BNN - Thursday, May 23, 2024 - 12:00 p.m. (ET) - Segment #1

It chooses us. >> Andrew: hello, there. Welcome to "market call." eric nuttall, one of the favourites is on the show today partner senior portfolio manager at ninepoint partners. He is taking your questions on energy stocks. There is the number. 1-855-326-6266. Or send an email to marketcall@bnnbloomberg.ca. Eric, thanks as ever for joining us. >> Good to be here. >> Andrew: crude near its lowest in two months. Why is that? >> That's right. We have seen a big liquidation in net [indiscernible] lengths. We are sitting at five-month low and I think the reasons for that is we have had the complete elimination of any political risk premium that was in the oil price. I was concerned when oil was in the high to mid 80s about a month and-a-half, two months ago because it was too much frothiness. I was getting far too much interview requests is oil going to hit $100. As contrarian that made me nervous. We raised quite a bit of cash in our main fund. 33% cash. >> Wow. >> We have been actively spending that. We have spent half a billion over the past week and-a-half given the sell-off that we have had. I just think it's been a cooling of any geopolitical risk premium. We are heading into a kiyo peck meeting in a few weeks' time. My best read on the situation is they will extend the voluntary cuts likely through to the end of this year. I think there is just still concerns about china, oil demand there has been fairly weak. The concern about will the fed cut l they point. How well is the U.S. consumer holding up, et cetera. What that means is we will have sharper than average inventory draws beginning next month. Honestly to be in the highest 70s right now with the headwinds now with the seasonal demand weakness that we typically have is pretty good. Like for energy to be up 20% year to date is a win. As we look to the second half of this year what we see is demand seasonally increasing. We have opec I believe continuing their voluntary cuts to draw down inventories. Falling inventories are bullish for oil. So we see the possibility of $90 brent by the end of this year also on natural gas something we can finally talk about as we are bullish heading into 2025 you've got lng canada starting to ramp up. They will start taking gas next month or so. Exiting this year to bcf of liquefaction capacity. The outlook for oil remains very solid. Gas very solid. Services very solid. We remain bull initial the outlook for the second half of this year in 2025. >> Andrew: what about in phenomenon in the states that gasoline demand has been surprisingly weak? Some people are linking that to better big vehicle efficiency even though we got all these suvs on the road. >> I think the source of that is the weekly due numbers that we government even this past week 0.9% officially from that number. We rely on gas buddy. We find it to be a little more reliable. >> Andrew: gas demand, sorry, eric. Or prices. I was talking about demand. >> Gasoline. >> Andrew: gasoline demand, I am sorry, yes. >> I think what we have seen is the weekly numbers that came out from the due typically are of low quality. What we saw even last year was there was underestimation of 400,000 barrels per day of demand in the U.S. I look to the monthlies that come out. I wouldn't be surprised to see an upward revision. Driving around I live 8 kilometres away. It took me 45 minutes to get in. Why? Everybody's driving on the roads. There is no tangible evidence that the consumer is faltering. We hear about the tradedowns to walmart and people not buying as many big macs et cetera. Miles driven, any tangible evidence we have we have real time cube that we we can measure. It's not shooting the light out but it's fine. The cuts are the continuation of the opec cuts for next a couple of months. >> Andrew: what do you listen to on your drive? Showbiz, podcasts eric? >> Techno. Technomusic to get me fired up for the show. >> Andrew: that's a great idea. Eric nuttall is here to take questions on energy stocks both producers and energy SERVICEText on Screen Text on Screen Text on Screen Text on Screen Text on Screen Text on Screen Harvest Equal Weight Global Utilities Enhanced Income etf. The world's top utility companies in one etf,

global Utilities and steady monthly income. Harvest ETFs, income happens here. Mulvihills Canadian Bank Enhanced Yield etf gives investors premium exposure to Canada's big six banks with monthly distributions and a 9.3% yield. Cbnk is the highest yielding Canadian Bank etf. Mulvihill. >> Andrew: we are back with eric nuttall taking your questions on energy stocks. Dave has sent us a email asking about capital gains. Are you concerned the upcoming capital gains change will affect share buy-backs? I think there is a school of of thought that will tha it will make it less attractive to buy back shares because it will make capital gains less attract jive right. We still see the religion of returning capital, free cash flow back to investors as enduring irrespective of tax changes. It's likely I would think there could be some selling pressure probably when it was announced to the end of june, june 28th, you can correct me if I am wrong is the deadline for that. And given how strong performing energy stocks have been it's likely that people will do some estate planning tax planning, et cetera, and maybe take some gains off the table. But I don't see the impact occurring on the share buy-back. The current government put in the 2% eric nuttall share buy-back tax and that hasn't changed anything either. So companies what you think about now they are awash in free cash flow. They are not meaningfully growing. They have paid down debt. There is literally nothing else to do with that cash than give it back in the form of dividends or buy-backs. Investors clearly want share buy-backs. >> Andrew: so yeah. And that's the mantra now. Unless it's a very attractive way to invest money or take over a company investors don't want to see do you that. >> The surest way to drive a re-rating and let's be honest we have had a bit of a re-rating. Stocks are trading at two times cash anymore. 10 to 12% free cash flow yield. Even at $80, $4 gas. Part of the re-rating has occurred. The real power between now and the next couple of years is that compounding effect of buying back 10 to 15% of your shares outstanding every year because you look at three, four years from now the remaining shares are so much more valuable in addition if you buy back let's say 10% of your shares outstanding that's a 10% dividend increase the following year because you have fewer shares you have to satisfy. I see and hear on twitter I think retail demand is very high for dividends even variable dividends which isn't a model we are huge champions of. We think the surest path going forward where while yes, we do have I'd say four to five years of adequate take-away capacity with tmx online industry still need to be disciplined and we are seeing no signs of that discipline fading. >> Andrew: the latest I've seen from the finance minister that is that the capital gains tax change will be introduced before the house of commons rises for ther? And it's scheduled to sit until friday june 21. >> Okay. >> Andrew: thanks for that question.

>>> Tom is in kingston, ontario. Go ahead, tom, please. >> Caller: thank you. Andrew. Crew energy. Any comments you can make on it will be very much appreciated. I had an aside question regarding lng. It's been two decades since chairman greenspan called for global lng transfer. I am wondering is there any plan to build an lng terminal on the hudson bay coast. >> Right. >> Caller: thank you for having me on. >> So our current government thinks that there is no business case for lng anywhere east of british columbia. So for now under the existing government which some of us will change in a year's time with everyone's pensions vested -- vest we don't see that occurring. What is happening in canada lng canada, it's almost online. Taking in gas very, very soon. >> Andrew: yes. >> The real story is in the united states which benefits canada. So they will be going from about 14.5 bcf a day of current liquefaction capacity to almost 28, 29. So a lot of people look at the drilling plans of the members of lng canada especially one would think they will announce a phase two sanctioning for the next year, I would say. The demand for international put gas is much stronger than what drilling plans would suggest. And so there is the belief that you could see some m & a occur. Crew I would say is one of the most likely names to be purchased when you look at land mass relative to ability to meaningfully drill it. I think some people own is it for that. I personally don't like to own stocks just on m & a take-out capacity. We remain in a market where trying to in small caps remains very, very low outside of me. And perhaps my remaining competitor. And so it's just not hitting enough radar screens currently. When we look at next year at $4 gas and $80 oil we have the stock at 2.7 times cash flow that's very inexpensive. More modest free cash flow because they are pursuing more growth than average. We would say a four multiple being reasonable, $4 gas. That would be about a $7 target but it's not a name that we own right now. >> Andrew: okay. We have don in grande prairie, alberta, go ahead, don, please. >> Caller: good afternoon, gentlemen. My question is on crescent point or baron the new name. $80 wti if we could get that average somewhere around the next 12 months. What do you see a price target on crescent point? >> So baron, we will have all to get used to the new name. At $80 we have them trading at .3 times and a 17% free cash flow yield. We think that the mid caps fair range 10 to 12% free cash flow yield is a target with the belief that the entire sector will return at a minimum 75%. Crescent point we think can get there in about a year's time. They continue to pay down dent from some of their acquisitions. At a 10% free cash flow yield which we think is reasonable for them when you look at the drilling depth they have they have 20 years I think of high quality inventory. They drilled recently the longest well ever drilled in canadian history. They are drilling some of the most economic drills in the montney right now. They have proven their ability to successfully execute on their drilling program. They have completely rechanged the company hence the name change. $10% free cash flow yield at $80 19.57 target price 70% up side from here and it's a reason why it remains one of our top holdings. 9.5% weighting in our fund. >> Andrew: crescent point.

>>> Frida in chilliwack, bc. >> Caller: bay tax and tack ram valley. Baytex. Which one is the best bet? Thank you. >> They remain deeply out of favour because investors have had a poorer experience. Both share the same attributes. They were active doing m & a. Tamarack more than others a little bit. It created overhang. So the timing and quality of the assets that each them bought was very good. But it's created this drag on the share price which will soon be alleviated. Tamarack should be I don't believe there is any existing overhang. The last one had been arc financial. Pretty sure that's been taken care of. When I think about tamarack, I cannot find any of their competitors who will say anything bad about the quality of their acreage. >> Andrew: normally more than happy. >> That's a very strong positive. >> Andrew: okay. >> They did buy high quality acreage perhaps at the time they may have slightly overpaid for some with the benefit of hindsight but a very high quality acreage. They have now finally hit our numbers for two quarters in a row and so are confident in their execution is increasing. And as we look to the company do you get some natural gas leverage in 2025 at $80 and $4 gas it. Trades at 2.9 times cash flow and more importantly at 20% free cash flow yield. So the whole theme is them paying down debt them reaching their 500 million-dollar target where they will inflect to 75% of free cash flow coming back to us and we have that happening in -- well, I guess the distant future. For now you have to be happy with 50%. Only a modest 10% of the shares outstanding that they can retire every single year. We had reduced the rating a little bit about a month and-a-half ago when we were call, on the overall market had. We took the weight down from 10 to about 6.5. I will say on shows share price weakness over the past week 20% free cash flow yield up side almost adds 7 price target which is almost a doubling from here. It's getting increasingly attractive even though we and people have had a bad experience with it over the past year, year and-a-half. >> Andrew: we will be talking more about baytex energy later in the show.

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