Eric Nuttall, portfolio manager, Sprott Asset Management
FOCUS: Canadian Energy & Small-cap Stocks
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MARKET OUTLOOK:
Oil has corrected 20 per cent due to misplaced macro concerns surrounding weak oil demand, rising gasoline inventories, a rally in the USD, and a small increase in the oil directed rig count. The realities remain that the oil market is undersupplied, production is falling sharply around the world, demand remains strong, the industry is bankrupt at current oil prices, and in order to incentivize the new world swing producer (U.S. tight oil producers) to meaningfully increase drilling activity they need an oil price around $60/bbl. Today’s noise is temporary and is providing the pullback that most investors who missed the initial rally were waiting for. We see many stocks with 50 per cent+ upside potential over the next 1-2 years.
The Sprott Energy Fund is the #1 performing energy fund in Canada both year-to-date and on a 3-year basis and we have outperformed the index by 11 per cent per year for 3 years and have outperformed the average energy fund in Canada by 10 per cent per year for 3 years.
Top Picks:
Birchcliff Energy (BIR.TO)
Birchcliff yesterday closed a transformational asset purchase off of Encana via which they materially reduced their financial leverage, diluted down an existing major shareholder, increased their liquids weighting, increased their exposure to a highly economic prospective zone within the Montney, and generally improved the visibility for many years of production growth. The stock trades at 6.1X 2017 EV/CF using $60 oil and $3.25 gas versus its peers trading between 7.0X to 9.0X. We believe that as the company communicates the deal (haven’t been on the road yet to tell its story) that the stock will get a re-rate towards its peers. Using a 7.0X target on our 2018 estimates we arrive at a $14 share price which would offer 57 per cent upside.
Cardinal Energy (CJ.TO)
Cardinal offers investors good leverage to the upward trajectory in the price of oil while offering the defensive qualities of low debt levels and a low corporate decline rate. Recent well results have confirmed highly attractive capital efficiencies and the company will be pursuing some low hanging fruit on a field that it recently acquired from Penn West at highly attractive metrics. Trading at 5.2X 2017 EV/CF we believe the stock could rerate to 7.0X equating to a $12.25 share price = 39 per cent upside.
DHX Media (DHXb.TO)
DHX is a children’s media content company that owns the rights to many successful titles including Bob the Builder, Teletubbies, and the Twirlywoos. Benefiting from increasing demand for online children’s content, they are generating organic growth rates in excess of 30 per cent which for a small cap Canadian company is very special. DHX is also benefitting from an increase in partnerships with Mattel for toy merchandizing for several of their titles and success on their modernization of the Teletubbies franchise could prove hidden upside for which the market is ascribing very little value. Trading at less than 10X forward EBITDA (a public comp DreamWorks was just acquired for 30X EBITDA) given the strong organic growth and high margins of long legacy content we see fair value closer to $10/share offering ~40 per cent upside.
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| BIR.TO | N | N | Y |
| CJ.TO | Y | N | Y |
| DHXb.TO | Y | N | Y |
Past Picks: August 25, 2015
Crescent Point Energy (CPG.TO)
- Then: $12.79
- Now: $18.96
- Return: +48.24%
- TR: +56.10%
Northern Blizzard Resources (NBZ.TO)
- Then: $3.68
- Now: $4.30
- Return: +16.85%
- TR: +30.96%
TORC Oil & Gas (TOG.TO)
- Then: $4.75
- Now: $6.81
- Return: +43.37%
- TR: +52.63%
Total Return Average: +46.56%
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| CPG.TO | N | N | Y |
| NBZ.TO | N | N | N |
| TOG.TO | N | N | Y |
Fund Profile
Sprott Energy Fund
Sprott Energy Fund = #1 Energy Fund in Canada YTD and on a 3 YEAR BASIS
Performance as of: July 28, 2016
| Fund | Index* | |
|---|---|---|
| YTD | 34.3% | 17.1% |
| 3 Year | 6.3% | -5.0% |
| 5 Year | -2.0% | -6.9% |
* Index: S&P/TSX Capped Energy Total Return Index
* Performance is net of fees and based upon reinvested dividends
Top Holdings:
- Birchcliff Energy
- Cardinal Energy
- Crescent Point Energy
- Kelt Exploration
- Gulfport Energy
Twitter: @Sprott
Website: www.sprott.com
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