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

MARKET OUTLOOK

The oil market has meaningfully improved in the past month: economies around the world are slowly emerging from lockdown resulting in increased traffic (and gasoline consumption), cresting crude inventories in the U.S. remove the fear of limited physical storage capabilities and global inventories are building at a significantly slower rate than what many doomsayers were predicting a month ago. With April OECD builds of only 109 million barrels and global March/April builds of 450 million, it will take significantly less time to rebalance the market that what was originally thought. With meaningful OPEC curtailments, ongoing global non-OPEC shut ins (Canada  over 1 million barrels per day and about 1.4 million in the U.S.), significantly reduced drilling activity (down 60 per cent in 2020) and the potential for production damage from older fields, the outlook for oil is more bullish than what a $34 per barrel 2021 oil strip would suggest. We believe that oil inventories can normalize by year-end 2020, U.S. shale hyper-growth is permanently impaired, global offshore production has entered into a multi-year period of stagnation and that as a result oil can rally above $50 in 2021 resulting in oil stocks doubling or more in the next year.

TOP PICKS

MEG ENERGY CORP (MEG TSX)

MEG has one of the highest quality oil sand assets in Canada and has 55 per cent of their 2020 production hedged at $59 WTI. The current enterprise value is $3.8 billion and under normalized oil prices (2021) the business can generate $70 million in free cash flow (18 per cent free cash flow yield) on 33 years of proved reserves.  With the share price down 59 per cent year-to-date, the market is clearly not giving any value for the defensiveness of their 2020 hedge book. Under a normalized oil price ($50 WTI in 2021) MEG could get back to $6 (it’s at $2.36 currently) and potentially up to $9 on a takeout.

TORC OIL & GAS (TOG TSX)

With the stock down 77 per cent year-to-date and at 1.8 times enterprise value to 2021 cash flow at $50 WTI (15 per cent free cash flow yield), we see meaningful upside for TORC. With the CPP as a major shareholder (29 per cent) and an experienced management team, TORC is positioned to be a natural consolidator in a market in which scale and size now increasingly matter to be relevant to investors. If we are correct that oil can rally to above $50 WTI in 2021, TORC could be a $4.50 to $6.25 stock using a five-times multiple and $50 to $60 WTI oil price: a 330 to 500 per cent upside (the stock began 2020 at $4.50 when oil was at $60).

CENOVUS ENERGY (CVE TSX)

While Cenovus is completely unhedged on their oil production (just like every other Canadian large cap), it has adequate liquidity to allow them to weather the storm and ensure sub-cash flow break even oil pricing in 2020.  At $35 WTI for 2020, Cenovus would burn through $1.5 billion of cash on available liquidity of $5.6 billion. Given the share price has collapsed by 60 per cent, we believe the stock is discounting a scenario worse than what we expect (no global oil demand pickup for over a year).  At $50 WTI and normalized crack spreads, Cenovus could easily be a $10 stock again versus its current trading price of $5 (if it escapes being acquired by another operator beforehand).

PAST PICKS: JULY 19, 2019

BAYTEX ENERGY (BTE TSX)

• Then: $1.88
• Now: $0.38
• Return: -80%
• Total return: -80%

CRESCENT POINT ENERGY (CPG TSX)

• Then: $4.07
• Now: $1.75
• Return: -57%
• Total return: -56%

ENERPLUS (ERF TSX)

• Then: $8.65
• Now: $3.43
• Return: -60%
• Total return: -60%

Total return average: -65%