Oil companies generating 'egregious' amount of free cash flow: Strategist
The “egregious” amount of free cash flow that oil companies are currently generating may lead to significant share buybacks and dividends, according to a high-profile Canadian energy fund manager.
“So far this year it’s been all about repairing the balance sheet damage that occurred last year,” said Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners, in an interview Friday. “Effective I think September, you’ll start to see major announcements.”
Nuttall said he’s working “extremely aggressively” to try to get small-cap oil companies to utilize their free capital now that balance sheets have been cleaned up.
“We just need a little bit more patience, give it another month,” Nuttell said, noting that many workplaces are planning on bringing employees back into the office in mid-September.
“That’s when conference season starts, people will start redoing their models, etc.; and, importantly, companies are going to start messaging what they are going to be doing with their free cash flow.”
As examples, Nuttall pointed to Cardinal Energy Ltd., saying it may be guiding towards re-initiation of a “very, very significant dividend” early next year.
Nuttall said he also “would not be surprised to see” companies trading at two times cash flow, such as Tamarack Valley Energy Ltd., initiating a 10 per cent share buyback in addition to a brand new dividend.
“My key message is, the amount of free capital that these companies are curating right now is so egregious,” he said.
“It’s time for this sector, for CEOs to say, ‘if you don’t want our stock, we see the opportunity – we are going to act extremely aggressively and if you don’t want to buy our stock, we do because we see the value.”
Recently, global oil prices have clawed back most of their losses following OPEC+ meetings earlier this month, when the cartel and its allies finally reached an agreement to continue with gradual output hikes.
“The market took it as a negative in the short-term,” Nuttall said Friday, adding that he was “pretty public in saying, ‘look, this is a very strong positive because it accelerates the timeline to the exhaustion of OPEC’s spare capacity.’”
“If you look at it, OPEC’s production will end this year only 2.3 million barrels per day below what I estimate to be their productive capacity. That’s a very, very thin margin in a world where demand continues to normalize despite these fears we have of the Delta variant, etc.”
When asked by anyone about the state of the oil market currently, Nuttall said he replies, “every day above US$70 is a good day.”