Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners
Focus: Energy stocks

MARKET OUTLOOK

Oil demand has now recovered to roughly 90 per cent of pre-pandemic levels as economies around the world gradually return to normal. While energy stocks have rallied sharply from the lows, given that many remain down 60 per cent year-to-date, we see many opportunities in which they need to rally by 100 to 150 per cent to get back to where they were prior to COVID-19 (and valuations then were already nearest their lowest levels in history). We believe that U.S. shale hyper-growth is dead, that global offshore production has entered into a period of stagnation/decline, and that OPEC has limited remaining spare capacity (adjusted for current curtailed production) and a strong desire for materially higher oil prices. Given normalized inventory levels, by year-end, we believe oil can reach between $50 and $60 in 2022. With that macro backdrop, Canadian small and mid-cap oil stocks present the best opportunity for investors and we see many multi-bagger opportunities.

TOP PICKS

TORC OIL & GAS (TOG TSX)

Torc remains down 62 per cent year-to-date despite having staying power ($27 WTI break-even and a 29 per cent ownership by CPP) and a management team that consistently beats expectations. It’s trading at 2.6/2 times 2021 enterprise value to cash flow (EV/CF) and a free cash flow yield of 17/36 per cent at $50/$60 WTI. As stocks being to rerate, we think Torc could trade to a five-time multiple on 2021 cash flow, which would represent a$4.20 to $5.75 share price versus $1.80 today.

TAMARACK VALLEY (TVE TSX)

Tamarack is a deeply discounted Canadian small cap that we believe is a potential acquisition target given their very strong balance sheet and low decline asset base. Trading at 2.1/1.6 times EV/CF and a free cash flow yield of 40/70 per cent at $50/$60 WTI and being down 57 per cent year-to-date, we see material upside in the name as flows return to the sector and investors are willing to go a bit down market cap.

KELT EXPLORATION (KEL TSX)

Kelt’s stock has been hammered on liquidity issues, as they are roughly fully drawn on their credit line and banks are currently being reviewed with reductions of 30 to 50 per cent not uncommon. Given the quality of Kelt’s assets, the rising oil price and material inside ownership we believe that the various government programs (such as the EDC and BDC) will allow Kelt to emerge from the redetermination largely unscathed. In a $50/$60 WTI price environment, we think the value of Kelt’s assets (of which they would like to monetize in 2021) could exceed $5 per share.

PAST PICKS: AUG. 30, 2019

MEG ENERGY (MEG TSX)

• Then: $5.08
• Now: $3.84
• Return: -24%
• Total return: -24%

NUVISTA ENERGY (NVA TSX)

• Then: $1.61
• Now: $0.91
• Return: -44%
• Total return: -44%

CRESCENT POINT ENERGY (CPG TSX)

• Then: $4.20
• Now: $2.32
• Return: -45%
• Total return: -44%

Total return average: -37%

TWITTER: @ericnuttall  
WEBSITE: www.ninepoint.com