Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners

FOCUS: Energy stocks  

MARKET OUTLOOK:

Energy markets are grappling with an enormous amount of uncertainty, both with respect to the prospect for regional and global recessions owing to rapidly rising interest rates, and significant geopolitical worries. Specific geopolitical worries include the likely land campaign by Israel into Gaza and the potential that has to lead to a larger regional confrontation with a possible oil supply impact. We continue to be bullish on oil, though think due to broader economic worries that oil is likely to be rangebound for the next two to three quarters between US$80 West Texas Intermediate (WTI) and $95ish WTI.

With many energy stocks discounting an oil price of $60WTI or lower, despite having their strongest balance sheets in history and generating the most amount of free cash flow in history, we still see compelling value and upside. Many companies will reach their final debt targets in the coming months to quarters and inflect to return as much as 100 per cent of free cash flow back to investors. We remain bullish on 2024 being another good year for performance.

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TOP PICKS:

Crescent Point Energy (CPG TSX)

Crescent Point is having remarkable success with a new frac design (elevator frac) in its recently acquired Montney acreage, having recently drilled one of the most economic wells in the Montey ever drilled. With 300 potential follow-up locations amenable to this technique, and 15 years of inventory overall, we see the current valuation of  2.8X EV/CF and 23 per cent free cash flow yield at $80WTI as very compelling. We think fair value is 5X = $22/share = ~100 per cent potential upside.

Cenovus Energy (CVE TSX)

Cenovus should reach its final debt target of $4 billion in January allowing it to begin returning 100 per cent of free cash flow back to shareholders. Trading at a 14 per cent free cash flow yield at $80WTI we believe the name could re-rate to a 10 per cent free cash flow yield or 6X multiple = $38 fair value or 40 per cent potential upside.

Enerplus (ERF TSX)

Enerplus is a near debt-free oil company with 15 years of Bakken inventory and is currently returning at least 60 per cent of free cash flow back to investors. Trading at a 3X EV/CF multiple at $80WTI and a 16 per cent free cash flow yield, we see meaningful upside to our target of 5X EV/CF = $28.50 = 66 per cent potential upside.