The Americans are coming!
Why that's a great thing for energy investors, and why there's more of them to come
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 email@example.com
by Max Fawcett
Eric Nuttall is feeling good. In fact, he says, he hasn’t felt this bullish about the Canadian energy sector in three or four years, and no wonder – with U.S. investors flooding back into the space, the Canadian dollar boosting company cash flows and concerns about takeaway capacity (and big differentials) fading away, it’s a good time to be invested in energy. Nuttall’s fund, for example, is coming off its strongest quarter in 11 years.
And while he likes the prospects of the sector as a whole going forward, he’s particularly fond of Whitecap Resources (TSE:WCP), Tourmaline Oil (TSE:TOU) and Paramount Resources (TSE:POU). Whitecap, he says, is one of the most conservatively-run dividend plays in the energy sector. But that doesn’t mean it’s without upside. “They just closed an acquisition of assets from Imperial Oil. Previous to that acquisition I really liked the stock, and now I really, really like it,” he said during an appearance on Market Call earlier today. “Not only was it accretive on all measures – be it lowering their decline by three per cent, and increasing their production per share and reserves per share – it also allowed them to increase their dividend by roughly 10 per cent.”
That could just be the beginning, too. Nuttall’s math says that in 2015, once the Imperial acquisition has been fully integrated, the company will be spending 85 per cent of its cash flow to grow production by 11 per cent and pay out its dividend. But if it applied that additional 15 per cent to the dividend, it could boost it by an additional 47 per cent. “I don’t think they’ll increase it by 47 [per cent],” he said, “but could the CEO increase it by another 20 or 30 per cent next year or at the end of this year? I think that’s highly likely.”
Nuttall was even more bullish on Paramount Resources, which is bringing its new Musreau gas processing facility online. That facility could increase the condensate cuts from the company’s gas production by as much as 200 per cent, and juice its free cash flow by anywhere from $300 million a year (management’s estimate) to $600 million (an analyst estimate). BNN Market Call host Michael Hainsworth pressed Nuttall about the stock’s valuation, given that its price appears to have gone nearly parabolic and its RSI reading (relative strength index) is at a ridiculous 84. “Maybe it pulls back a little,” Nuttall said, “but I can’t tell you how much momentum is coming from new buyers. The U.S. guys are just coming back, and they’re coming back in droves. Again, remember how cheap these stocks were. So just because some of them have gone up 20, 30, 40, 50, 60 per cent or more, many of them were massively undervalued, especially relative to their U.S. peers. That is no longer as much the case, but there’s still some upside in many of these names.”
The story on Tourmaline was a familiar one, meanwhile. He sees it hitting $65 at some point in 2015, noting that it stands to be one of the biggest beneficiaries of the short and medium-term strength in natural gas (particularly Canadian gas, which could trade at a premium to U.S. gas for the first time in a while). In light of that, he thinks the street’s estimates are still too low, and that the company will throw off more cash than it is expecting – and therefore devote more to cap-ex, which will juice its production and generate still more cash. “You’re getting a great management team – they probably own $200 million or more of inside ownership – a great balance sheet, great assets and now finally a commodity that’s helping them out as well.”