The scoop from Eric Nuttall's latest appearance on BNN's Market Call Tonight
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
The international investors that left the Canadian oil and gas space over the last two years are starting to come back. That’s the read that Eric Nuttall, portfolio manager at Sprott Asset Management, is getting from his conversations with key players in Calgary. “There are indications that US investors are now coming back to Canada,” he said last night on BNN’s Market Call Tonight. “I get that from management teams, who tell me that their phones are as busy as they’ve been in years fielding calls from San Francisco and New York. I think 2014 is shaping up to be a very, very good year for Canadian oil producers.”
They’re coming back, he said, because of two discrepancies: the spread between the valuation of Canadian and American oil companies, and the disconnect between the price of oil and the market’s pricing of Canadian oil companies. Going back to July 2012, the price of oil is up 45 per cent in Canada when you take differentials into account. But the multiple on their cash flow (which ought to expand as oil prices rise) has remained flat. Maybe the market doesn’t buy the fact that oil prices will remain above $100, but Nuttall pointed out that the macro factors are increasingly supportive of higher oil prices, particularly in Canada. Chinese PMI is at a six month high, demand for oil from that country is up four per cent, and the differentials between Western Canadian Select and WTI has narrowed thanks to oil by rail. As such, a reversion of sentiment might be in the offing.
In terms of particular picks, Nuttall warned about Niko Resources (TSE:NKO), a company that’s suffered a spectacular fall from grace. He estimates that it has roughly six months of cash left, thanks in large part to the massive off shore drilling rigs that the company has to pay to retain access to whether they use them or not. Combine that with several costly exploration failures and you have a recipe for disaster. “If you look at their cash outflows relative to their cash inflows, they’re burning cash on a daily basis,” he said. “Unless they can come to market and raise successfully – probably $100 million – the viability of the company is highly in question.” An equity raise with a share price of under $5 (particularly when it was above $100 as recently as 2011) would be punishing and humiliating, but it may not have any other choice. As such, investors should treat any investment in Niko as purely speculative, he said. “This is pure, pure mad money.”
As for his top picks, his first was Legacy Oil and Gas (TSE:LEG), an old favourite of his that continues to beat estimates, pay down debt and grow production by 12 to 13 per cent. “The CEO tells me that his phone has never been busier in terms of inbound calls from U.S. investors,” Nuttall said. “You have a share price at $6.50, and ultimate potential value in the mid to high-teens, if not higher. Not to be too aggressive, but I think this potentially will trade to a 5.5 [cash flow] multiple up from a 4.5 multiple. That would give you a $9 stock.”
Second up was TORC Oil and Gas (TSE:TOG), the latest company to convert to a dividend-paying model. And while some have failed, he thinks this one will succeed. CEO Brett Herman owns plenty of the company, which Nuttall says suggests that his interests are aligned with those of shareholders, and management is consistently conservative in their estimates of both cash flow and production – a key to making the transition to dividend paying successfully. He thinks the street is underestimating the potential in their Monarch play, and thinks increases to both forward guidance and the dividend may be in the offing.
Finally, he picked Athabasca Oil (TSE:ATH), a play that he conceded was clearly contrarian. “I think this is such a hated name – it’s really bombed-out.” But he thinks it will get the proceeds from its Dover put (worth $1.3 billion, or $3.30 a share) by the end of the year, and thinks that their Duvernay acreage could be worth much more than that. “It’s going to be one of the key plays for 2014,” he said, “and Athabasca has 200,000 net acres in what they believe is the core of the play.” Using a recent transaction in the area, he thinks their acreage could be worth between $5 and $7 – and that’s in addition to the $3.30 in cash from the Dover put and a billion barrels of conventional reserves and seven billion of oil sands reserves. “I’m hoping in the next couple months we’ll have a couple of catalysts to really get the stock moving up to $9 or $10.”