OPEC+ has taken the option of waiting and seeing for now: RBC strategist
The decision by OPEC+ to stay the course on Monday could be priming Bay Street for a surge in free cash flow at energy names that just a few months ago weren't finding much love.
A recent report by Scotiabank pinpointed Gran Tierra Energy Inc. and Kelt Exploration Ltd. as having the most torque to higher oil prices.
Indeed, according to Scotia’s analysis, Gran Tierra's sensitivity to rising prices positions it for an 85 per cent surge in estimated free cash flow (to US$149 million versus US$80 million) next year when West Texas Intermediate (WTI) moves from US$65 per barrel to US$75.
And that doesn't even capture the potential magnitude of the cash gusher, considering WTI rallied above US$78 per barrel Monday after OPEC and its allies said they will add another 400,000 barrels per day in output next month rather than opening the spigots even wider amid ongoing concern about a supply-demand imbalance.
"In our view, there is significant value in the energy space," wrote Scotia's analysts in the report, which was published Sept. 27. "With industry focused on debt repayment and returns to shareholders, balance sheets have improved considerably."
According to Scotia's analysis, Kelt ranks second in sensitivity, with free cash flow poised to jump 57 per cent as WTI rallies from US$65 to US$75.
At the opposite end of the spectrum, Arc Resources ranked last in Scotia's sensitivity analysis, which estimated just a seven per cent variance in free cash flow next year based on that same US$10 per barrel change in WTI prices.
Scotia has Sector Outperform recommendations on Arc and Kelt; Gran Tierra Energy, meanwhile, is rated Sector Perform.