Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners
FOCUS: Energy stocks
MARKET OUTLOOK:
The oil market is quickly healing from the historic COVID induced demand shock of 2020 making a fresh one year high of ~$58/bbl. With demand already back to pre-COVID levels in much of the developing world (China, India) and vaccine rollout accelerating in Europe and the U.S. we look for oil demand to closely normalize to pre-COVID levels globally by year-end.
Already, the global inventory surplus has fallen by 57 per cent from its peak and we forecast normalized inventory levels by early summer and with it a firm footing at ~$60WTI. Looking further out, we expect:
1) OPEC will bring on the majority of shut-in production to closely match the recovery in demand thereby exhausting its spare capacity.
2) U.S. shale growth is largely over given the need to prioritize “return of capital” over production growth and compete with other industries to restore investor relevance.
3) Global offshore production (1/4 barrels produced) is entering a period of multi-year declines due to insufficient investment. In summary, while volatile we think oil has found firm footing at $55-$60 with $60+WTI in the 2H’21 (and significantly higher in the years ahead).
With that backdrop, we see many energy stocks with 100 per cent plus potential upside. Even though many energy stocks have rallied by 1x-4x from the lows in 2020 they never should have sold off so hard and current valuations are extremely compelling with many stocks trading at a third of historical levels. We were extremely vocal about the opportunities throughout 2020 and remain convinced that oil is entering a multi-year bull market. Get fully exposed today!
TOP PICKS:
Tamarack recently entered the most profitable oil play in Canada (Clearwater) via two consecutive acquisitions. This was a major turning point for the company as it eliminated worries about inventory depth, increased their market cap/investor relevance and with time will increase their oil weighting. Looking to 2022 we see their oil weighting increasing from 58 per cent to 68 per cent and as a result their margin/free cash flow increasing materially. Using $60WTI we see them trading at 1.9X 2022 EV/CF and a 32 per cent free cash flow yield (this means they could keep production flat while paying a 32 per cent dividend or buyback all of the shares outstanding within three years). Assigning a target multiple of 4X we see 125 per cent upside in the name.
Seven Generations Energy (VII TSX)
Seven Generations gives you the best of both worlds: meaningful leverage to a rising oil price via their condensate production as well as exposure to an improving natural gas macro. As they have flattened their growth rate in recent years and with it their decline rate, Seven Generations can now generate meaningful amounts of free cash flow with which to pay down debt and hopefully soon launch a meaningful share buyback program. At $60WTI we see the company trading at 2.5x 2021 EV/CF (1.9X 2022) and a 33 per cent free cash flow yield. Using a target multiple of 5X we see 184 per cent potential upside in the name using $60WTI and strip natural gas pricing.
Enerplus (finally!) executed on an accretive acquisition which elongated inventory life as well as augmented their free cash flow profile. With 10 years of oil drilling inventory in the Bakken and exposure to natural gas via their Marcellus acreage ERF is trading at 2.8X 2021 EV/CF (2.2X 2022) and a 31 per cent free cash flow yield. Given their minimal financial leverage (1.1X D/CF at $60) we anticipate the company to launch a meaningful share buyback program in the second half of the year. Using a target multiple of 5X we see 108 per cent upside in the name.
PAST PICKS: February 12, 2020
TAMARACK VALLEY ENERGY (TVE TSX)
- Then: $1.70
- Now: $1.63
- Return: -4%
- Total Return: -4%
BAYTEX ENERGY (BTE TSX)
- Then: $1.47
- Now: $0.98
- Return: -33%
- Total Return: -33%
PRECISION DRILLING (PD TSX) 1:20 Stock Split November 12, 2020
- Then: $1.66
- Now: $30.30
- Return: -9%
- Total Return: -9%
Total Return Average: -15%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| TVE TSX | N | N | Y |
| BTE TSX | N | N | Y |
| PD TSX | N | N | N |
Personal Twitter Handle: @ericnuttall
Company Website: www.ninepoint.com
Advertisement