Eric Nuttall, partner and senior portfolio manager, Ninepoint Partners
FOCUS: Energy stocks
Top Picks: Expand Energy, Nuvista, Tamarack Valley
MARKET OUTLOOK:
Natural gas is in a structural bull market given the meaningful increase in domestic demand due to the increase in liquified natural gas (LNG), a material increase in power, and marginal supply costs of $4-5/mcf (thousand cubic feet). With LNG Canada soon to be onstream we see the discount/differential for Canadian gas shrinking from around $2/mcf currently to around $1.10/mcf resulting in an increase to Canadian natural gas producers net margin and free cashflow.
We believe that oil will trade in a $50-$60 range for the next nine to 12 months. Demand appears to have weakened in the past month, likely due to the repressive impact of U.S. tariffs on the global economy and global oil inventories are rising, while OPEC has accelerated the return of barrels to the market due to chronic cheating from Kazakhstan and Iraq. With the likely continued increase in inventories, potentially back to average levels by the end of 2026, short-cycle supply, namely U.S. shale, needs to fall. We believe the twilight of U.S. shale is here, and a price of US$60 West Texas Intermediate (WTI) or below will result in U.S. shale to fall helping to balance the market. We remain bullish on the medium and long-term outlook for oil given the normalization of OPEC spare capacity over the next one to two years, the loss of growth from U.S. shale, and the likely peaking of non-OPEC production in the next three to four years.
- Market-moving news, fast: Get the BNN Bloomberg App now
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
TOP PICKS:
Expand Energy (EXE NASD)
Expand is a large cap U.S. natural gas producer that offers excellent long-term exposure to a bullish outlook for natural gas. With few investable U.S. natural gas names, we think the stock can expand their multiple over time and is well positioned to benefit from increased U.S. gulf coast LNG demand given its high exposure to the Haynesville.
Nuvista (NVA TSX)
Nuvista is growing their production by 33 per cent over the next four years at which point they will have 28 years of stay flat inventory and the ability to pay a 10-16 per cent dividend per year at $60/$70WTI and $4NYMEX. With recent mergers and acquisitions in the Montney, we think the company could sell itself today for $18-$20/share.
Tamarack Valley (TVE TSX)
Tamarack has continued to beat expectations for several consecutive quarters owing to a very high quality asset base and continued success in its Clearwater waterflood initiatives. Trading at a 11/17 per cent free cashflow yield at $60/$70WTI and over 20 years of stay flat inventory we think the stock is materially undervalued.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| EXE NASD | N | N | N |
| NVA TSX | N | N | Y |
| TVE TSX | N | N | Y |
PAST PICKS: MAY 23, 2024
Baytex Energy (BTE TSX)
- Then: $4.62
- Now: $2.34
- Return: -49%
- Total Return: -48%
Precision Drilling (PD TSX)
- Then: $95.02
- Now: $59.95
- Return: -37%
- Total Return: -37%
ARC Resources (ARX TSX)
- Then: $25.06
- Now: $29.29
- Return: 17%
- Total Return: 20%
Total Return Average: -22%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BTE TSX | Y | Y | N |
| PD TSX | N | N | N |
| ARX TSX | Y | N | Y |
