Eric Nuttall's Top Picks
Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners
FOCUS: Energy stocks
While the market frets of 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 into a multi-year oil bull market due to structural supply challenges: U.S. shale hyper-growth is over as investors demand “returns” in the form of dividends and buybacks overgrowth. OPEC is set to imminently exhaust its spare capacity and the global supermajors cannot grow due to too many years of insufficient investment. Short-term, if demand growth slows, there are demand drivers such as gas-to-oil switching in Europe that could make up for any recessionary-induced weakness in demand.
With the sector trading at an estimated free cash flow yield of 28 per cent and codifying the return of 50-75 per cent of it back to investors in the form of dividends and share buybacks, we see a meaningful potential upside of more than 150 per cent in many names. We especially see upside in Canadian oil small and midcaps that are trading at 30 per cent-plus free cash flow yields despite near debt-free status, sub 2x enterprise value to cash flow multiples, and a strong commitment to not grow and instead pay juicy dividends and buyback meaningful amounts of stock. We remain bullish
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Baytex has drilled nine of the top 10 plays in Clearwater, the most economic oil play in North America. With wells that are recouping investments in under three months, Baytex is near an inflection point where deleveraging will soon be complete and the company will be able to return more than the current 25 per cent of free cash flow back to shareholders. We estimate the company to be trading at 1.9x EV/CF at $100 and a 38 per cent free cash flow yield while reaching its ultimate debt target around the second-quarter of 2023. Our target multiple is 5x at $100 = target price = 178 per cent potential upside.
MEG has begun to return free cash flow back to shareholders with 25 per cent of free cash flow going towards an active share buyback, reaching the next threshold to increase to 50 per cent of free cash flow in the fourth-quarter of this year. With the company trading at a 32 per cent free cash flow yield and a commitment to return all of it back to shareholders once the company reaches their final debt target in the third-quarter of 2023 we believe MEG can drive a re-rating in its trading multiple from 2.8x to 6.0x (12 per cent free cash flow yield target) = $41 target price = 137 per cent potential upside.
ERF is actively selling off its Canadian assets to become a pure U.S. Bakken / Marcellus-focused company. Trading at 1.6x EV/CF and a 39 per cent free cash flow yield the company recently renewed its 10 per cent normal course issuer bid and on its second-quarter conference call committed to a significant issuer bid (SIB) in the fourth-quarter if the share price remains so profoundly mispriced. With 14 years of staying flat, inventory in the Bakken and likely more inventory depth in the Marcellus, Enerplus is a free cash flow beast and we believe fair value is closer to a 11 per cent free cashflow yield = $42 target price = 197 per cent potential upside.
Past Picks: July 30, 2021
Tamarack Valley (TVE TSX)
- Then: $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%
Total Return Average: 114%