Checking in with the Boy Wonder
Sprott Asset Management's Eric Nuttall shares his view of the Nexen-CNOOC deal and its implications for other publicly traded Alberta energy companies
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
Sprott Asset Management’s Eric Nuttall stopped by today on BNN’s morning show with Marty Cej and Frances Horodelski to talk about the pending Nexen-CNOOC deal, the effect that will have on M&A activity in Alberta’s energy sector and some of his favourite oil and gas plays.
On the Nexen (TSE: NXY) deal, Nuttall thinks it will get approved by Investment Canada, perhaps with some minor modifications requesting a slightly larger domestic head count or capital expenditures program. “When you look at the asset breakdown, I think the majority of the upside really lies in the North Sea or potentially the Gulf of Mexico,” he said. “Nobody would say that Long Lake is the crown jewel of the Canadian oil sands.” Of interest to investors is the spread between Nexen’s current share price and the takeover bid, one that reflects the lingering uncertainty about whether the deal really will get approved. Given that he thinks it will, Nuttall sees that spread as an opportunity for traders to profit. “As an arb[itrage] play,” he said, “I think it’s pretty attractive at this point.”
Once that deal goes through, Nuttall said, it could trigger a wave of M&A in the sector on the part of both international and domestic players. He says the government is going to set a threshold on how much activity can take place, and so there will be what he called a “first-mover advantage” for companies who can lock up assets quickly. That activity, he said, will likely be focused on companies with assets in Northern B.C. “My expectation is that in early 2013 you’re going to see some very, very large takeovers, specifically in the Montney fairway – so a name like a Painted Pony,” he said. “You’re also going to see joint-venture interest, and I think Talisman Energy with BG Group and its Montney assets are something of a slam dunk.” Nuttall owns both Talisman (TSE: TLM) and Painted Pony (TSE:PPY) and thinks there’s “easily” $2 per share of unrealized value in the former and as much as 100 per cent upside in the latter.
He also identified small-cap energy companies as an investment opportunity, given that many of them have huge portfolios of un-booked reserves but lack the financial wherewithal to capitalize on them. Deethree Exploration (TSE:DTX), for example, is trading at 4.3 times next year’s cash flow and operates in “an incredibly economy play,” Nuttall said. “[But] with their financial means, it would take them decades to get through their inventory.”
Finally, he singled out PetroBakken (TSE:PBN) as a company worth monitoring. It’s a noteworthy change of heart for Nuttall, who had been bearish on the stock up until last year’s restructuring that saw it get out from under a convertible debt offering that drove its share price down below $7. “They’ve done a great job of de-leveraging the balance sheet,” he said. “It’s paying a dividend of 6.7 per cent, and it’s fully financed with their DRIP program with $90 oil.”
There could be more upside to come for the company, too. It’s trading at five times its cash flow, while the average for its peer group is closer to eight. And while Nuttall expects it to post weak Q3 numbers, he thinks Q4 will be strong. “You’re going to see a strong ramp-up in production growth.”
And if Petrobank (TSE:PBG), which holds a majority of PetroBakken shares, decides to spin out its interest in the company to its shareholders, it could trigger a short squeeze on PBN, which currently has a large short interest on it.