Consolidation of Canadian exploration and production (E&P) players could be in the offing, and there is potential upside from increasing long-term price expectations as well as a rerating of various companies' stocks to reflect their "abnormally large resource potential," UBS Investment Research analysts said in a Monday note.
"With the majority of Canadian large cap E&Ps discounting below US$40/bbl long-term oil prices and with strip oil prices remaining in the US$55/bbl range, we believe there is substantial opportunity for large-scale industry consolidation," wrote UBS analyst Andrew Potter.
The large oilsands exposure of many Canadian companies makes them attractive takeover targets, Potter noted.
"Given our belief that Canadian E&Ps will see a multiple expansion and our bullish view on long-term oil and natural gas fundamentals, we believe the sector continues to offer a compelling long-term risk/reward relationship," he wrote. "Our top picks in the Canadian large cap E&Ps are Canadian Natural Resources and Nexen, representing a slight bias towards oilier weighted names with heavy oilsands exposure. Within the Canadian integrateds, Suncor and Petro-Canada offer the highest return potential."
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