The resource rally starts here - Catch-up to commodities
Financial Post, December 16
Thomas Hirschmann
Amid the din of technology stock euphoria, resource analysts have
been trying hard this week to put out the word that their sectors are
poised to take off.
The most bullish calls are for oil and gas stocks, but metals and
forestry have also been singled out as groups set to jump -- as they
did yesterday. The fundamental reason for the positive outlook is
the lag stocks have been experiencing, even as commodity prices
rise.
"Resource stocks should experience a reverse reality check and
catch up to commodity prices," George Vasic, an analyst at Bunting
Warburg Dillon Read Inc., wrote in a report. Resource stocks had
been tracking the rise in commodity prices until a "reality check" in
early September. But Mr. Vasic believes global economic growth
will be revised upward, and renewed confidence should spur
resource stocks on.
For oil and gas stocks, the upswing could be 40% to 60%, says a
report by Salomon Smith Barney. It says the average share price of
the large-cap producers has fallen 30% since the September peak.
"Fundamentals are strong and multiples of forward estimates have
not been this low in six years."
However, Salomon warned the rally may not begin for another
couple of months and hinges on an end to the warm weather and to
tech stocks' hot run. Salomon highlighted three Canadian
companies, giving Canadian Occidental Petroleum (CXY/TSE) a
12-month target of $35 a share, Gulf Canada Resources Ltd.
(GOU/TSE) one of $7.50 and Talisman Energy Inc. (TLM/TSE)
one of $62.50.
Randy Ollenberger, an analyst at Merrill Lynch & Co., said in a
bulletin that gas firms are inexpensive based on a consensus
price-to-cash flow multiple of roughly 3.5 times for seniors and 2.7
for juniors -- well below the respective historic medians of 5.4 and
4.4.
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