Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners
FOCUS: Energy stocks
Top Picks: MEG Energy, ARC Resources, Tamarack Valley
MARKET OUTLOOK:
Global and U.S. oil inventories are at their lowest levels since 2017-16 and global oil demand is at its highest level ever, yet sentiment for oil remains in the doldrums. Sentiment is the worst in years despite the S&P TSX Total Return Energy Index up roughly 20 per cent year to date. Why? The constant, negative barrage of stories about oil gluts, weak Chinese demand, peak demand that is always “just around the corner,” and fear mongering by the International Energy Agency (IEA), which used to be a respected institution, are all contributors. Additionally, oil has been very volatile this year owing to geopolitical tensions in several parts of the world, plus now uncertainty around the impact of a Donald Trump presidency on both the oil market and the global economy. With all of that said, the unease amongst energy investors is understandable.
Yet, we think the market is too bearish looking towards 2025 balances. Yes, we believe that inventories will rise next year, but not as much as consensus believes, and also importantly, they will be rising from their lowest levels ever. Oil is already mispriced by US$13/bbl. We see the likelihood of demand, especially in China, being stronger next year. U.S. shale has entered its twilight and additionally with price uncertainty we see 2025 growth underwhelming. Finally, we do not believe that OPEC+ will flood the market, and while it is likely anxious about keeping barrels of the market in perpetuity, the logical move would be to defer adding back production until April when demand begins to seasonally strengthen. We see West Texas Intermediate (WTI) trading in a $70-$80 band, natural gas averaging $3.50/mcf, and are positive on the outlook for coal and uranium. There is no energy transition, we need more of all forms of energy.
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TOP PICKS:
MEG Energy (MEG TSX)
MEG is trading at a 10 per cent/14 per cent free cashflow yield at $70/$80 WTI and is returning all of it back to shareholders in the form of share buybacks. With over 35 years of stay-flat high quality inventory MEG offers oil bulls strong leverage to a rising oil price in the years ahead.
ARC Resources (ARX TSX)
ARC offers investors 20 plus years of very high quality stay-flat inventory, scalable low rate growth over many years, and the compounded impact of meaningful share buybacks given most of the FCF being returned to shareholders and a current 10 per cent free cash flow yield at $70 WTI and $3.50NYMEX. This is one to put away and forget about it.
Tamarack Valley Energy (TVE TSX)
Tamarack Valley, after two years of operational challenges, has now hit their numbers for three quarters in a row and has become one of the “go to” midcap oil names in Canada. With most of their production now coming from the Clearwater and Charlie Lake (plays with exceptional economics) and 20 years of stay-flat inventory in the Clearwater, Tamarack trades at a 12 per cent/17 per cent free cashflow yield at $70/$80 WTI.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| MEG TSX | N | N | Y |
| ARX TSX | Y | N | Y |
| TVE TSX | N | N | Y |
PAST PICKS: NOVEMBER 22, 2023
Precision Drilling (PD TSX)
- Then: $77.04
- Now: $92.55
- Return: 20%
- Total Return: 20%
Veren (VRN TSX)
- Then: $9.49
- Now: $7.65
- Return: -19%
- Total Return: -15%
Cenovus (CVE TSX)
- Then: $23.98
- Now: $22.90
- Return: -4%
- Total Return: -1%
Total Return Average: 1%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| PD TSX | N | N | Y |
| CPG TSX | Y | N | Y |
| CVE TSX | Y | Y | N |