Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners

Focus: Energy stocks

MARKET OUTLOOK:

Oil is in a structural bull market with a near-term fundamental support around US$70WTI given falling global inventories and a rapid recovery in demand. As demand continues to head towards (and surpass) pre-COVID levels OPEC will gradually bring on all curtailed volumes and effectively exhaust most/all of their spare capacity by the end of 2022. With the backdrop of the end of U.S. shale hyper growth and flatlining global offshore production oil inventories will continue to fall. Ultimately, given growing ESG pressures and the need to prioritize return of capital over growth the oil price will have to go high enough to rationalize demand growth and this will likely require all-time high oil prices in the next 4-6 years. 

Oil stocks have tremendously lagged the oil price recently with some having fallen by 20 per cent despite ever improving fundamentals. Canadian oil stocks, be it small or large, have never been cheaper and stand on the cusp of returning egregious amounts of capital back to shareholders in the form of dividends and buybacks. Summer doldrums will pass and the advent of conference season will see more and more companies announce such plans.

TOP PICKS

Theme is small cap stocks that can potentially DOUBLE despite having already doubled over the past year

Tamarack Valley (TVE TSX)

Market Cap: $1.04B

Tamarack has successfully pivoted from a company with a boring albeit profitable suite of assets to one with several years of running room in the hottest plays in Canada. Trading at 2.2x EV/’22 CF and a 31 per cent free cashflow yield we look to the company to announce an aggressive return of capital plan this September.  Given such profound mispricing we hope the company will announce a five per cent base dividend along with a 10 per cent share buyback which would still leave $150MM of additional free cashflow with which to delever (debt/cashflow of < 0.5x) or add further to their inventory. A target multiple of 4.0x EV/CF equates to a $5.64 target price potentially returning 119 per cent from current levels.

Cardinal Energy (CJ TSX):

Market Cap: $442M

We have been able to acquire about eight per cent of the company over the past several months making us the 2nd largest shareholder after Murray Edwards.  Cardinal possess at least 10 years of drilling inventory and aims to return an egregious level of returns back to shareholders once they have brought down debt levels to fortress like strength (~0.3x D/CF) early next year. Trading at 1.9x EV/’22 CF and a 39 per cent free cashflow yield we believe the company could announce a new base dividend equal to a 20 per cent yield in early 2022 and still have ample remaining free cashflow with which to add to their inventory or even grow its dividend further. With a net zero emissions status given their CO2 project we believe Cardinal could obtain a 4.0x trading multiple which would suggest a $7 share price or 136 per cent potential upside.

Crescent Point Energy (CPG TSX):

Market Cap: $2.6B

Crescent Point has fallen by 18 per cent this month despite oil being marginally flat despite releasing a solid Q2. We believe summer doldrums along with an overhang due to Shell’s remaining 30MM share block caused the selloff and both are easily fixable. With added running room from their Duvernay acquisition from Shell and the benefits from a stable mature production base the company has the ability to return an egregious amount of capital back to shareholders. Trading at 2.2x EV/’22 CF and a 26 per cent free cashflow yield we believe the company should announce an aggressive share buyback program (at least 10 per cent) along with a significant increase to its dividend. A target multiple of 4.0x equates to a $10.50 potential target price offering 134 per cent potential upside.

Past Picks: August 6, 2020

Freehold Royalties (FRU TSX)

• Then: $4.12
• Now: $8.66
• Price Return: 110%
• Total Return: 114%

Whitecap Resources (WCP TSX)

• Then: $2.48                    
• Now: $5.75    
• Price Return: 132%
• Total Return: 135%

TORC Oil & Gas (TOG TSX) – sold to WCP

• Then: $1.79
• Now: bought by WCP (all stock) on March 3, 2021 – last trade was $3.21
• Price Return: last trade to March 3 was 79%, plus WCP return (March 3 to now) of -6% = 73%

Total Return Average: 105%