Eric Nuttall, partner and senior portfolio Manager, Ninepoint Partners
FOCUS: Energy stocks
MARKET OUTLOOK:
Despite lingering worries of a recession and the potential negative impact on oil demand, we believe energy investors are positioned for further gains heading into year-end and in 2023. The largest release from strategic stockpiles in history is set to come to an end in just over two months. This coincides with an EU embargo on Russian oil imports and the use of EU tankers to transport Russian crude in early December, potentially impacting Russian production by up to 1MM Bbl/d. Even with the massive SPR release and ongoing Chinese COVID-zero policies which have impacted oil demand by about 0.5MM Bbl/d, global inventories have continued to fall throughout this year. What happens in a few months’ time when SPR releases end, Russian production finally gets impacted by sanctions, European gas-to-oil fuel switching kicks in and Chinese demand eventually normalizes due to COVID-zero policy easing?
The tenets of our multi-year oil bull market thesis remain in place. Oil demand remains largely unaffected by a slowing economy and will grow for at least the next 10 years. U.S. shale production, constrained by the need to prioritize share buybacks and dividends over growth, has disappointed this year and may be close to peaking. OPEC has largely exhausted its spare capacity and the global supermajors face a decade of stagnation owing to eco-wokeness. We believe that fundamentals today support an oil price of US$100 West Texas Intermediate.
West Texas Intermediate and oil will trade at a “higher” price, roughly US$100-$120+/bbl, for the next six or more years.
Energy companies are nearly debt-free, gushing free cash flow, pledging low-to-no growth and are set to return 20 per cent-plus to shareholders in the form of share buybacks and variable dividends in 2023, while trading near generational low valuations. We remain bullish.
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TOP PICKS:
The MEG investment thesis is simple: 35 years of stay flat inventory trading at <3X EV/CF at US$100WTI and the ability to privatize themselves with just three years of free cash flow. The company should soon reach its next debt target to allow 50 per cent of FCF to go towards shareholder returns and we expect by this time next year the company to be using 100 per cent of free cash flow for share buybacks. We think fair value is 6X EV/CF = $41/share = 127 per cent potential upside.
Tamarack has been an aggressive consolidator in the Clearwater play, now becoming the largest public Clearwater company which is the most economic play in North America. It is trading at a below-market multiple of 2.3x EV/CF despite top percentile play economics and a 42 per cent free cash flow yield. We think the company can quickly deliver allowing for 50 per cent of free cash flow to go toward shareholder returns by second-quarter 2023. We think fair value is 5X EV/CF = $11.50/share = 164 per cent potential upside.
Baytex offers significant exposure to the Clearwater play as well as highly economic conventional heavy oil production. Trading at just 1.8X EV/CF and a 39 per cent free cash flow yield, we think the company will hit its final leverage target in third-quarter 2023 allowing for 75 per cent of free cashflow to be returned to shareholders in the form of buybacks. We think fair value is 5X EV/CF = $19/share = 186 per cent potential upside.
PAST PICKS: November 5, 2021
Cenovus (CVE TSX)
- Then: $15.59
- Now: $26.15
- Return: 68%
- Total Return: 70%
Athabasca Oil (ATH TSX)
- Then: $1.24
- Now: $2.41
- Return: 94%
- Total Return: 94%
Arc Resources (ARX TSX)
- Then: $12.87
- Now: $18.42
- Return: 43%
- Total Return: 47%
Total Return Average: 70%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CVE TSX | N | Y | Y |
| ATH TSX | N | N | Y |
| ARX TSX | N | Y | Y |
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