Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners

FOCUS: Energy stocks 

MARKET OUTLOOK:

The four tenets of our “multi-year oil bull market” thesis remain intact. Demand is set to surge as China emerges from its COVID-19-zero policy, U.S. shale will grow by only ~0.5MM Bbl/d given asset maturity, 20 per cent inflation costs, and investors’ ongoing demand to prioritize dividends over production growth. OPEC spare capacity remains challenged with incremental capacity not coming online until 2025 and 2027, also the global supermajors continue their eight-year-long trend of insufficient investment. We believe that while the path will be volatile, oil will strengthen throughout the year reaching US$100WTI in the coming quarters.

Energy stocks remain severely mispriced discounting an oil price below US$60WTI. Given record free cash flow and a commitment to return the majority of it back to investors, we believe that 2023 will be another very strong year of performance. We remain bullish.

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TOP PICKS:

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. Trading at a 12 per cent/27 per cent free cash flow yield at US$80/$100WTI this year and a 22 per cent/31 per cent free cash flow yield at US$80/$100WTI in 2024, we see the company being able to privatize itself in just three years from free cash flow. With $3.3BN 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 = $6.85 target.

Tamarack Valley (TVE TSX)

Tamarack significantly lagged in 2022 as the market digested its very active pace of consolidation in the Clearwater play. Now with at least 10 years of drilling inventory, the company is focused on reaching leverage targets to allow for more meaningful shareholder returns. With the stock trading at 2.8x/2.2X 2024 EV/CF at US$80/$100WTI we see fair value closer to $9.22/$12.37 at US$80/$100WTI.

Baytex Energy (BTE TSX)

Baytex offers meaningful exposure to both a rising oil price and an improving WCS differential (to $15 in 2024). With the company returning 25 per cent of free cash flow to investors we see this rising to 50 per cent in the second quarter and 75 per cent in the second quarter of 2024. With the stock trading at only 2.3x/1.6x 2024 EV/CF at $80/$100, Baytex offers some of the highest potential upside of any stock we follow. We think fair value at US$80/$100WTI at 5X EV/CF is $13.89/$19.81 offering potential multi-bagger returns.