Eric Nuttall's Top Picks: May 28, 2021

BNN Bloomberg

May 28, 2021

Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners

FOCUS: Energy stocks

MARKET OUTLOOK:

The fear of peak demand is leading to the reality of peak supply. With normalizing demand, the end of U.S. shale hyper growth, the imminent exhaustion of OPEC spare capacity, and plateauing global offshore production for the next several years oil has entered into a structural, multi-year bull market and will likely surpass US$100WTI in the coming years.

Having been consistent in my views (called for US$50WTI by YE’20 when oil was in the US$30’s in early 2020; US$60WTI then US$70WTI by June ’21 earlier in the year) the macro continues to evolve almost exactly as expected. Given vastly improved oil prices the oil and gas sector is on the cusp of generating egregious levels of free cash flow and with balance sheets nearly repaired of the damage inflicted in 2020 companies are nearly ready to return unfathomable levels of capital back to shareholders.

With the average free cash flow yield of the companies I follow exceeding 20 per cent at US$70WTI we are on the cusp of significant dividend increases and share buybacks. Equally, with average trading multiples of 3.2x versus historical averages of 8x the inevitable return of generalist investors is near and with it a significant rerating in energy stocks. The party is just starting.

TOP PICKS:

Whitecap Resources (WCP TSX)

Whitecap is a net negative emissions emitter that has successfully emerged from the 2020 bloodbath as a stronger entity given the successful acquisitions of several companies at compelling valuations. Trading at 2.7x EV/CF at $70WTI in 2022 and a 29 per cent free cash flow yield I see them being able to meaningfully increase their dividend (3.5 per cent current yield) while modestly growing production and lowering debt (<1X D/CF). With a market cap of $2.7B it is relevant to most generalists and is a no-brainer midcap pick for new money entering the space. Using US$70WTI and a 6x target multiple I see the potential for 110 per cent upside.

Baytex Energy (BTE TSX)

Baytex has totally fallen off of most investors’ radar screens given the perception of limited inventory depth and too much debt. With recent success in a new area of the emerging Clearwater play (40 derisked sections in the most profitable play in Canada) Baytex’s inventory depth appears to have just meaningfully deepened while debt levels are falling (1.6X 2022 D/CF at $70). Targeting flat production and the maximization of free cashflow to allow for deleveraging and a consequent multiple expansion Baytex’s current trading multiple of 2.7x 2022 EV/CF at $70WTI and a 51 per cent free cash flow yield is very attractive. Using $70WTI and a 4x EV/CF target multiple I see potential upside of 111 per cent.

Cenovus Energy (CVE TSX)

Cenovus is actively working on monetizing some of the non-core assets purchased with the Husky acquisition to allow for rapid deleveraging and thus sooner-than-expected return of capital. While Conoco Phillips has announced their gradual liquidation of their stake in the company it amounts to less than five per cent of average trading volumes thus does not present a major overhang. Trading at 3.5x EV/CF at US$70WTI and a 35 per cent free cash flow yield once leverage metrics are achieved I see them meaningfully increasing their dividend while announcing a major share repurchase program. Using a target multiple of 6x EV/CF and US$70WTI we see potential upside of 115 per cent.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
WCP TSX	N	N	Y
BTE TSX	N	Y	Y
CVE TSX	Y	N	Y

PAST PICKS: June 19, 2020

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Eric Nuttall's Top Picks: May 28, 2021