Eric Nuttall’s Top Picks: August 12, 2022
Eric Nuttall, Partner and Senior Portfolio Manager, Ninepoint Partners
FOCUS: Energy values
While the market worries about potential regional recessions and the impact this 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 issues: US shale hyper-growth is over, with investors demanding ‘returns’ in the form of excessive dividends and buybacks . OPEC is on the brink of exhausting its spare capacity and the global supermajors cannot expand due to too many years of insufficient investment. In the short term, if demand growth slows, some demand drivers such as the switch from gas to oil in Europe could offset any recession-induced demand weakness.
With the sector trading at an estimated 28% free cash flow yield and codifying the 50-75% return of this to investors in the form of dividends and share buybacks, we see significant upside potential from over 150% cent in many names. We particularly see an advantage in Canadian small and mid-cap oil stocks which trade at over 30% free cash flow yields despite near debt-free status, enterprise value to cash flow multiples below 2x and a firm commitment not to grow and to pay rather juicy dividends and repurchase of significant amounts of shares. We remain optimistic
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Baytex Energy (BTE TSX)
Baytex has drilled nine of the top 10 plays in Clearwater, the most economical oil play in North America. With sinks recouping investments in less than three months, Baytex is close to an inflection point where deleveraging will soon be complete and the company will be able to return more than the current 25% free cash flow to shareholders. . We estimate the company is trading at 1.9x EV/CF at $100 and a free cash flow yield of 38% while hitting its ultimate leverage target around Q2 2023. Our target multiple is 5x at $100 = target price = 178 percent upside potential.
MEG Energy (MEG TSX)
MEG began returning free cash flow to shareholders, with 25% of free cash flow going to active share repurchase, reaching the next threshold to move to 50% of free cash flow in the fourth quarter of this year . With the company trading at a free cash flow yield of 32% and a commitment to return all of it to shareholders once the company reaches its final debt target in the third quarter of 2023, we believe that MEG may result in a revaluation of its trading multiple from 2.8x to 6.0x (free cash flow yield target of 12%) = $41 target price = 137% upside potential.
Enerplus (ERF TSX)
ERF is actively selling its Canadian assets to become an all-American company focused on Bakken/Marcellus. Trading at 1.6x EV/CF and a free cash flow yield of 39%, the company recently renewed its 10% normal course issuer bid and, during its second quarter conference call , has agreed to launch a major issuer bid (SIB) in the fourth quarter. if the stock price remains so deeply wrong. With 14 years of stagnation, inventory in the Bakken and likely greater inventory depth in the Marcellus, Enerplus is a free cash flow beast and we believe fair value is closer to a free cash flow yield 11% available = $42 target price = 197% upside potential.
Past Picks: July 30, 2021
Tamarack Valley (TVE TSX)
- So: $2.69
- Now: $4.12
- Return: 53%
- Total return: 55%
Cardinal Energy (CJ TSX)
- So: $3.14
- Now: $8.52
- Return: 171%
- Total return: 174%
Crescent Point Energy (TSX GIC)
- So: $4.56
- Now: $9.59
- Return: 110%
- Total return: 113%
Average total return: 114%