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Noah Zivitz

Managing Editor, BNN Bloomberg

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Long-time oil bull Eric Nuttall is predicting "mind-blowing" results from the oil producers that were Bay Street's star performers in the first half of this year.

"I think it's going to be a very, very strong second half to this year," he said in an interview Wednesday.

"Yes, we get sucked up into macro volatility and whatnot; you know, recessionary fears and such. But I think what we're going to see is [second-quarter] results for this space are going to be absolutely mind blowing in terms of how much free cash flow they're generating and the commitment not to grow and return back to investors."

 Nuttall, a partner and senior portfolio manager with Ninepoint Partners LP, was one of few voices who urged investors to play the long game when crude oil prices collapsed in the early months of the pandemic, including a brief trade in negative territory.

 Late in 2021, Nuttall acknowledged that he, like his peers, questioned himself at times, particularly "when you feel like throwing up at the sheer quantum of money that you just lost," referring to March 2020, when fear surrounding COVID-19 was at its worst, and shares of Cenovus Energy Inc. sank 53 per cent in a single trading session.

 Fast-forward to today, and Nuttall would be forgiven for doing a victory lap. After all, the S&P/TSX Composite Index has slid about 13 per cent since closing at a record high in March; it's red on stock-trading screens virtually anywhere you look — other than the space that Nuttall has championed.

 Heading into the final trading session of the first half of 2022, the TSX's energy subgroup is alone in posting a meaningful gain, after rallying 25.2 per cent through the close of trading Wednesday. And all 10 of the top percentage gainers on the composite index are from that energy group — including Cenovus, whose misfortune Nuttall once lamented, and has rallied 61.2 per cent in the first six months of the year.

 Nuttall's thesis, at its core, is built on a view that there is insufficient supply in the current environment. But that's not because of the factors dominating headlines every day.

 "We were structurally under-supplied heading into this year. We were already approaching the exhaustion of OPEC spare capacity," he said. "[Environmental, Social, and Governance] investing divestments was already disallowing sufficient investment on the part of the super majors. And so this year was really the culmination of all of those bullish factors combined with the surge in demand as the world is unlocking from COVID."

 Despite the rally that the sector and underlying commodities have enjoyed, Nuttall said he thinks energy stocks are still discounting a worst-case economic scenario that would drive the price of oil toward US$70 per barrel.

 And so he repeated a familiar call for companies to share their wealth with shareholders, particularly amid his prediction for "mind-blowing" free cash flow in the coming weeks.

 "My primary focus today is on stocks that are imminently returning meaningful capital," he said, before singling out Crescent Point Energy Corp., Baytex Energy Corp., and Enerplus Corp. as names he's been watching (and which he holds for clients). Nuttall added in a follow-up email that he has been actively topping up his positions in all three of those stocks "at every chance."  

 "My ask, as the largest (energy) investor in Canada, is of these companies, and the small caps at least: I want 75 per cent [of the free cash flow]."