Favorable refining leverage, but relative valuation still expensive - Goldman Sachs - July 27, 2007
What's changed
Petro-Canada reported 2Q 2007 EPS of US$1.50, which was ahead of our $1.13 expectation. R&M results were especially strong, though E&P earnings were also better than our forecasts. Management also provided updated production guidance, favorably narrowing its full-year 2007 range to 400-420 MBOE/d (gross) versus previous guidance of 390-420 MBOE/d.
Implications
We believe 1H 2007 results highlight the upside in Petro-Canada’s shares via its Canadian refining business. We see its refining assets as favorably differentiating Petro-Canada from many other companies pursuing oil sands opportunities in the Athabasca region. While Petro-Canada’s oil sands ramp is particularly long-dated versus other companies we cover that are investing in the region, in a resource constrained world Petro-Canada shares should benefit meaningfully from this exposure. We are less excited about the company’s North America gas and international oil businesses and think strategic action is likely needed.
Valuation
Petro-Canada shares are currently trading at 6.1X and 6.6X 2008E and 2009E EV/DACF, above the North America integrated oils average (ex-Suncor) of 5.8X and 5.5X, respectively. As such, we continue to rate Petro-Canada a Sell on the basis of relative valuation. We are, however, raising our 12-month target price to $48 from $40, which now assumes a North America integrated oil peer average EV/DACF valuation.
Key risks
Key risk is sustained lower commodity prices. |
