Eric Nuttall, Partner and Senior Portfolio Manager, Ninepoint Partners
FOCUS: Energy stocks
MARKET OUTLOOK:
While the market worries about potential regional recessions and the impact that would have on short-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: US shale hypergrowth is over as investors demand “returns” in the form of dividends and excessive buybacks. OPEC is imminently running out of excess capacity and the global majors cannot grow due to too many years of underinvestment. In the short term, if demand growth slows, there are demand factors such as the switch from gas to oil in Europe that could offset any recession-induced weakness in demand.
With the sector trading at an estimated free cash flow yield of 28% and codifying a 50-75% return to investors in the form of dividends and share buybacks, we see significant upside potential of over 150 percent . hundred in many names. We see particular upside in Canadian oil small- and mid-caps trading at 30% plus free cash flow yield despite near-debt-free status, enterprise value below double cash flow multiples and a strong commitment not to grow and pay more juicy. dividends and repurchase of significant amounts of shares. We remain optimistic
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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 plays in Clearwater, the cheapest oil zone in North America. With wells recovering investments 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% of free cash flow to shareholders. We estimate the company will trade at 1.9x EV/CF at $100 and a free cash flow yield of 38% while reaching its final debt target around Q2 2023. Our target multiple is 5x at $100 = target price = 178. percent upside potential.
MEG Energy (MEG TSX)
MEG has begun returning free cash flow to shareholders with 25 percent of free cash flow earmarked for active share repurchases, reaching the next threshold to increase to 50 percent of free cash flow on fourth quarter of this year. With the company trading at a free cash flow yield of 32% 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 can drive a rerating of its trading multiple from 2.8x to 6.0x (12 percent free cash flow yield target) = $41 price target = 137 percent potential upside.
Enerplus (ERF TSX)
ERF is actively selling its Canadian assets to become a pure American company focused on the Bakken / Marcellus. Trading at 1.6x EV/CF and a free cash flow yield of 39 percent, the company recently renewed its 10 percent normal course issue offer and in its second quarter teleconference it committed to a significant issue offer (SIB) in the fourth quarter. if the stock price continues to be so deeply mispriced. With 14 years of going steady, inventories in the Bakken, and probably more inventory depth in the Marcellus, Enerplus is a free cash flow beast and we believe fair value is closer to a cash flow yield free of 11 percent = target price of $42 = 197 percent. potential upside
Previous selections: July 30, 2021
Eric Nuttall’s previous picks
Eric Nuttall, senior portfolio manager at Ninepoint Partners, discusses his past picks: Tamarack Valley, Cardinal Energy and Crescent Point Energy.
Tamarack Valley (TVE TSX)
- Then: $2.69
- Now: $4.12
- Yield: 53%
- Total yield: 55%
Cardinal Energy (CJ TSX)
- Seeds: $3.14
- Now: $8.52
- Yield: 171%
- Total return: 174%
Crescent Point Energy (CPG TSX)
- Seeds: $4.56
- Now: $9.59
- Performance: 110%
- Total return: 113%
Average Total Return: 114%
TV TSX
YNY CJ TSX NNN CPG TSX NNY