Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners

FOCUS: Energy stocks 

MARKET OUTLOOK:

The global oil market is in deep deficit due to record high oil demand, despite over a year of recessionary fears, and restrained oil exports from OPEC+. The will and intent of His Royal Highness Abdulaziz bin Salman (HRH ABS), the minister of energy of Saudi Arabia, are perhaps the key distinctions to understand in order to forecast where the oil price is likely to go.

We believe that global oil inventories over the second half of 2023 will fall by more than all of the oil released by the U.S. from the Strategic Political Reserve. This is no coincidence. Saudi Arabia has a hugely ambitious growth initiative centred around the construction of 15 “giga projects.” Attaining the necessary revenue to fulfil their vision is key in our minds as to why they are acting in the way that they are. Just like the saying “don’t fight the Fed,” in the oil market today, “don’t fight HRH ABS” as we do not doubt either his will or his intent. We remain bullish.

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TOP PICKS:

Cenovus (CVE TSX)

Currently paying out 50 per cent of its free cash flow in the form of dividends and share buybacks, we have CVE reaching its final debt target in the first quarter of 2024 (at US$80WTI) at which point it has pledged to return all of it to shareholders. Trading at a 16 per cent/19 per cent free cash flow yield at US$80WTI/US$90WTI, we believe CVE will ultimately re-rate to below a 10 per cent free cash flow yield, offering a 50 per cent+ potential upside.

Crescent Point (CPG TSX)

Crescent Point has fixed its inventory problem with several successful acquisitions and now has over 15 years of development inventory. Trading at a 24 per cent/31 per cent free cash flow yield at US$80/US$90WTI and paying out 50 per cent of that to shareholders, we believe continued meaningful share buybacks combined with successful delineation of its new lands will result in a five X EV/CF multiple versus 2.7-2.3x currently, offering potential 120-200 per cent potential upside.

Athabasca Oil (ATH TSX)

Having streamlined its portfolio with the divestment of lower-tier non-core assets for $16 million in cash, ATH now offers exceptional price leverage to our bullish Western Canadian Select thesis. Pledging to payout 75 per cent of its free cash flow going forward and trading at a 18 per cent/20 per cent free cash flow yield at US$80/US$90WTI, we believe continued aggressive share buybacks will result in a multiple expansion from 2.8x/3.4X to five X offering over 50 per cent potential upside.