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

Benchmark analyst Mike Hickey expects Tilray Inc. (TLRY-Q) to gain a “meaningful share” of Canada’s legal cannabis market, citing the strength of its national brands as well as agreements with drug maker Novartis International AG and Canadian pharmacies.

Mr. Hickey said the legalization of recreational marijuana usage is likely to give Tilray a near-term growth catalyst, allowing it to build upon its early mover advantage in the medical space.

"We believe establishing an early first mover advantage is critically important in the emerging cannabis market, particularly when it comes to building national and global scale, leading brands, and developing innovative products and form factors that use cannabis as an active ingredient,” he said.

The analyst projects the Canadian cannabis market to grow to $4.1-billion in 2019 and expanding to $10.5-billion. Globally, he estimates the market will top $200-billion as other countries, including the United States, explore legalization.

Initiating coverage of Tilray with a “buy” rating, he set a Street-high target price of US$200 for its stock, exceeding the current average of US$98.67, according to Bloomberg data.

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OrganiGram Holdings Inc. (OGI-X) has “flown under the radar” relative to its marijuana-producing peers, according to Beacon Securities analyst Russell Stanley.

“While the stock has performed very well, the discount at which it trades relative to its peer group has expanded from its historical 20 per cent to 50 per cent,” said Mr. Stanley. “This is despite our view that OGI is a major league producer: it has large scale cultivation capacity (current and planned), a strong revenue mix that favours higher value products, and sales agreements with seven provinces. These factors should also make it a first round pick for strategic investors looking for a platform acquisition in the cannabis space.”

In a research report released Tuesday, Mr. Stanley initiated coverage of the Moncton-based company with a “buy” rating, believing it has established itself as a “national player in scale and quality.”

“While its roots are out east, OrganiGram’s current and planned capacity (25,000 kilograms and 113,000 kilograms, respectively) rank it amongst the largest in the space,” the analyst said. “This has no doubt played a role in establishing supply agreements with seven provinces, including Ontario and Alberta. Moreover, the Company’s unique 3-level cultivation approach and its increasing scale have allowed it to reduce its all-in cultivation costs by 70 per cent over the past three quarters to 80 cents per gram.

“We believe OGI has also delivered industry leading quality, as the Company’s three 1st place rankings at the Canadian Cannabis Awards in November 2017 were 2nd only to MedReleaf (which has since been acquired by Aurora Cannabis). With approximately 45% of last quarter’s revenue coming from oil products (against the weighted peer group average of 30%), the Company has rapidly upgraded its revenue mix. In combination with recent strategic investments, we view OGI as well prepared to compete on product innovation for tomorrow’s market.”

Mr. Stanley pointed to several potential near-term catalysts for the stock, including its possible graduation to the TSX, a U.S. exchange listing and the release of its fourth-quarter financial results in early December.

He also called OrganiGram a “prime” acquisition candidate, noting: "It offers would-be acquirers a strong, fully-financed production platform, established supply agreements with seven provinces, and a deep management team. This makes it a strong candidate as a platform acquisition, particularly for strategic investors coming from the beverage/pharmaceutical/tobacco markets.”

Mr. Stanley set a target price of $12, which tops the current consensus of $9.09.

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Canaccord Genuity analyst Dennis Fong upgraded Imperial Oil Ltd. (IMO-T) to “buy” from “hold” based on the expectation of outperformance from its downstream segment and stronger-than-anticipated productivity at its Kearl Oil Sands Project.

Also expressing confidence that it will sign a crude-by-rail deal before year-end, Mr. Fong hiked his target price for Imperial Oil shares to $52 from $50. The average is $45.55.

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Believing Gibson Energy Inc. (GEI-T) sits in the best position to benefit from wide differentials among energy companies in his coverage universe, BMO Nesbitt Burns analyst Ben Pham raised his rating for its stock to “outperform” from “market perform” based on heightened demand for storage infrastructure and robust crude oil marketing contribution.

“We believe this attractive backdrop could lead to further upside to consensus expectations, a step-change improvement in payout (6.3-per-cent yield), and supporting industry leading growth of 10-per-cent-plus without need for equity,” he said.

Mr. Pham said the Calgary-based company’s one-billion-barrel expansion at its Hardisty Terminal, which was announced Monday, highlights the increasing demand for oil storage infrastructure in the current wide differential environment, and also the company’s “difficult to replicate footprint at Hardisty."

He raised his target for Gibson shares to $25 from $22. The average is $22.83.

Elsewhere, CIBC World Markets' Robert Catellier raised his target for Gibson shares to $22 from $19, keeping a "neutral" rating.

Mr. Catellier said: “With the sanctioning of new tankage, Gibson continues to make significant progress in the execution of its expansion strategy at the Hardisty Terminal. Recent share price appreciation leaves a modest return to target, causing us to maintain our Neutral rating despite increasing our price target ... We believe the shares are reflecting WTI-WCS differentials of about US$19/bbl, in line with our understanding of recent crude-by-rail contracts, but above our expectations of long-term rail costs and pipeline tolls. Given the company’s exposure to near-term wide differentials and slow progress to adequate pipeline capacity, this appears to us to be a fair proposition.”

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CIBC World Markets analyst Jon Morrison thinks the Canadian oilfield services sector cannot be a growth market without enhanced takeaway capacity.

“We are ... making some decent reductions to our 2019 industry activity forecasts within the Western Canadian Sedimentary Basin (WCSB) to reflect: 1) the ongoing oil price differential challenges that will impact producer cash flows and 2019 capex budgets; and, 2) our view that, absent long-term egress solutions in the WCSB (i.e., actually building the TMX and Keystone XL pipelines), the Canadian energy industry can no longer grow production,” said Mr. Morrison in a research report previewing third-quarter earnings season. "We believe this reality will start to percolate into 2019 capex budgets, with a number of producers likely to delay the issuance of formal guidance until January and then we believe many are likely to announce development programs that show little to no incremental production growth. To be clear, we don’t want to come across as a ‘Debbie Downer,’ but we believe this is the reality facing the market.

“We also believe that this earnings season will be somewhat of a soft one for the oilfield services sector and that consensus estimates are likely to drift lower over the coming weeks. Specifically, we are 7 per cent below Q3 EBITDA consensus expectations across our coverage universe, with some of the more notable deviations including those for Black Diamond, Precision, Source, STEP and Western.”

Mr. Morrison downgraded his rating for both Source Energy Services Ltd. (SHLE-T) and Western Energy Services Corp. (WRG-T) to “neutral” from “outperformer,” noting: “[W]e struggle to find reasons for investors to own certain largely Canadian-weighted equities at this stage against this macro backdrop.”

His target for Source fell to $4.50 from $8.50. The average is $6.20.

He lowered his target for Western Energy Services to $1.50 from $2, which tops the average of $1.05.

The analyst said: “From a multi-year perspective, we remain constructive on the outlook for the oilfield services sector. The oil price remains at solid levels and physical crude data continue to support our view that the acute tightening in the global oil market has already played out and that further draws in inventories could drive some price spikes. We, therefore, believe elevated North American activity levels and production growth will be required to meet the current call on crude that is upon the global market. With that being said, the industry is at a crossroads where: 1) U.S. activity levels are likely flattish on an aggregate basis for the next six to nine months on the back of takeaway capacity challenges in various basins; and, 2) Canada faces its own acute pipeline shortage. Where there are diverging market outlooks 12 to 24 months ahead is that the U.S. is clearly on a path to fixing many of the country’s infrastructure difficulties in H2/19 whereas long-term energy infrastructure reprieve in the WCSB remains opaque. Further, the current Canadian diffs are telling us something and it’s not just that there is hefty refinery maintenance work under way across a number of refineries (although that is a real driver that shouldn’t be completely overlooked). Specifically, Canada is facing an unprecedented epic pipeline problem. And while we have known that this issue has been on the horizon for years, the pressure in the system is building and it’s set to remain ugly for some time. As such, we believe that more WCSB producers will need to temper their growth plans and that adding incremental production in this market doesn’t make sense. Investors, therefore, need to be prudent in their thinking about the mid-cycle earnings capacity of the Canadian oilfield services industry as true growth will likely be more of a 2020+ story.”

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Scotia Capital analyst Vladislav Vlad downgraded his rating for Enerflex Ltd. (EFX-T) to “sector perform” from “sector outperform” with a target of $25, which tops the consensus of $21.39.

Mr. Vlad also lowered Secure Energy Services Inc. (SES-T) to “sector underperform” from “sector perform” with a target of $10.50, falling from $11 and beneath the consensus of $11.91.

He also cut Ensign Energy Services Inc. (ESI-T) to “sector underperform” from “sector perform,” keeping a target of $7.50, which is 9 cents under the average on the Street.

Elsewhere, citing exposure to weakness in Canada’s crude market, Evercore ISI analyst James West also downgraded Ensign to “in line” from “outperform” and lowered his target by a loonie to $6.

He also dropped Trican Well Service Ltd. (TCW-T) to “in line” from “outperform” with a $3 target, down from $4 and below the average of $3.56.

Canaccord analyst John Bereznicki downgraded Trican and Calfrac Well Services Ltd. (CFW-T) to “hold” from “buy,” citing revised 2019 outlooks.

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Ahead of the release of its third-quarter financial results on Oct. 30, Citi analyst Mark May raised his operating expense forecasts for Facebook Inc. (FB-Q), leading him to lower his target price for its stock.

“While we have fewer FB checks this qrt, they seem at least in-line (e.g., Kenshoo showing no sequential decline) and Google checks (which have historically been highly correlated with FB results) have likewise been at least in-line,” he said in a research note released late Monday. “Management may opt to provide 2019 opex guidance, though we believe our expectation for guidance of 35-45 per cent is in-line with buy-side expectations (and we view the low-end of that range as the likely ultimate outcome). The more likely risk factor in the 3Q report regards 3Q user metrics (i.e., the DAU/MAU ratio, MAU growth, etc.), which have been flagged as a risk factor by third-party data providers.”

“We expect 3Q results and 4Q outlook will be in-line with forecasts and believe 2019 opex guidance – if provided – will be in-line with lowered buy-side expectations (up 35-40 per cent, though initial guidance could be 35-45 per cent). We believe the consensus buy-side ‘19 GAAP EPS estimate is $7.75-$8.00. We are updating our 2019 forecasts to account for the recent ramp in opex and capex growth, which causes our GAAP EPS estimate to decline to $8.12 .... While there is a risk of further multiple contraction given modest EPS growth in ’19, topline growth remains more than 20 per cemt and management’s long-term mid-30s margin guidance implies expense growth decelerates meaningfully starting in 2020. We see the primary risk related to user metrics like DAU/MAU, which if disappointing could be viewed as a forward indicator of future revenue growth.”

Maintaining a “buy” rating for Facebook shares, Mr. May’s target fell to US$185 from US$200. The average is US$203.58.

Meanwhile, Rosenblatt Securities initiated coverage of Facebook with a “buy” rating and US$213 target.

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In other analyst actions:

Eight Capital initiated coverage of Canopy Rivers Inc. (RIV-X) with a “buy” rating and $12 target price. The average on the Street is $9.56.

GMP analyst Ian Gillies upgraded Pason Systems Inc. to “buy” from “hold” with a target of $24.50, exceeding the average of $23.40.

With files from Bloomberg News

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/03/24 11:25am EDT.

SymbolName% changeLast
IMO-T
Imperial Oil
+0.21%93.29
GEI-T
Gibson Energy Inc
+0.52%22.98
ESI-T
Ensign Energy Services Inc
+2.37%2.59
SES-T
Secure Energy Services Inc
+0.18%11.29
ACB-T
Aurora Cannabis Inc
+12.98%6.44
EFX-T
Enerflex Ltd
-0.5%7.91
TLRY-Q
Tilray Brands Inc
+7.36%2.48
SHLE-T
Source Energy Services Ltd
+1.2%12.65
WRG-T
Western Energy Services Corp
0%2.71
TCW-T
Trican Well
+2.47%4.15
CFW-T
Calfrac Well Services Ltd
+3.14%3.94

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