Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners

MARKET OUTLOOK:

Sentiment remains weak due to ongoing recessionary fears and disappointment over (so far) loss of Russia production, further fueled by seemingly weak (and questionable) U.S. inventory data. Energy investors need to take a breath, tune out the noise and focus on what matters.

Oil demand hit a record in December 2022 (despite China being under lockdown, and recent mobility stats show their demand is sharply normalizing = 1MM Bbl/d in demand improvement). U.S. shale has continued to disappoint, OPEC spare capacity is razor thin and will likely be fully exhausted by year’s end, and the global supermajor’s production continues to stagnate with no signs of improvement. Once we emerge from seasonal weakness and peak refinery maintenance, and China continues to normalize, we expect sharp inventory draws to resume in the next several months leading to a rally in the oil price, ultimately to US$100WTI and beyond. We remain bullish.

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TOP PICKS:

Tamarack Valley (TVE TSX)

Tamarack continues to be punished for its active mergers and acquisitions streak in 2022 which created an overhang on the share price and annoyed existing shareholders by deferring their payday in the form of meaningful dividends and buybacks by several quarters. While much of 2023 will be used to pay down its debt, investors still get paid a four per cent dividend while maintaining significant leverage to a rising oil price. We see the company paying an annualized 13 per cent dividend (or buyback) by the first quarter of 2024 and a 32 per cent dividend by the fourth quarter of 2024 at US$100WTI. Trading at 2.5x/1.9 EV/CF at $80/$100 in 2024, we see fair value closer to $9.69/$13.00, offering over 100 per cent potential upside.

Athabasca Oil (ATH TSX)

Athabasca Oil offers tremendous leverage to both a rising oil price and a falling WCS differential. Having met its debt target (debt free now) the company has pledged to return at least 75 per cent of free cash flow back to investors in 2023, with a buyback beginning in April. Trading at a 13 per cent/23 per cent free cash flow yield at US$80/US$100WTI this year and a 20 per cent/29 per cent free cash flow yield at US$80/US$100WTI in 2024, we see the company being able to privatize itself in ~three years from free cash flow. With $3.3 billion of tax losses for which the market ascribes zero value ($0.44/share in value), we see the potential for ATH to be acquired at some point in the next two years and think fair value is 5X 2024 EV/CF at US$100WTI = $6.78 target = 145 per cent potential upside.

Cenovus Energy (CVE TSX)

Cenovus trades at a material discount to its U.S. peers, somewhat owing to several non-operated downstream issues over the past year. The new chief executive officer, Jon McKenzie, is laser focused on improving downstream reliability while driving debt down to $4 billion to allow them to return 100 per cent of free cash flow to investors, which we see by the third quarter of 2023. It is trading at a 14 per cent/21 per cent free cash flow yield this year and 20 per cent/29 per cent in 2024 at US$80/US$100WTI. We salivate thinking of the coming buybacks and variable dividends which should drive a re-rating to 6X cash flow = 135 per cent potential upside at US$100WTI.

PAST PICKS: March 4, 2022

MEG ENERGY (MEG TSX)

• Then: $18.24
• Now: $21.19
• Return: 16%
• Total Return: 16%

ENERPLUS (ERF TSX)

• Then: $17.20
• Now: $21.40
• Return: 24%
• Total Return: 26%

NUVISTA ENERGY (NVA TSX)

• Then: $10.70
• Now: $11.26
• Return: 5%
• Total Return: 5%

Total Return Average: 16%