Nuttall, partner and senior portfolio manager, Ninepoint Partners
FOCUS: Energy Stocks

MARKET OUTLOOK:

Our forecast from earlier this year has now become reality: global oil inventories have been falling at their fastest pace in history, now down to a six plus year low and likely to end 2023 at a 320MM Bbl deficit to the 2017-2019 average. We see inventories continuing to fall in 2024, owing to strong demand, disciplined production growth, and OPEC+ volume curtailments.  We believe that oil will trade in a rough US$85 to US$105 barell per litre for about the next year, with the upper band dictated by Saudi Arabia given the imminent twilight of U.S. shale and the commensurate lack of short-cycle supply.  In a US$90 West Texas Intermediate (WTI) context, the energy sector is trading at a 17 per cent free cashflow yield, have their strongest balance sheets in history, and within the next several months to quarters, will reach their final debt targets allowing them to pivot to returning 75 per cent to 100 per cent of their free cashflow back to shareholders. We remain bullish.

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TOP PICKS:

Cenovus Energy (CVE TSX)

Cenovus should reach their final debt target of $4 billion by the end of December or January allowing them to pivot to returing 100 per cent of free cashflow back to shareholders. Trading at a 17 per cent free cashflow yield at US$90WTI, we see the company buying back 10 per cent of their shares via a NCIB and the residualseven per cent via a SIB in the second half of 2024. We think fair value is six times enterprise value to free cash flow (EV/CF) = $43 at US$90WTI = 51 per cent potential upside.

Athabasca Oil (ATH TSX)

Athabasca has 40 years of proven stay flat inventory, net cash on their balance sheet, exceptional leverage to a shrinking WCS differential, and is returning 75 per cent of free cashflow back to shareholders currently. Trading at a 20 per cent free cashflow yield at $90WTI we see the company retiring 15 per cent of their shares outstanding, with fair value = five times EV/CF = $6.60 at US$90WTI = 60 per cent potential upside.

Crescent Point Energy (CPG TSX)

Crescent Point has successfully pivoted from a low-productivity Saskatchewan focused oil company to a more balanced oil company with meaningful liquids rich exposure in the Montney. They recently drilled a ~2,000 Boe/d well in their Montey acreage, a 15x increase to their old style Saskatchewan oil wells. With at least 15 years of Tier one acreage the company has lots of running room and is now returning 50% of free cashflow back to shareholders. Trading at a 28 per cent free cashflow yield at US$90WTI we see the company retiring 14% of their shares outstanding while paying down debt by over $500MM. We see fair value at five times EV/CF which at $90WTI = $25.50 target price = 124 per cent potential upside.