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It gets better

Sprott Asset Management's Eric Nuttall shares his picks for the patch during his latest visit to Market Call

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 mfawcett@albertaventure.com

Feb 12, 2013

by Max Fawcett

That’s the message from Sprott Asset Management portfolio manager Eric Nuttall, who was on BNN’s Market Call last night to talk about stocks in the beleaguered Canadian energy sector. “It’s been two very awful years,” he said. “I think this one will be better.” Why? He thinks that there’s a 90 per cent chance that Keystone XL gets approved sometime between June and September, and that it will be the sentiment-turning catalyst that the sector has been desperately waiting for. More importantly, it will also get U.S. investors back into the game. “The U.S. investor has not been in our space in more than a year,” Nuttall said, “and we need them to come back.”

The disconnect between commodity prices and small and midcap energy stocks has gotten to nearly farcical levels, he pointed out. While stocks in that space are down an average of 40 to 50 per cent over the last two years, the price of oil has gone up. And while heavy oil producers have gotten nailed by widening spreads between their crude and WTI, the average Canadian light oil producer is still getting $90 per barrel for theirs. ““It’s not a bad business,” Nuttall said.

His top picks on the evening were, appropriately enough, three smaller companies. He likes TORC Oil and Gas (TSE:TOG), which bought Vero Energy last year at a good price but has seen its share price battered all the same. They think they’ve discovered 2 billion barrels of OOIP (original oil in place) in their Monarch assets, and will update those holdings in March. But the fact that the company is building a $5 million battery there suggests management has confidence that they can get the oil out economically, and it’s currently trading at a slight premium to net asset value, which means investors are getting all two billion of those prospective barrels for free.

Nuttall also likes Renegade Petroleum (TSXV:RPL), which he thinks is in a transitional stage that investors can capitalize on. The company recently converted from a growth-oriented strategy to a yield-based one, and so while growth-oriented investors have sold it off dividend investors are waiting for a few quarters of performance and paid dividends to see that the mode l is sustainable. Nuttall, for his part, thinks it’s sustainable down to WTI prices in the mid $70 range. “Over time I think it will get re-rated to $3,” he said, “and in the meantime you get paid a 10 per cent yield.”

Finally, he picked Whitecap Resources (TSE:WCP) which he likes for its pristine balance sheet and inventory of drilling prospects. “If people are looking for a sustainable dividend player,” he said, “Whitecap has the most sustainable dividend model in Canada.” The company can grow its production at five per cent without having to resort to debt financing, he said, and has a reserve life of 14 years.

Other names he mentioned:

Twin Butte Energy (TSE:TBE): “I was buying at $2.15. A little bit lower and I’ll be adding to my position.”

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Penn West Energy (TSE:PWT): “They shouldn’t be paying a dividend. Everyone knows it’s not sustainable.”

PetroBakken (TSE:PBN): “Knowing the management team and their strategy, I don’t think you’ll see a dividend cut coming any time soon.”

Surge Energy (TSE:SGY) : “It’s been carpet bombed…If you owned it, I wouldn’t sell it, but for the time being they’re in the penalty box and it can take a very long time to work your way out of that.”

Suncor Energy (TSE:SU): “I would hold on to Suncor.” The company, he said, has upwards of $2 billion in free cash flow, and could be debt-free in two years. It’s more likely, he said, that they’ll “meaningfully” increase the dividend – perhaps as much as 50 per cent.

Canadian Natural Resources (TSE:CNQ): “I still think CNQ is going to be the best-performing large-cap this year, but it’s going to be more of a second-half story.”

 

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