Eric Nuttall's Market Outlook
Oil investors need to demand more from energy companies that are not maximizing their returns to shareholders, especially as crude oil prices hover around US$120 per barrel, according to Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners LP.
He pointed to Cenovus Energy Inc. that is doling out 100 per cent of its free cash flow to investors - a move that he said has “set the bar” for the industry as a whole.
“A small cap can say, ‘Well, we're giving you 25 per cent [return on capital].’ That's great. I can get 100 per cent owning Cenovus - why do I own you?,” Nuttall said. His funds do not currently hold Cenovus shares.
He added that high capital returns from companies such as Cenovus allow himself and other institutional money managers to “put pressure on the small- and mid-caps” that are trading at low multiples to be more meaningful in returning capital.
“That is the curative to the apathetic coma that some [investors] still - somehow - are finding themselves in. We're at almost US$120 [per barrel] oil - I don't know what more people need. Connect the dots,” he said.
American benchmark West Texas Intermediate (WTI) closed at US$118.87 per barrel on Friday - for its sixth weekly gain.
Energy companies have been rewarding patient investors amid a significant increase in free cash flow while oil prices hover around the highest level since 2014.
Over the past several months, in addition to Cenovus, other Canadian oil giants such as Suncor Energy Inc., Canadian Natural Resources Ltd. and MEG Energy Corp. have dished out excess cash to shareholders through dividend hikes and share buybacks.
“We have a sector that's committed to low-to-no growth and giving us - if not all - almost all of the free cash flow back in dividends and share buybacks,” Nuttall said.
“We see this sector trading at about a 25 to 26 per cent free cash flow yield at US$100 (per barrel) oil - so not even where we are today - irrespective of where we might be going in the months and quarters to come.”
Nuttall said he thinks, realistically, the sector will continue to produce a free cash flow yield above 10 to 15 per cent, which would imply meaningful upside for energy stocks.
“There is not an energy investor on this planet that wants these companies to grow their production, what we want is to get paid for the misery of the past decade … despite us having a pretty good year this year and strong performance last year, the oil party is just getting started,” he said.