May 4, 2018

Eric Nuttall's Top Picks: May 4, 2018

BNN Bloomberg

Eric Nuttall , BNN Bloomberg

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

_______________________________________________________________

MARKET OUTLOOK

Oil is in a multi-year bull market and will likely trade over $80 per barrel in the next two years. Barring a global depression, the oil market will remain under-supplied given the lack of large new projects coming online from OPEC (40 per cent of global production) and non-U.S/OPEC producers (50 per cent of global production) over the next four years and beyond. This eventuality means that oil will have to rise high enough to rationalize demand as supply will not be able to grow enough to balance the market. In previous periods, this meant an oil price meaningfully higher than the current levels.

Every market dip in energy stocks due to a tweet, negative headline, or general wobble in the broader market should be bought. We’re not even in the first inning of sector rotation or money coming back to the space, which is under-owned and represents a multi-year-low allocation of major stock indexes. At today’s oil price (around $70 per barrel), many oil stocks have 50 per cent to 100 per cent upside. If we are directionally correct in our three-to-four-year call, the next several years will be highly rewarding to energy investors.

TOP PICKS

PARSLEY ENERGY (PE.N)

Parsley is a pure Permian Basin producer that trades at only a slight premium to its peers despite stronger than average production growth (50 per cent in 2018, 30 per cent plus in 2019) and has a deep, high-quality asset base (more than 5,000 locations).

After several quarters of poor execution, the company finally beat expectations this morning in Q1 and are setup to continue to exceed expectations in 2018. Trading at 4.9 times 2019 EBITDA ($70 per barrel), we see the potential for 50 per cent upside over the next year and potentially more than 80 per cent upside if our bullish oil call comes to fruition.

ATHABASCA OIL (ATH.TO)

Athabasca Oil offers the highest leverage to a bullish oil outlook (or even where oil is at today) with a $5 move in WTI equal to 10 per cent of their current market capitalization. While excess leverage has been a problem in the past, we see the potential for them to monetize part or all of their infrastructure and be debt-free within the next four to six months.

Offering a 15 per cent production growth CAGR over the next several years, the company is growing fast enough to attract U.S. investors while also having the potential to initiate a share buyback, given that the stock is trading at a 50 per cent discount to its proved reserve valuation and 2.7 times EV/EBITDA at $70 per barrel in 2019. We see Athabasca becoming the go-to oil beta name when sentiment firmly turns and see the potential for a double from current levels (which would only get them to proved reserve value).

WPX ENERGY (WPX.N)

WPX is a U.S. Permian and Bakken light oil producer trading at a discount to peer averages despite high asset quality, an enviable inventory life index, reputable management and an improving balance sheet that will reach peer average leverage by the end of the year. Trading at 5.1 times 2019 EV/EBITDA ($70 per barrel), we see 50 per cent upside over the next year and nearly 80 per cent upside over the next two given our above consensus oil call. For Canadians looking for high quality exposure to a mid-cap U.S. oil producer this is a solid pick, growing at 15 per cent and generating free cash flow (with takeout potential in 2018 or 2019).