Eric Nuttall’s Top Picks: May 28, 2021
Eric Nuttall, Partner and Senior Portfolio Manager at Ninepoint Partners
FOCUS: Energy stocks
The fear of peak demand leads to the reality of peak supply. With demand normalizing, the end of hyper shale growth in the United States, the impending depletion of OPEC’s reserve capacity, and the capping of global offshore production over the next few years, oil has entered a multi-year structural bull market and will likely exceed US $ 100 in the coming years.
Having been consistent in my view (called at US $ 50 WTI by YE’20 when oil was in the US $ 30 range at the start of 2020; US $ 60 then US $ 70 WTI by June 21 earlier within the year), the macro continues to evolve almost exactly as expected. Given the dramatic improvement in oil prices, the oil and gas industry is poised to generate huge levels of free cash flow and with balance sheets nearly repaired from the damage inflicted in 2020, companies are almost ready to give back. unfathomable levels of capital to shareholders.
With an average corporate free cash flow yield that I am above 20 percent at US $ 70 WTI, we are poised to significantly increase dividends and share buybacks. Likewise, with average trading multiples of 3.2x versus historical averages of 8x, the inevitable return of generalist investors is near and with it a significant revaluation of energy stocks. The party has only just begun.
Whitecap Resources (WCP TSX)
Whitecap is a net negative issues issuer that has successfully emerged from the bloodbath of 2020 as a stronger entity given the successful acquisitions of several companies at compelling valuations. Trading at 2.7x EV / CF at $ 70 WTI in 2022 and a free cash flow yield of 29%, I see them being able to significantly increase their dividend (current yield of 3.5%) while by slightly increasing production and reducing debt (
Baytex Energy (BTE TSX)
Baytex has totally fallen off the radar screens of most investors given the perception of limited inventory depth and too much leverage. With recent success in a new area of gambling emerging from Clearwater (40 sections derailed in Canada’s highest-grossing game), Baytex’s inventory depth appears to have deepened considerably as debt levels decline (1 , 6X 2022 D / CF at $ 70). Target stable production and maximization of free cash flow to enable deleveraging and consequent multiple expansion Baytex’s current trading multiple of 2.7x 2022 EV / CF at $ 70 WTI and a free cash flow yield of 51 % is very attractive. Using $ 70 WTI and a multiple of target 4x EV / CF, I see upside potential of 111%.
Cenovus Energy (CVE TSX)
Cenovus is actively working to monetize some of the non-core assets purchased with the Husky Acquisition to allow for rapid deleveraging and therefore earlier than expected principal repayment. If Conoco Phillips has announced its gradual liquidation of its stake in the company, this represents less than 5% of the average volume of trade, which therefore does not present a major overhang. Trading at 3.5x EV / CF at US $ 70 and a free cash flow yield of 35% once leverage metrics are met I see them significantly increasing their dividend while announcing a major buyback program actions. Using a target multiple of 6x EV / CF and US $ 70 WTI, we see upside potential of 115%.
PAST: June 19, 2020
TORC Oil and Gas (TOG TSX) Acquired by WCP on March 1, 2021
- Then: $ 1.76
- 02/26/2021: $ 3.21
- Efficiency: 82%
- Total efficiency: 82%
Tamarack Valley (TVE TSX)
- Then: $ 0.85
- Now: $ 2.56
- Efficiency: 202%
- Total yield: 202%
Kelt Exploration (KEL TSX)
- Then: $ 1.58
- Now: $ 3.08
- Return: 95%
- Total efficiency: 95%
Average total yield: 126%
Personal Twitter nickname: @ericnuttall
Company Website: www.ninepoint.com