Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners

FOCUS: Energy stocks

MARKET OUTLOOK:

Oil is in a multi-year bull market: demand will reach pre-COVID levels by mid-2022 while supply growth is highly challenged. Investor and ESG pressures are restricting U.S. shale growth potential to about 0.5MM Bbl/d while OPEC which sits on ~4MM Bbl/d of spare capacity is set to exhaust it by the end of 2022.  Further, non-OPEC/US production which accounts for 40 per cent of global supply is in a multi-year plateau/decline as companies prioritize return of capital and decarbonization over production growth. The fear of peak demand is leading to the reality of peak supply and the world is hurtling towards an energy crisis which will result in all time high oi prices.

We stand on the cusp of meaningful shareholder returns given egregious levels of free cashflow being generated by industry and this could serve as a catalyst to awaken the generalist investor from their apathetic coma. Energy stocks are cheaper today after having rallied by 100 per cent+ in many cases than they were on Jan. 1, 2021.  Trading at an average 2.9x EV/CF and 30 per cent free cashflow yield at $70WTI investors are getting free optionality to higher oil prices in the years ahead…we do not need oil to rally further for energy stocks to increase by another 100 per cent over the next year.

TOP PICKS:

Whitecap Resources (WCP TSX)

Whitecap has been a terrible performer YTD increasing by just 21 per cent despite oil increasing by 51 per cent. I suspect there may have been a large institutional seller pressuring the name due to ESG pressures (ie. divestment) and believe the seller may be close to out of the name. Given net negative emitter status, large inside ownership, low leverage, and well performing assets I look for this name to rerate and catch up to its peers. Trading at 2.7x EV/CF and a 22 per cent free cashflow yield we look for the company to become aggressive at using at least 50% of its FCF to launch a material share buyback and increase its base dividend by ~25 per cent.  Using a target multiple of 6x we think fair value for WCP is $13.70/share which triangulates to a 10 per cent free cash flow yield offering potential 133 per cent upside.

Cenovus Energy (CVE TSX)

Within spitting distance of its interim $10BN leverage goal Cenovus is months away from being able to implement a sizeable base dividend increase and more importantly a meaningful (10 per cent or more) share buyback program given its depressed valuation (3.7x EV/CF and 27 per cent free cashflow yield). The CEO recently told me “there is no investment I can make that is remotely as attractive as buying back our own shares.” My target is $23/share at $70WTI equating to 87 per cent upside and Cenovus is my highest conviction short-term tactical call while offering meaningful upside potential should oil rally further in the coming year.

Enerplus (ERF TSX)

Enerplus represents DEEP value (2.2x EV/CF at $70WTI) and is tremendously mispriced in my opinion. With over 10 years of development inventory the company could privatize itself and become debt free with just 5 years of free cashflow offering free optionality on both inventory depth and oil price upside.  Trading at a free cashflow yield of 30 per cent to its market cap we look for the company to launch an aggressive share buyback program in early 2022 equating to potentially 20 per cent of its outstanding shares (75 per cent of 2022 free cashflow to shareholder returns).  Our target is 5X 2022 EV/CF = $21.80 = 152 per cent potential upside.

PAST PICKS: Sept. 18, 2020

TORC Oil & Gas (TOG TSX) – Acquired by WCP March 1, 2021

• Then: $1.55
• 02/26/21: $3.21
• Return: 107%
• Total Return: 107%

Freehold Royalties (FRU TSX)

• Then: $3.92
• Now: $9.98
• Return: 155%
• Total Return: 167%

Whitecap Resources (WCP TSX)

• Then: $2.69
• Now: $5.88
• Return: 119%
• Total Return: 128%

Total Return Average: 134%