Eric Nuttall's Top Picks
Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners
FOCUS: Energy stocks
Oil has entered a multi-year bull market, given normalizing demand and structural supply challenges. With the successful vaccine rollout (in most areas of the world) we look for demand to reach pre-pandemic levels by the end of 2021. This will allow for OPEC to return the majority of their curtailed production back onto the market, thereby exhausting its spare capacity. The priority is the return of capital over growth and premium inventory exhaustion. The era of U.S. shale hyper growth is over; this is a watershed event for the sector given shale’s disruptive role over the past decade, which led to price wars, billions of dollars of shareholder capital lost, and artificially low oil prices. Looking forward as inventories normalize in the coming months and head into steep deficit, we see the need for either global offshore production growth (challenged given the ESG pivot of many) or lower demand via meaningfully higher oil prices ($100+).
With oil trading at ~$65WTI and biased higher in the years ahead, energy stocks are ridiculously mispriced and offer a generational opportunity. Many are trading at less than 3x EV/CF, mid-teens free cash flow yields, and could buy back all of their outstanding shares and pay off all of their debt with just five years of free cash flow. Even though many stocks have rallied strongly this year, we see highly meaningful upside ahead.
I recently purchased 9.9 per cent of the company directly from Equinor (formerly Statoil) when oil was ~$53 believing that we would see $60 by June (paid $0.18). Athabasca Oil offers unrivaled leverage to a rising oil price with free cashflow increasing by 10X with an oil price increase from $50 to $60. At current oil prices and differentials Athabasca Oil trades at 2.3X EV/CF and a 31 per cent free cashflow yield. Given strong oil prices and accommodative high yield markets we are optimistic that Athabasca Oil will be successful in refinancing maturing debt in the next few months making it more “investable” to the masses. Our target multiple of 4x EV/CF would imply a $0.93 target at $60WTI and $1.91 target at $70WTI offering potential upside of 86 per cent to 282 per cent. There is risk in their refinancing so I do not consider this a “widows and orphans” stock.
Gear Energy is a deeply discounted small cap oil stock that is well-run, shareholder friendly, and potentially debt free by next year. With 20 years of “stay flat” inventory, Gear Energy will free cashflow its entire market cap every three years at $65WTI, meaning they could privatize themselves over six times before depleting their drilling prospects. With a current EV/CF trading multiple of 1.8X at $65WTI using a target multiple of 4x we see more than a potential double in the share price. We own 9.9 per cent of the company.
Cardinal Energy is a small cap light/medium oil producer that offers tremendous pricing leverage to an oil price over $60WTI. While not the most exciting suite of assets, their free cashflow generation is enormous with a current ($65WTI) free cashflow yield of 30 per cent. Trading at 2.3X EV/CF using a target multiple of 4x would imply a ~$5 target offering potential upside of 92 per cent. We own seven per cent of the company.
PAST PICKS: May 15, 2020
MEG Energy (MEG TSX)
- Then: $2.92
- Now: $6.93
- Return: 137%
- Total Return: 137%
TORC Oil & Gas (TOG TSX) – acquired by Whitecap Resources (WCP TSX) on February 24th, 2021
- Then: $1.11
- 02/24/2021: $3.21
- Return: 189%
- Total Return: 189%
Cenovus Energy (CVE TSX)
- Then: $5.21
- Now: $9.74
- Return: 87%
- Total Return: 87%
Total Return Average: 138%
Personal Twitter Handle: @ericnuttall
Company Website: www.ninepoint.com