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Look for buying opportunity in Suncor and Canadian Natural, Citigroup says
5 O; o" k+ r! y, P6 k* F1 j0 CThe negative after-market reaction to Alberta’s proposed royalty changes for the energy sector appears overdone and may present an opportunity to buy some names in the sector, says Citigroup analyst Doug Leggate.
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' D1 k8 [4 |( @. ?( @) |He recommends keeping an eye on preferred names in the sector like Suncor Energy Inc. (SU/TSX) and Canadian Natural Resources Ltd. (CNQ/TSX), but admits there will likely be a strong response to any change from the industry.' a% O2 D* E/ \! T
p+ ^& u& u) e" K$ l3 G- l$ FThis view is partly a result of oil prices. Citigroup has a long-term oil price assumption of US$60 per barrel, which means the changes are not considered material enough to warrant any alterations to its earnings or target prices.
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& G( e0 c' H/ g8 d/ i" g0 AAt first glance, the proposed regime looks significantly less onerous than feared, Mr. Leggate said in a research note, adding that with US$55 oil, there would be no changes to his assumptions.
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/ u8 H6 G' R4 P# |) ^$ g! l; pThere would be an impact with prices at US$100 and the royalty rate increases on a sliding scale with a cap at US$120 for WTI crude, he said, adding that the sector is discounting prices below US$60.
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“...Versus the level of oil prices we estimate are currently being discounted in the major Canadian oil sands players, the impact on valuations looks benign,” Mr. Leggate wrote.% ~5 ]8 T! M5 u' l* ?# [5 [8 x- R
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So while he acknowledged that the new regime gives away some upside, the analyst thinks plenty of core value remains with investors. |
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