Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners

FOCUS: Energy stocks

MARKET OUTLOOK:

The energy bull market remains intact. Oil demand is at record highs, global oil inventories sit near record lows, U.S. shale production growth rates are significantly falling, and OPEC+ compliance remains strong with HRH’s “will and intent,” resulting in completely offsetting the politically motivated U.S. SPR release, lowered oil volatility, and a more budget-friendly price to allow for the ongoing fulfilment of Saudi Arabia’s Vision 2030.

With the Trans Mountain pipeline linefill having commenced we are now in a “golden era” for Canadian oil producers. Balance sheets are in their strongest shape in history, price differentials have fallen and should remain low for the next three to four years bolstering revenue. Additionally, field inflation is subdued, and companies have committed to return the vast majority (or even all) of free cash flow back to shareholders, predominantly in the form of significant share buybacks.

With U.S. shale companies experiencing a “negative rate of change” regarding drilling inventory (depth and quality), we see ongoing funds flow returning to Canada, leading to a multiple expansion to eight to 10 per cent free cash flow yields.

TOP PICKS:

Crescent Point Energy (CPG TSX)

Crescent Point has successfully transformed into an inventory deep Montney and Duvernay producer, having now drilled some of the most economic wells in the history of the Montey. Trading at a 18 per cent 2025 free cashflow yield at $80WTI/$4NYMEX gas and a 3.4x EV/CF multiple, we see fair value at 10 per cent FCF yield = $19.67 price target = 65 per cent potential upside.

Paramount Resources (POU TSX)

Paramount offers tremendous price leverage to a more bullish 2025 natural gas outlook, trading at 2.7 times EV/CF with zero debt after accounting for strategic investments and more than 20 years of stay flat inventory. We think fair value is closer to five times = $51 price target at $80WTI/$4 NYMEX gas = 76 per cent potential upside.

Precision Drilling (PD TSX)

Precisions has meaningfully reduced debt levels over the past several years with forward D/EBITDA falling below 1.5 times by year’s end. The company is now returning 30-40 per cent of free cash flow back to shareholders via buybacks, and even with tame activity levels due to a weak natural gas price, we believe the company will be able to repurchase 10 per cent of the shares this year and 15 per cent of their shares in 2025. Trading at a 2024/25 FCF yield of 27-31 per cent, we see the potential for PD’s share price to more than double over time.

PAST PICKS: March 24, 2023

Baytex Energy (BTE TSX)

• Then: $4.64
• Now: $5.08
• Return: 9 per cent
• Total Return: 11 per cent

Chord Energy (CHRD NASD)

• Then: US$124.91
• Now: US$183.29
• Return: 47 per cent
• Total Return: 57 per cent

Athabasca Oil (ATH TSX)

• Then: $2.93
• Now: $5.03
• Return: 72 per cent
• Total Return: 72 per cent

Total Return Average: 47 per cent