Eric Nuttall, Partner & Senior Portfolio Manager, Ninepoint Partners

Focus: Energy stocks

Top picks: Meg Energy, Athabasca Oil, Arc Resources

MARKET OUTLOOK:

The energy sector remains deeply out of favour given heightened volatility and confusing crosscurrents, resulting in the most attractive valuation levels since the pandemic. We believe that oil will average ~US$70WTI and natural gas ~$4.00NYMEX, putting the energy sector at an average 13 per cent free cashflow yield.

Despite the calls for “drill, baby drill,” at the current oil price, U.S. shale production growth is in the “dead zone” after having grown at its weakest rate (excluding COVID-19) since its inception. This, combined with the very gradual return of OPEC+ curtailed production (~0.9MM Bbl/d over 18 months) should allow global oil inventories to remain at or near their all-time lows to the end of 2025. We believe over the next two years that OPEC+ will fully normalize its spare capacity levels, that U.S. shale will peak, and that total non-OPEC production will be at or near its peak production levels as well. This sets up the next major bull market for oil, and the strategic value of Canada’s deep reserves will be extremely high.

Natural gas has entered a multi-year bull market, given the buildout of new LNG capacity both in the U.S. and Canada, as well as growth in power demand due to AI/data centres and the failure of the broader alternative energy “transition.” Natural gas is not a “bridge fuel” but instead is becoming the fuel of choice for baseload demands.

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TOP PICKS:

Meg Energy (MEG TSX)

MEG Energy has over 35 years of stay-flat inventory and is returning 100 per cent of free cashflow back to shareholders while modestly increasing production over the next few years. Trading at a 13 per cent free cashflow yield at US$70WTI, we believe the company will be able to buyback 50 per cent of their shares outstanding over the next five years while growing their production by about 30 per cent. Our one year target is $32 but see meaningful upside beyond that over a longer timeframe.

Athabasca Oil (ATH TSX)

Over the next five years at US$70WTI flat, we believe the company can grow production by almost 80 per cent while also buying back 68 per cent of their shares outstanding, resulting in free cashflow per share greater than their share price by 2029, assuming that they continue to buyback shares at their current price. With over 50 years of stay-flat inventory and meaningful shareholder returns, we see the stock as profound mispriced. Our one year target is $6, but we see very meaningful upside beyond that over time.

Arc Resources (ARX TSX)

ARC offers meaningful exposure to an increasingly bullish natural gas outlook combined with modest production growth + share buybacks. Over the next five years we see ARC growing production by 11 per cent while buying back 32 per cent of their shares outstanding. Trading at 4.5x EV/CF and a 12 per cent free cashflow yield we see ~ 50 per cent potential upside over the next one-two years.

Past Picks: April 2, 2024

Veren (VRN TSX)

• Then: $11.52
• Now: $8.49
• Return: -26%
• Total Return: -23%

Baytex Energy (BTE TSX)

• Then: $5.30
• Now: $2.89
• Return: -46%
• Total Return: -45%

Precision Drilling (PD TSX)

• Then: $96.01
• Now: $65.01
• Return: -32%
• Total Return: -32%

Total Return Average: -33%