Dennis da Silva, managing director and senior portfolio manager at Middlefield Capital Corporation
Focus: Resource stocks


MARKET OUTLOOK

The fourth quarter of 2018 was the worst quarter for Canadian energy equities since the financial crisis and drove the sector’s 28 per cent annual decline, also the worst since 2008. It marked the second straight year in which energy was the worst performer on the TSX. WTI started 2019 down over 40 per cent from its October high of $76.40 per barrel. Current oil prices are well below the threshold that allows for internally funded growth (within cash flow) while offsetting existing declines. Key to watch will be how much discipline U.S. shale producers demonstrate, the OPEC cuts that come into effect this quarter and the macroeconomic outlook. We’ve arguably seen maximum pessimism in Canadian egress. A Canadian energy rebound is dependent on new pipeline capacity (starting with Enbridge’s Line 3 replacement) along with the ramping of crude-by-rail. The Alberta government’s mandated oil production shut-ins announced in early December has had the desired impact, with differentials tightening significantly since the October 2018 peaks. We’re encouraged by how crude and energy stocks have traded in the last couple of weeks. The XEG is up 10.2 per cent since bottoming on Dec. 24. Since then, the S&P/TSX Composite Index is up 5.3 per cent and the Dow is up 8 per cent.

Another interesting commodity is gold. Gold bullion proved to be a stable commodity in 2018. We expect to see the price of gold to trend potentially above our short-term price range of US$1,100 to US$1,350 per ounce as the U.S. Federal Reserve normalizes monetary policy in the first half of 2019. Under a higher 10-year real rate environment, gold bullion should outperform broad markets as we saw in the period of 1999 to 2007. With a strong rising gold price, we see Canadian gold producers as offering an unique entry point with valuations trending near 10-year lows in terms of enterprise value to cash flow multiples and relative to the price of gold.

TOP PICKS

Dennis da Silva's Top Picks

Dennis da Silva, managing director and senior portfolio manager at Middlefield Capital Corporation, shares his top picks: Enbridge, Kelt Exploration and Harte Gold.

ENBRIDGE (ENB.TO)
Recent purchase of $45. 

Enbridge is one of our top Canadian ideas. It’s effectively addressed various challenges to its forward momentum, like deleveraging through sales of non-core assets and streamlining the business by buying four related entities:  Enbridge Energy Partners, Energy Management and Income Fund as well as Spectra Energy. In addition, the company has created visible growth beyond 2019 by announcing mainline optimization projects and new opportunities.

Enbridge is a household name that could potentially be in the mid-$50s by the end of the year. We liked it so much we created a single-purpose fund that provides investors with a couple of ways to participate in Enbridge’s potential:  ENS offers 1.7 times beta to Enbridge stock while paying an enhanced yield of 10% and ENS.P is a preferred share paying a fixed 5.25 per cent yield.

KELT EXPLORATION (KEL.TO)
Purchased in April at $8.85.

Kelt is a mid-tier, 27,000 barrels of oil equivalent per day (boe/d) producer with high condensate cut (45 per cent ). Its premier management team with a large ownership stake accumulated a massive, top-tier liquids-rich Montney land base (with more than 1,000 sections) over two years. The premium valuation is gone after the Q4 Canadian energy equity meltdown. It deserves a premium, given the strength of its balance sheet, egress options and well economics (liquids-rich) that justify growth. Its 2018 program marked a shift from small appraisal programs to harvest/development mode which increases land value by growing production, de-risking inventory and improving efficiencies (top-tier recycle ratio). It’s a beneficiary of non-AECO/Station2 pricing (80 per cent in 2018).

HARTE GOLD (HRT.TO)
Purchased in October at $0.52.

Harte is a small gold producer and developer that just declared commercial production from their Northern Ontario mine. It’s seeing opportunities to enhance value from grade improvements, resource additions and mine plan efficiencies. This concluded a three-month ramp-up from initial gold pour in early October after several delays in getting their permit in late August/early September. The ramp-up topped off a busy 2018, where they tripled the resource to 1.5 million ounces, published an attractive preliminary economic assessment and negotiated a debt package. They’ve worked hard to establish a small initial production base of 40,000 ounces per year to generate cash flow and de-risk their mine. They plan to seek financing options to expand their mine and grow to over 100,000 ounces per year in 2021.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
ENB N N Y
KEL N N Y
HRT N N Y

 

PAST PICKS: MARCH 8, 2018

Dennis da Silva's Past Picks

Dennis da Silva, managing director and senior portfolio manager at Middlefield Capital Corporation, reviews his past picks: Atlantic Gold, Cardinal Energy and Tourmaline Oil.

ATLANTIC GOLD (AGB.TO)

  • Then: $1.86
  • Now: $1.73
  • Return: -7%
  • Total return: -7%

CARDINAL ENERGY (CJ.TO)

  • Then: $4.19
  • Now: $2.34
  • Return: -44%
  • Total return: -40%

TOURMALINE OIL (TOU.TO)

  • Then: $19.89
  • Now: $18.06
  • Return: -9%
  • Total return:-8 %

Total return average: -18%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
AGB N N Y
CJ N N Y
TOU N N Y

 

WEBSITE: www.middlefield.com