Morning Pulse OCTOBER 20, 2017 TARGET/ESTIMATE CHANGES Express Pulse released yesterday 3 AltaGas Ltd. (ALA, Hold, Average Risk, Target C$29.00) Cenovus, Encana, IGM, Pattern 3Q results; larger-than-expected dividend boost pleases investors Energy, Rogers 4 Cenovus Energy Inc. (CVE, Buy, Above-average Risk, Target C$14.00) Desjardins upcoming events Palliser sale; three of four done, but (much) more to go Toronto 5 Dream Industrial Real Estate Investment Trust (DIR.UN, Hold, Average Risk, Oct-24 Calian Target C$9.50↑) Oct-24 25 Kristopher Zack Brian Pauls joins the Dream team Montréal 6 Rogers Communications Inc. (RCI.B/RCI, Hold, Average Risk, Target C$67.50↑) Oct-30 Yamana Gold Nov-3 SNC-Lavalin Increased profitability fuels additional capex Calgary/Edmonton Oct-25 26 Doug Young INDUSTRY COMMENTS Vancouver/Victoria 7 Oil & Gas Oct-23 24 Doug Young Natural Gas Report—supportive injection lost in noise of mild winter outlook Houston Oct-25 Leucrotta Click on company/sector for a summary or on icon to link to full document See following page for details Earnings calendar coverage companies Oct-24: CNR (4pm) Oct-26: HSE (bef mkt), MEG, SJR.B, TFII (aft mkt) Oct-27: IMO Oct-30: VET (4am) Nov-1: AP.UN (aft mkt), BEP.UN (7am), GSC (aft mkt), MR.UN (aft mkt), WCP (aft mkt) Nov-2: BBD.B (bef mkt), BCE, BNP, CCA (aft mkt), CVE, ENF (bef mkt), GWO, IGM, KL (bef mkt), PPL (aft mkt), SAP, SNC (bef mkt), VII (bef mkt) Nov-3: TOG (bef mkt) DESJARDINS RESEARCH www.desjardins-securities.ca www.thomsononeanalytics.com http://thomsonreuters.com/financial/ Bloomberg: DSER <GO> This report was prepared by an analyst(s) employed by Desjardins Capital Markets and who is (are) not registered as a research analyst(s) under FINRA rules. Please see disclosure section on pages 8–11 for company-specific disclosures, analyst certification and legal disclaimers. 1 OCTOBER 20, 2017 Desjardins Upcoming Events TORONTO Calian Group Ltd.—Kevin Ford, President & CEO October 24 Kristopher Zack, Oil & Gas Analyst October 24–25 Stingray Digital Group Inc.—Eric Boyko, President, CEO & Founder/Mathieu Péloquin, November 10 Senior Vice-President, Marketing & Communications/Jean-Pierre Trahan, CFO Manulife Financial Corporation—Steve Finch, Executive Vice-President, Chief Actuary/ November 16 Robert Veloso, Vice-President, Investor Relations Mosaic Capital Corporation—Mark Gardhouse, CEO/Cam Deller, Vice-President, November 21 Corporate Development MONTRÉAL Yamana Gold Inc.—Peter Marrone, Chairman & CEO/Steve Parsons, Senior Vice-President, October 30 Investor Relations & Corporate Communications SNC-Lavalin Group Inc.—Neil Bruce, President & CEO/Sylvain Girard, Executive Vice-President November 3 & CFO/Denis Jasmin, Vice-President, Investor Relations Manulife Financial Corporation—Steve Finch, Executive Vice-President, Chief Actuary/ November 15 Robert Veloso, Vice-President, Investor Relations Pine Cliff Energy Ltd.—Philip Hodge, President & CEO November 16 Calian Group Ltd.—Kevin Ford, President & CEO/Jacqueline Gauthier, CFO & Corporate Secretary November 21 AGF Management Limited—Kevin McCreadie, President & CIO/Adrian Basaraba, December 7 Senior Vice-President & CFO/Paul Francis, Corporate Development & Investor Relations Dollarama Inc.—Michael Ross, CFO December 8 CALGARY/EDMONTON Doug Young, Banks & Insurance Analyst October 25–26 WINNIPEG Manulife Financial Corporation—Steve Finch, Executive Vice-President, Chief Actuary/ November 14 Robert Veloso, Vice-President, Investor Relations Doug Young, Banks & Insurance Analyst December 14 VANCOUVER/VICTORIA Doug Young, Banks & Insurance Analyst October 23–24 Manulife Financial Corporation—Steve Finch, Executive Vice-President, Chief Actuary/ November 13 Robert Veloso, Vice-President, Investor Relations BOSTON Dollarama Inc.—Michael Ross, CFO December 1 AGF Management Limited—Kevin McCreadie, President & CIO/Adrian Basaraba, December 6 Senior Vice-President & CFO/Paul Francis, Corporate Development & Investor Relations HOUSTON Leucrotta Exploration Inc.—Robert Zakresky, President & CEO October 25 MINNEAPOLIS/CHICAGO InterRent Real Estate Investment Trust—Brad Cutsey, President/Curt Millar, CFO November 20–21 For additional information, please contact your institutional salesperson, Angela Di Pede (416) 867-1952, [email protected] or Christine Katona (416) 867-2262, [email protected] 2 OCTOBER 20, 2017 Target/estimate changes AltaGas Ltd. Justin Bouchard, P.Eng., CFA • (403) 532-6615 • [email protected] Zaakir Karim, CFA, Associate • (403) 532-6625 • [email protected] Petur Radevski, Associate • (403) 532-6601 • [email protected] Rating: Hold, Risk: Average, Target: C$29.00 ALA C$29.54, TSX 3Q results; larger-than-expected dividend boost pleases investors The Desjardins Takeaway AltaGas reported solid 3Q results, with adjusted EBITDA ahead of consensus, driven primarily by Click here for full document stronger-than-expected results in its gas segment. However, the real crowd pleaser was the 4.3% dividend increase, which was larger than expected—and ALA is expected to increase the dividend again Key changes in mid-2018 (once the WGL acquisition closes). That said, we continue to view the stock as fairly valued Norm EBITDA (C$) at current levels. 2017E Old 771 New 791↑ 2018E Old 776 Highlights New 847↑ AltaGas reported normalized 3Q EBITDA of C$190m, ahead of consensus of C$179m. Relative to our Norm FFO/sh estimate of C$174m, the EBITDA beat was primarily attributable to wider-than-expected frac spreads 2017E Old 3.49 and higher-than-estimated equity income from Petrogas. New 3.52↑ Payout ratio (%) 2017E Old 75 ● Dividend boost ahead of our expectations. ALA increased the dividend to C$2.19/share (from C New 77↑ $2.10/share) on an annualized basis, an increase of ~4.3% (we were looking for an increase of 2.9%). 2018E Old 79 Given AltaGas’s annualized dividend growth guidance of 8–10% to 2021 (contingent on closing the New 73↓ WGL acquisition), we anticipate another dividend increase in mid-2018. Source: Desjardins Capital Markets ● North Pine NGL separation facility trending below budget and ahead of schedule. The first train of the facility (10 mbbl/d) is expected to be completed in December 2017 (ahead of the original schedule of 1Q18) and cost C$100–110m (below the initial budget of C$120m). ● The WGL acquisition remains on track; ALA launches first phase of asset dispositions. AltaGas continues to expect the WGL acquisition to close in mid-2018. As part of its plan to finance the acquisition, AltaGas has launched the first phase of its asset sale process (which it expects will be completed in early 2018), which includes Blythe and the Tracy facility in California (additional asset sales may be undertaken in 2018). Valuation We reiterate our C$29 target, which is derived through a blended valuation of our DCF (C$35/share) and a sum-of-parts valuation (C$23/share). Recommendation We reiterate our Hold–Average Risk rating. 3 OCTOBER 20, 2017 Cenovus Energy Inc. Justin Bouchard, P.Eng., CFA • (403) 532-6615 • [email protected] Zaakir Karim, CFA, Associate • (403) 532-6625 • [email protected] Petur Radevski, Associate • (403) 532-6601 • [email protected] Rating: Buy, Risk: Above-average, Target: C$14.00 CVE C$12.51, TSX/CVE US$10.01, NYSE Palliser sale; three of four done, but (much) more to go The Desjardins Takeaway Cenovus’s sale of the Palliser asset (in conjunction with the sale of Pelican Lake and Suffield in 3Q) has Click here for full document removed many of the risks around the divestment strategy and reduced balance sheet risk, and thus represents a clear step in the right direction. Nevertheless, uncertain commodity prices, still elevated Key changes debt levels, high breakeven prices (relative to peers), 208m shares off lock-up on November 17 and DACF (C$m) uncertainty around the Deep Basin strategy remain headwinds to the story. 2017E Old 3.4b New 3.3b↓ 2018E Old 3.9b Highlights New 3.6b↓ Over the past five months, the execution of Cenovus’s C$4–5b divestment strategy (and with it the Ttl prd (mboe/d) company’s opportunity to rightsize the balance sheet) has been front and centre on the minds of 2017E Old 461 investors. The Palliser disposition gives CVE ~C$2.8b for its first three asset sales, which is ahead of our New 446↓ 2018E Old 590 estimated mid-point for these assets (C$2.4b) and suggests the company will likely close toward the low New 534↓ end of the target range for its four legacy conventional assets. As a result, we believe the asset sales CFPS (dil) (C$) announced to date have helped to accomplish three key objectives: reduced the risk around potential 2017E Old 2.45 credit downgrades, meaningfully strengthened its balance sheet and removed the risk that CVE might New 2.39↓ have to divest of assets at fire sale prices. 2018E Old 2.54 New 2.34↓ That said, the work to rightsize the balance sheet is not yet finished (in our view). Assuming CVE is able to Source: Desjardins Capital Markets fetch C$1b for Weyburn (our sales price expectation is C$975–1,350m), we estimate it needs a ~US$60/ bbl WTI price environment to sport net debt/cash flow of sub-2.0x in 2018. The problem with this is that oil prices have not touched US$60+/bbl WTI since mid-2015. Meanwhile, in a more modest recovery to US$55/bbl WTI, CVE would require an additional C$1.5b in asset sales to realize net debt/cash flow of 2.0x in 2018. As a result, we believe more asset sales are coming in 2019. Possible divestiture candidates include its undeveloped Kirby West oil sands assets and Deep Basin midstream assets. Even then, the headwinds noted above continue to loom large. Valuation We reiterate our target price of C$14 per share, based on the equal weighting of our estimated 2017 NAV/share of ~C$15.50 and a 6.5x EV/DACF multiple (2018E).