Eric Nuttall feeling gassy
Why the Sprott fund manager has taken a shine to natural gas companies of late
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
For the first time in a long time, Sprott Asset Management portfolio manager Eric Nuttall is bullish on natural gas. So much so, in fact, that two of his top picks on his most recent appearance on BNN’s Market Call tonight were Alberta-based natural gas players. More on that in a moment. First, his view of the macroeconomic situation that underpins the valuation of energy companies, which is that things are looking better than they have in a while. “Behind the scenes we’ve had a pretty big improvement, both on the infrastructure side and with the currency – with the loonie dropping four per cent, that boosts the realized sale price of Canadian producers by four per cent. So, the fears that people had, that Canadian oil would be shut out and we’d run out of customers because the U.S. would gain oil independence – all of those factors have become essentially obsolete.”
And yet, as he pointed out, shares prices were failing to react to the improving fundamentals. The Oracle of Omaha’s entry into the space may change that. “Finally, Warren Buffett steps up with one of our perennial leaders in the energy patch, seeing the opportunity that some of us others have been talking about for some time. Hopefully, that’s the beginning of a shift.” That shift would involve some of the U.S.-based funds that have flowed out of the Canadian space returning, but it could also be complemented by Canadian investors getting involved again as well. As Nuttall pointed out, it’s not just U.S. investors who have abandoned it over the last year – some of the top holdings at bank-owned energy funds are American energy companies rather than Canadian ones.
Any rotation back into the space will help the average company, regardless of the composition of their production profile. But Nuttall thinks the natural gas producers are starting to look awfully tempting, and he’s added enough of them to his own fund to get its gas weighting up to 30 per cent. Two of his favourites are Tourmaline Oil (TSE:TOU) and Arc Resources (TSE:ARX), both of which were among his top picks. He likes Tourmaline for the first-rate rate management team, its superior collection of assets and a “bullet-proof” balance sheet, the combination of which merits its reputation as the best of breed in the gas space. “Long-time viewers will know I haven’t been bullish on natural gas names in a long time because they’ve been very expensive, but Tourmaline is really, really compelling,” Nuttall said. “It’s trading at around nine times 2014 cash flow, which some people may not think is inexpensive, but the stock used to trade at 12 to 14 times. As gas appreciates, I think Tourmaline will get a multiple expansion back to that 12 times level, which would be a $50 stock.” What lies ahead for the company? Either a sale or a dividend, he thinks – and maybe by the end of 2014.
He wasn’t quite as effusive about Arc, but recommended it on the basis of its solid balance sheet, its ample drilling inventory and the existence of a regular and reliable dividend. One he didn’t pick was Painted Pony Petroleum (TSE:PPY), a former top pick of his on an appearance last year. The core thesis behind that ranking – a takeover, based on the location and quality of its Montney gas assets and their proximity to an eventual LNG export terminal – is still in place, but the timeline may be pushed out more than he’d hoped, and in the interim the company’s aggressive growth targets may create a funding gap that will have to be filled. And the problem there, Nuttall suggested, is that it’s become a clear seller’s market, with both Talisman and Suncor putting some of their Montney acreage up for sale already. “Everything still remains,” he says, “but I think people have to be a bit more patient.”