Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners

FOCUS: Energy stocks 

MARKET OUTLOOK:

Oil has sold off by nearly 10 per cent as banks and other financial institutions were forced to unwind their long oil/short U.S. treasury positions in one week owing to fears of a banking crisis in both Europe and the U.S. Consequently, the one-week liquidation was the fiercest since September 2020. It is also an example of the financial demand collapsing even while the physical demand for oil is improving as Chinese demand continues to normalize, Indian demand has hit a record level and we are emerging from peak refinery turnaround season.

Even with the U.S. and Europe in a mild recession this year, we still believe that non-OECD demand growth will exceed OECD demand loss. This will lead to significant inventory drawdowns beginning soon, resulting in multi-year low levels by the end of the year. This should exert meaningful upwards pressure on the oil price. Do not let price set the narrative, we are still in an oil supply crisis and we remain bullish on oil in the quarters and years to come.

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TOP PICKS

Baytex Energy (BTE TSX)

Baytex recently announced an acquisition in the Eagleford that increases its free cash flow per share by 18 per cent while allowing it to modestly fast-track more meaningful shareholder returns. Upon deal completion, Baytex will initiate a dividend (two per cent yield) while increasing shareholder returns to 50 per cent of free cash flow. We believe that the merits of the deal and the quality of what it purchased are vastly misunderstood offering a profound opportunity with the stock trading at 1.7x/1.2x EV/’24 cash flow at US$80/US$100WTI and a 44 per cent-75 per cent free cash flow yield.

Chord Energy (CHRD NASD)

Chord is a pure-play U.S. Bakken producer with over 10 years of stay flat inventory that trades at 2.2X/1.7X EV/’24 CF at US$80/US$100WTI and a 21 per cent/31 per cent free cash flow yield. It has committed to return at least 75 per cent of that back to investors. We believe CHRD stands to return the highest amount of shareholder returns of any U.S. energy company this year, yielding nearly eight per cent at US$70WTI and 11 per cent at US$80WTI.

Athabasca Oil (ATH TSX)

The company stands on the cusp of initiating its very first share buyback program next month, having committed 75 per cent of free cash flow to be returned to shareholders. Trading at a 20 per cent/29 per cent free cash flow yield at US$80/US$100WTI, we see meaningful share buybacks acting as a catalyst to drive a re-rating in the stock valuation.