Energy firms in a golden era of free cash flow: Eric Nuttall
Ninepoint Partners LP announced on Thursday that Senior Portfolio Manager Eric Nuttall is adding a second fund to his name. The Ninepoint Energy Income Fund will be structured as an alternative mutual fund with an ETF series, the company said in a release.
“It's perfectly on brand with something that I've been championing, which is oil companies moderating growth, maximizing free cash flow and distributing that out to shareholders. I think we're in a multi-year bull market that will sustain significantly high oil prices, which will allow companies to not only pay dividends but increase dividends in the years ahead,” Nuttall said in an interview.
Many oil firms have seen a significant increase in their free cash flow as crude prices surged to levels not seen since the industry heydays of 2014.
After years of streamlining their operations, becoming more efficient and paying down debt, many of these companies such as Suncor Energy Inc., Canadian Natural Resources Ltd. and Cenovus Energy Inc. have recently dished out extra cash to shareholders in the forms of dividend hikes and conducted share buybacks.
“It's the absolutely perfect setup for dividends because these companies no longer have to pay down debt. They no longer have to return capital back to the debt holder. They have, generally speaking, long inventory - the average Canadian company is sitting on 15 years of drilling inventory, so they don't have to go and do [mergers and acquisitions]. So when you think about when you're generating so much cash, it's a natural problem of what do you do with it?” Nuttall said.
“The only alternative is to return it back to shareholders.”
Nuttall said the fund’s holdings will start with 65 per cent Canadian firms and 35 per cent American firms, without disclosing which specific names he’s looking at.
He said the U.S. holdings will focus on shale companies that are reining in growth and offer variable dividends – or dividends that fluctuate with the price of oil.
So far, the new fund is labeled with a high risk tolerance, mainly because there’s no track record of its performance yet but Nuttall is hoping to bring that down to a medium-to-high risk tolerance over time.
Outside of the more obvious commodity price risks, Nuttall said investors should be aware of single issuer risks since the fund will likely consist of fewer than 20 names – similar to his existing energy fund, which consists of only 14 holdings.
“The dividend payout will fluctuate depending upon the commodity price. What we can do in house is figure out at US$90 to US$100 oil price, what's the potential cash yield for these businesses?” he said.
“In some cases, we think we'll be able to make over 10 per cent cash yields and at the same time, be able to write covered calls on the positions to generate even further income from that. So we've stated a minimum [monthly distribution] of five per cent - we think we can do meaningfully better than that in this environment.”
He believes the base dividend for many energy companies can be covered at an oil price well below US$60 per barrel, so he’s confident he’ll be able to meet the fund’s payout targets.
“From a risk of dividend cuts and whatnot, unless we repeat something like 2020 where you've got the biggest demand shock of all time, we think that dividends are very easily covered,” he said.
The fund is expected to begin trading on the NEO Exchange under the ticker symbol NRGI on or around March 7.