Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners
Focus: Energy stocks
MARKET OUTLOOK
We are at the beginning of the next bull market for oil and energy stocks. The recent trade truce between the U.S. and China has greatly helped to ease worries about a global slowdown in 2020 while oil supply growth around the world stagnates. U.S. shale growth is sharply decelerating, OPEC+ is restricting further volumes and global offshore (25 per cent of total global production) is entering into a multi-year period of negative growth beginning in 2020-2021. Altogether, the oil market is much tighter than consensus believes. We see continued inventory drawdowns throughout 2020 with significant tightness in 2021. Given the complete lack of accessible global spare capacity, we see compelling upside to the oil price over the next several years.
With energy stocks discounting $49 WTI and trading at roughly half of their historical multiples, we see multi-bagger potential given the prospect of both trading multiple expansion (4 to 6 times or higher?) and leverage to a higher oil price. Generalists are only just beginning to come back to the space, aided by a growth versus value unwind.
The best opportunity in the world is in Canada and hence our 100 per cent domestic weighting. Sentiment remains the worst despite 250,000 barrels per day (bbl/d) of additional takeaway capacity, the Trans Mountain pipeline going in the ground as we speak and crude-by-rail hitting an all-time high. Yet, valuations are the most compelling, with over 15 per cent free cash flow yields. With the tax loss selling coming to an end and WTI up 34 per cent year-to-date, it appears that the worst is finally behind us and that we are at the inflection point for energy stocks. Merry Christmas and happy holidays to all!
TOP PICKS
BAYTEX ENERGY (BTE:CT)
Despite offering compelling value, Baytex has greatly lagged the oil price (and energy index) in 2019, falling by 29 per cent while oil has rallied by 34 per cent. Trading at 3.3 times enterprise value to cash flow (EV/CF) and a 20 per cent free cash flow yield, we believe Baytex will aggressively pay down debt in early 2020. This will allow it to begin buying back shares in the second half of the year. Some investors have been worried about their ability to roll forward some debt maturing in 2021/2022, but given the improvement in the energy high yield market we do not see this as a credible risk.
CRESCENT POINT ENERGY (CPG:CT)
Crescent Point energy has lagged its peers so far this month, rallying by only 1 per cent while oil is up 10 per cent as faster type money has exited the name following their highly successful monetization of their midstream assets (buy the rumour, sell the news…). Trading at 2.7 times EV/CF and a 17.5 per cent free cash flow yield, we see Crescent Point being in a position to meaningfully buy back its shares (10 per cent?) in 2020. When generalist money returns to the sector and starts to go down more cap, we think Crescent Point will rank very well given liquidity, balance sheet strength (1.2x debt to cash flow) and profound mispricing. Were the stock able to regain a fraction of its historical multiple (5 times versus the old 8 to 9 times), the stock could potentially rally by 150 per cent.
TOURMALINE OIL (TOU:CT)
Tourmaline recently spun out a small portion of its midstream assets (sold assets for 9 times EBITDA that were trading at 3 times) into a vehicle that will be a major consolidator in 2020, allowing the company to arbitrage the robust valuations of midstream stocks versus the undervaluation of exploration and production (E&P) stocks. Trading at only a 25 times premium to its proved developed producing reserve value (blowdown value), a 10 per cent free cash flow yield (after its 3.3 per cent dividend yield), and 4.4 times EV/CF at strip natural gas pricing, we see a compelling risk/reward scenario. It’s likely to be active early in the year consolidating assets accretively, Tourmaline should be a catalyst-rich stock, increasing its ability to attract generalist funds flow.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BTE | N | Y | Y |
| CPG | N | N | Y |
| TOU | N | N | Y |
PAST PICKS: DEC. 14, 2018
WPX ENERGY (WPX:UN)
- Then: $12.08
- Now: $13.14
- Return: 9%
- Total return: 9%
PARSLEY ENERGY (PE:UN)
- Then: $16.43
- Now: $18.26
- Return: 11%
- Total return: 12%
BAYTEX ENERGY (BTE:CT)
- Then: $2.37
- Now: $1.70
- Return: -28%
- Total return: -28%
Total return average: -3%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BTE | N | Y | Y |
| CPG | N | N | Y |
| TOU | N | N | Y |
TWITTER: @ericnuttall
WEBSITE: Ninepoint.com
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