Eric Nuttall's Market Outlook
Looking at oil and gas stocks this year? Think small and Canadian, at least according to the world’s leading energy fund manager.
“Canada is, I think, the place to be in 2022,” said Eric Nuttall of Toronto’s Ninepoint Partners LP. His $950 million (US$752 million) Ninepoint Energy Fund was Morningstar’s top-performing energy-focused fund in 2021, posting a 189 per cent total return that blew away the S&P/TSX Composite Index’s 22 per cent. The second-best performer, Canoe Energy Portfolio Class, is another Canadian energy-focused fund and posted a total return of 101 per cent last year.
Nutall was helped by the overall surge in energy stocks, the best sector in the S&P 500 Index and S&P/TSX last year, and the more than 50 per cent rebound in oil prices as economies reopened and the pandemic receded. The performance comes after a string of difficult -- he calls them “soul sucking” -- years investing in the oil and gas business.
“I just thought I had to make it to the other side, then I’d be the last man standing,” he said.
Energy investors in 2021 benefitted from what Nuttall called a “disproportionate” increase in smaller-cap Canadian energy companies like Baytex Energy Corp. and Cardinal Energy Ltd., both of which rose over 420 per cent last year. But the fund’s most prescient trade was buying 53 million shares of beleaguered oil sands producer Athabasca Oil Corp. from Norway’s state oil company Equinor ASA in January 2021.
At the time, Athabasca had US$450 million of debt maturing in February 2022. Its total market value was less than US$80 million. But as oil prices rose and Athabasca’s cash flow improved, the company refinanced its debt, pushing almost US$90 million in maturities out to October 2023 and an additional US$350 million to 2026. The stock gained 600 per cent last year.
Equinor spokesperson Ola Morten Aanestad described the divestment as a “financial investment,” adding that the fund has exited the oil sands industry but remains active in Canada’s offshore oil and gas production.
Athabasca chief financial officer Matt Taylor said in an email that the company’s balance sheet refinancing was a catalyst for the shares. “The stock’s performance and trading volume (in 2021) is reflecting this optimism and we have attracted a number of new investors like Ninepoint.”
Meanwhile, Nuttall is searching for similar deals to boost his returns for this year. But he acknowledges it will be difficult to come up with another Athabasca.
“That one was special,” he said.
Despite breaking out in 2021, Canadian oil and gas companies trade at lower valuations, an average of 16.11 times their earnings, than their U.S. peers, trading at 21.49, according to data compiled by Bloomberg.
Nuttall said the country’s producers can “force a re-rating” by using free cash flows from higher commodity prices to aggressively buy back shares and boost dividends. That would get the attention of fund managers who have exited the oil and gas industry due to concerns related to ESG investing strategies.
“The commonality of all fund managers is you can be fired by the click of a mouse button in three nano seconds,” said Nuttall, adding that the industry’s returns should leave investors with the fear of missing out. “That FOMO, that performance anxiety, is going to lead to the generalists coming back to the space.”
Nuttall is bullish on crude in 2022 but sees a few potential risks to oil prices. He’s particularly concerned about the potential for a new “vaccine resistant” coronavirus variant that hurts oil demand, and the possibility of larger than expected increases in supply from either U.S. shale oil producers or Iran, if sanctions lift.
The West Texas Intermediate oil price benchmark is currently trading at US$77.69 per barrel on a spot basis, and futures contracts are trading above US$70 per barrel through Jan. 2023.
“If you don’t get the call on the commodity correct, then you’re doomed,” he said, adding that bad calls on commodity prices can sink otherwise smart investments in geographies, sub sectors, resource types or alternatives.