Eric Nuttall, Partner and Senior Portfolio Manager, Ninepoint Partners
Focus: Energy reserves
MARKET OUTLOOK:
While the market worries about potential regional recessions and the impact that would have on near-term demand, the real story for oil remains on the supply side. The world has entered a multi-year oil bull market due to structural supply challenges: the US shale boom has ended as investors demand “returns” in the form of dividends and buyback booms. OPEC will soon run out of spare capacity and the global super-majors cannot grow due to too many years of underinvestment. In the short term, if demand growth slows, there are demand drivers such as the gas-to-oil shift in Europe that could offset any recession-induced weakness in demand.
With the sector trading at an expected free cash flow yield of 28 percent and codifying returning 50-75 percent of that back to investors in dividends and share buybacks, we see significant upside potential of more than 150pc in many names. We particularly see upside in Canadian oil small- and mid-caps, which are trading at over 30 percent free cash flow yields, despite near-debt status, less than 2x enterprise value to cash flow and a strong commitment not to grow and instead paying juicy dividends and buying back significant amounts of stock. We remain optimistic
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
- Listen to the Market Call podcast on iHeart or wherever you get your podcasts
Top Picks:
Eric Nuttall’s top picks
Eric Nuttall, senior portfolio manager at Ninepoint Partners, discusses his top picks: Baytex Energy, MEG Energy and Enerplus.
Baytex Energy (BTE TSX)
Baytex has drilled nine of the top 10 fields in Clearwater, the most economical oil field in North America. With wells paying back investment in less than three months, Baytex is nearing an inflection point where deleveraging will soon end and the company will be able to return more than the current 25 percent of free cash flow back to shareholders. We calculate that the company trades at 1.9x EV/CF at $100 and a 38 percent free cash flow yield, while reaching its final debt target around the second quarter of 2023. Our target multiple is 5x at $100 = price target = 178% potential growth.
MEG Energy (MEG TSX)
MEG began returning free cash flow back to shareholders, with 25 percent of free cash flow going toward active share repurchases, reaching the next threshold of increasing 50 percent of free cash flow in the fourth quarter of this year. With the company trading at a 32 percent free cash flow yield and a commitment to return everything to shareholders once the company reaches its final debt target in the third quarter of 2023, we believe MEG could lead to a re-rating in its trading multiple of 2.8x to 6.0x (12 percent target free cash flow yield) = $41 price target = 137 percent upside potential.
Enerplus (ERF TSX)
ERF is actively selling off its Canadian assets to become a purely American company focused on the Bakken / Marcellus. Trading at 1.6x EV/CF and yielding 39 percent free cash flow, the company recently renewed its IPO at a 10 percent normal rate and on its Q2 conference call committed to a substantial IPO (SIB) in Q4 if the stock price remains so deeply flawed. With 14 years of upside, reserves in the Bakken and possibly greater depth in the Marcellus reserves, Enerplus is a free cash flow beast and we believe the fair value is closer to 11 percent free cash flow yield = $42 target price = 197 percent potential growth.
Previous selection: 30 July 2021
Eric Nuttall’s previous selections
Eric Nuttall, senior portfolio manager at Ninepoint Partners, discusses his previous picks: Tamarack Valley, Cardinal Energy and Crescent Point Energy.
Tamarack Valley (TVE TSX)
- After that: $2.69
- Now: $4.12
- Return: 53%
- Total return: 55%
Cardinal Energy (CJ TSX)
- Then: $3.14
- Now: $8.52
- Return: 171%
- Total return: 174%
Crescent Point Energy (CPG TSX)
- Then: $4.56
- Now: $9.59
- Return: 110%
- Total return: 113%
Overall average return: 114%
TVE TSX
YNY CJ TSX NNN CPG TSX NNY
Add Comment