Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners

FOCUS: Energy stocks

MARKET OUTLOOK:

Oil is in a structural, multi-year bull market that will result in all-time high oil prices. Energy stocks, due to still lingering energy ignorance, are currently discounting US$60 WTI.

We believe we have entered a “golden era” of free cash flow, which will translate into egregious dividends and share buybacks. The average energy stock could privatize and become debt free with just 3.3 years of free cash flow at US$100 WTI yet on average has 15 years of stay flat inventory. 

Energy stocks represent a generational opportunity (still) and with a demand surge later this year once travel related demand recovers, the imminent exhaustion of OPEC spare capacity, and now a “security of supply” premium to account for the risk to Russia’s 4.5M barrels per day of oil exports, we see the price of oil advancing to US$130-US$150 per barrel in the coming months, despite a likely Iranian nuclear deal.

TOP PICKS:

MEG ENERGY (MEG TSX)

For an oil bull, it doesn’t get any better than MEG. With 30+ years of inventory, MEG, at US$100 WTI, could privatize itself with just 2.5 years of free cash flow. You are literally getting decades worth of free cash flow (ie. dividends) for free. With line of sight of initial deleveraging goals, MEG is set to start buying 10 per cent of its stock in Q2 with the potential to double this amount by the end of this year. What’s fair value? We put a 6x multiple on their 2023 cash flow at US$100 WTI to arrive at $43.80 target price = 155 per cent potential update

ENERPLUS (ERF TSX)

Enerplus remains the most mispriced energy stock that we can find. With over 10 years of stay-flat inventory, the stock trades at 2.0x EV/CF and a 40 per cent free cash flow yield. This makes no sense to us. At every opportunity, we buy more stock and fair value is 5x their 2023 cash flow = $36.35 = 188 per cent potential upside.

NUVISTA (NVA TSX)

Nuvista is likely to be added to the TSX which should be announced Friday, resulting in 8.6M shares to buy (not easy feat!). Trading at 1.5x 2023 EV/CF (US$100 WTI, strip gas) and a 38 per cent free cash flow yield, we see meaningful upside ahead. With at least 15 years of “stay flat” inventory and the ability to privatize itself with just 2.5 years of free cash flow we think a minimum reasonable value for Nuvista is 4x EV/CF (14 per cent free cash flow yield at US$90 WTI) = $22.75/share = 135 per cent potential upside.

PAST PICKS: March 26, 2021

Parex Resources (PXT TSX)

• Then: $22.01
• Now: $27.28
• Return: 24%
• Total Return: 26%

Tamarack Valley (TVE TSX)

• Then: $2.32
• Now: $5.34
• Return: 130%
• Total Return: 131%

Cardinal Energy (CJ TSX)

• Then: $2.50
• Now: $7.00
• Return: 180%
• Total Return: 180%

Total Return Average: 112%