Petro-Canada (PCZ): Removing Petro-Canada from Sell list; initiating coverage of PCA.TO - 11/27/07
Goldman Sachs Note November 27, 2007
What happened
We are removing Petro-Canada (PCZ) from the Americas Sell List and upgrading it to Neutral, as we now believe the company's downstream exposure and inexpensive valuation should outweigh its lack of medium-term E&P production growth and therefore see the risk/reward as more balanced. Since being added to the Sell list on July 25, 2006, PCZ shares are +13% versus +11% for the S&P 500 and +18% for the XOI index. Over the past year PCZ shares are +15% versus flat for the S&P 500 and +20% for the XOI. We are also initiating coverage of Petro-Canada's local market shares (PCA.TO) with a Neutral rating and C$53 12-month price target.
Current view
We now believe Petro-Canada shares appropriately reflect the company's lack of medium-term E&P production growth, while its substantial downstream exposure and strong oil sands position provide sufficient upside potential to balance the risk/reward. In contrast to previous periods, Petro-Canada shares now appear increasingly inexpensive, trading at 2008E EV/DACF of 4.8X--below the North American integrated oil sector average of 5.5X--suggesting relative downside risk is no longer great. At current levels, we see 5% upside potential to our revised US$53 12-month price target (previously US$60), below the 10% average upside potential we see for the North American integrated oil peer group. We believe additional upside potential exists for Petro-Canada shares in an environment where long-dated crude oil prices continue to rally, but in the near term shares will likely continue to be weighed down by the company's unfavorable non-oil sands growth outlook, uncertainty surrounding Fort Hills profitability, and investor hesitancy to give advance credit for its two major downstream projects. Our price target is based on cash flow, P/E, and asset valuation analyses, with the key risk being sustained lower commodity prices. We are also updating our 2008-2012 EPS estimates based on our revised outlook for Petro-Canada's production growth and refining capital projects. |
