In separate reports published Wednesday, BMO Capital Markets analysts offered investors a pair trade in the Energy sector by upgrading shares of Lundin Petroleum AB LNDNF to Outperform while downgrading shares of Bonanza Creek Energy Inc BCEI to Market Perform.
Lundin Petroleum: ‘Sector-Leading' Growth Through 2020
BMO's U.K.-based analyst Brendan Warn upgraded shares of OMX Nordik listed Lundin Petroleum to Outperform from Market Perform with an unchanged kr145 price target.
Warn noted that he met with Lundin's COO Alex Schneiter and CEO Ashley Heppenstall ahead of a changing of the leadership guard as Schneiter will assume top ranks at the company on October 1.
According to Warn, Lundin continues to stand out for its growth and positive free cash flow and dividend potential as of 2016 as the company is now emerging from a multi-year capital investment program. In addition, the company's Edvard Greig property's resource potential "remains significant" and is still on track for first oil by end of 2015. Meanwhile, the company's Johan Sverdup exposure is "world class" with a projected breakeven cost of around $32 per barrel.
Warn also added that the company could offer a "sustainable" dividend in 2016 under the right oil environment where oil is valued at $60 to $65 per barrel.
Bottom line, Warn concluded that the company is positioned to deliver "sector-leading production growth" through the end of the decade.
Bonanza Creek: ‘Persistent' Weakness, ‘Stubbornly' High Cost Structure
BMO's U.S.-based analyst Phillip Jungwirth downgraded shares of Bonanza Creek to Market Perform from Outperform with a price target slashed to $11 from a previous $24 due to a poor outlook.
According to Jungwirth, the small-cap E&P space is "clearly challenged" at lower oil prices. However, from a valuation, growth, leverage and margin perspective, Bonanza ranks below the peer medium. Accordingly, the company has "gravitated" from "high-quality" to "at-the-margin small-cap" as "persistent realization weakness," combined with a "stubbornly" high cost structure has eroded margins, resulting in a "challenged" outlook.
Jungwirth is modeling growth of 3 percent in 2016 and 4 percent in 2017, but its Debt/EBITDAX will trend higher to 4.1x in 2016 and 4.5x due to a forecasted capex versus flow ratio of 174 percent and 169 percent and a projected oil cost of $60 per barrel in 2016 and $65 per barrel in 2017.
Finally, Jungwirth suggested that the best positioned names within the small-cap E&P space include Carrizo Oil & Gas, Inc. CRZO, Matador Resources Co MTDR and PDC Energy Inc PDCE.
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