end of its 2019 EBITDA guidance range by $100-million and announced the Phase IX Peace Pipeline expansion and the development of a co-generation facility at Empress. In mid-December, PPL closed the acquisition of Kinder Morgan Canada and the U.S. portion of the Cochin pipeline, and re-affirmed that it will be increasing the monthly dividend by 5 per cent. The release included 2020 EBITDA guidance of $3.4-billion plus or minus $150-million, which was above previous Street expectations. In the past few days, PPL has announced progress regarding the de-risking of the propane dehydrogenation/polypropylene (PDH/PP) facility, a $1-billion public note offering, and the sale of PPL’s shares by Kinder Morgan Inc.which KMI acquired from PPL in conjunction with the Kinder Morgan Canada acquisition.”

Mr. Foscolos maintained a target price of $56 for Pembina shares. The average target on the Street is currently $55.39, according to Thomson Reuters Eikon data.

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Calling its near-term balance sheet constraints as a “notable risk,” Piper Sandler analyst Michael Lavery downgraded Aurora Cannabis Inc. (ACB-N, ACB-T) to “underweight” from “neutral” after the bell on Thursday.

Mr. Lavery said he expects negative cash from operations until the third quarter of 2021 and projects a cash deficit of $200-million in the interim.

Though he thinks the opening of more stores in Ontario will provide a boost after April, he emphasized weak sales in the EU are a risk to growth and margins.

The analyst reduced his target to US$1 from US$3. The average on the Street is US$3.84.

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Separately, Bank of America analyst Christopher Carey lowered Aurora to “underperform” from “neutral” with a $1.50 (Canadian) target, down from $4.

“With balance sheet risks to remain a core investment thesis in 2020 in our view, and lingering uncertainty especially on financial covenants, we struggle to envision a scenario where shares have sustainable support,” said Mr. Carey .

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Though he thinks current macro conditions continue to favour international markets, AltaCorp Capital analyst Tim Monachello expects North American energy services companies are likely to bounce back in 2020 following a “weak” conclusion to 2019.

"From a macro perspective we believe 2020 will likely bring 1) moderate sequential activity growth in the lower-48 as rig counts rebound from trough levels to begin the year; still we expect 2020 rig activity to be down roughly 9 per cent year-over-year in the U.S.; 2) in Canada we forecast activity to be lower on a year-over-year basis by roughly 4 per cent, but like the U.S., activity should pace higher on a sequential basis following a weak end to 2019 and given the typical seasonal uplift in Q1; and 3) we expect moderate growth to continue in international markets where long-cycle developments, including LNG, continue to advance – overall we estimate international rig activity could increase roughly 5 per cent per year over our forecast horizon," said Mr. Monachello in a research report released Friday.

"Given this macro backdrop, we believe equities could respond to strengthening activity levels in North America as activity begins to grow, but we do not believe activity is likely to reach early-2019 levels and pricing isn’t likely to gain significant traction for most North American service lines."

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Based on that view, Mr. Monachello advised investors to seek positions in defensive energy services equities with the following elements: the ability to generate “meaningful” free cash flow; carry low leverage or are “actively” deleveraging; are not heavily exposed to “commodity” services lines; possess leverage to growth sectors; and are attractively prices based on enterprise value-to-EBITDA and adjusted funds from operations (AFFO) yields.

Noting a continued bull market for crude could “justify an investment in less defensive names,” Mr. Monachello lowered his North American field activity forecasts and forward earnings estimates the coming fourth-quarter earnings season.

He also emphasized forward commentary is likely to dictate stock performance during this earnings period.

"By-and-large we believe weak field activity levels in Q4 are anticipated by the market, and have largely been priced into stocks as budget exhaustion and capital discipline weighed heavy on service providers," he said. "As such, outside of large scale beats and misses, we expect the market to primarily focus on forward-looking commentary for signals if recent commodity price strength (as long as it lasts) could translate into stronger activity levels in forward quarters. We also believe investors will likely focus heavily on bookings and the pace of project awards as a leading indicator which could dictate equity performance."

Mr. Monachello named three companies as his top picks for 2020 from his small and mid-cap stock coverage universe.

"Overall, we believe investors should look toward defensive energy services companies with strong free cash profiles that are trading at attractive valuations," he said. "As for our top picks, each offer strong free cash yields at current prices, have reasonable leverage metrics (3.0 times net debt/EBITDA or below) and are actively deleveraging, and are trading at meaningful discounts to peers and historical valuations."

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They are:

AKITA Drilling Ltd. (AKT.A-T), which he upgraded to “outperform” from “sector perform” with a target of $2, down from $2.25. The average on the Street is $1.88.

"Our bullish view on AKT is a function of 1) our view that the stock is considerably oversold, trading at only 4.7 times 2020 estimated and 4.0 times 2021 estimated EBITDAS and offering investors 17-per-cent and 26-per-cent FCF yields in each respective year; 2) we believe AKT is well-positioned to benefit from increased oil sands and thermal oil drilling activity in Canada in 2020 as its business has historically been heavily exposed to this sub-segment of the Canadian drilling market which was heavily depressed through 2019; and 3) we believe Akita’s US operations continue to perform well and has seen stronger activity levels following its 2019 geographic consolidation toward the Permian and Rockies regions," said Mr. Monachello.

CES Energy Solutions Corp. (CEU-T, “outperform”) with a $3.50 target, down from $4. Average: $3.50.

"CES is roughly 50-per-cent revenue exposed to North American drilling through its drilling fluids businesses; it is also roughly 50 per cent exposed to production chemicals which provides a stable and defensive cash flow stream," he said. "This balanced exposure to drilling and production allows investors upside to the drilling cycle while still providing ample free cash flow generation in cyclical downturns owing to its leverage to the more stable production cycle."

Exterran Corp. (EXTN-N, “outperform” with a US$16.50 target, down from US$19. Average: US$18.83.

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“Despite EXTN’s strong performance over recent weeks, up roughly 46 per cent from early December lows, we continue to believe EXTN shares remain undervalued,” he said.

At the same time, Mr. Monachello downgraded a pair of stocks.

He moved Western Energy Services Corp. (WRG-T) to “underperform” from “sector perform” with an unchanged 25-cent target, which matches the current average on the Street.

“Western shares have performed well over recent weeks – up roughly 93 per cent from mid-November lows," the analyst said. "Still, our more tempered view for Canadian field activity based on lower year-over-year E&P budgets leads us to believe that both activity levels and rates for mid-market drilling equipment are likely to remain pressured through 2020. Overall, our estimates suggest Western will likely generate negative free cash flow over our forecast horizon, and will thus struggle to deleverage its balance sheet which currently stands amongst the most leveraged in the sector (9.0 times net debt/EBITDA at September 30th, 2019). While we remain cautious on Canadian activity levels, we believe continued strength in global crude prices could continue to bolster high-beta and highly leveraged equities in the sector – we view this as the largest risk to our bearish stance on WRG shares.”

The analyst lowered Questor Technology Inc. (QST-X) to “sector perform” from “outperform” with a target of $5.50 (unchanged). The average is xxx.

“Our reduced rating is purely a reflection of QST’s strong performance over recent weeks as its shares have appreciated roughly 22 per cent since early-December and are now priced with only roughly 11-per-cent upside to our $5.50 price target,” said Mr. Monachello. “At its current price, QST now screens below the median AFFO yield in our coverage group. We remain positive regarding QST’s positioning and leverage to an ongoing systematic shift toward more stringent upstream environmental development practices but recommend investors wait for a more opportunistic valuation to build positions.”

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In other analyst actions:

* TD Securities analyst Greg Barnes raised First Quantum Minerals Ltd. (FM-T) to “action list buy” to “buy” with a $16.50 target, up from $15. The average on the Street is $16.07.

* TD’s Craig Hutchison cut Trilogy Metals Inc. (TMQ-T) to “hold” from “speculative buy” with a $3.75 target. The average is $4.30.

* Barclays lowered Descartes Systems Group Inc. (DSGX-Q, DSG-T) to “equal weight” from “overweight."

* Canaccord Genuity analyst Derek Dley raised his target for shares of retailer Artizia Inc. (ATZ-T) in response to its “impressive” quarterly results, which send the stock higher by almost 17 per cent on Thursday.

Keeping a “buy” rating, he moved his target to $27 from $24. The average target on the Street is $26.13.

“In our view, Aritzia has done a great job of navigating a changing retail landscape by offering an aspirational customer experience within its brick-and-mortar locations and an easy-to-use, consistent e-commerce platform,” said Mr. Dley. “With 21 consecutive quarters of same-store sales growth, a robust pipeline of new store openings, healthy balance sheet to support growth and margin enhancement initiatives, and a well aligned management team, we believe Aritzia is deserving of a premium valuation.”

* Credit Suisse’s Matthew Cabral became the latest analyst on the Street to raise his target for shares of Apple Inc. (AAPL-Q), citing “reflect market/comp multiple expansion as well as a better-than-feared iPhone 11 cycle so far.”

Keeping a “neutral” rating, he hiked his target to US$275 from US$221. The average is US$277.73.

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