BNN - Thursday, May 23, 2024 - 06:00 p.m. (ET) - Segment #1

... All right here. Subscribe now atCRAVE.CA. (Upbeat music) >> Hello there, welcome to Market Call. Eric Nuttall, one of the viewer favourites, is on the show today, partner, senior portfolio manager at Ninepoint Partners. He's taking your questions on energy stocks. There's 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. >> Crude near its lowest in two months; why is that? >> That's right. We've seen a big liquidation in net speculative length; I think we're sitting at about a five- month low. And I think the reasons for that is, we've 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 there was just too much frothiness. I was getting far too many interview requests saying, you know, is oil going to hit $100, and as a contrarian, that made me nervous. So we actually raised quite a bit of cash in our main fund. We went to about 33% cash. >> Wow! >> We've been actively spending that, so we've spent about half a billion, I think, over the past week and a half given the sell-off that we've had. So I just think it's been a cooling of any geopolitical risk premium. We're heading into a key OPEC 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's just still concerns about a weak China-- you know, oil demand there has been fairly weak; the concern about, will the Fed cut, will they won't; how well is the US consumer holding up, et cetera. And so what that means is we're going to have sharper than average inventory draws beginning next month. Honestly, to be in the high 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're bullish heading into 2025. You've got LNG Canada starting to ramp up; they'll start taking gas I think in the next month or so, exiting this year to BCF of liquefaction capacity. So the outlook for oil remains very solid, gas very solid, services very solid, so we remain bullish in the outlook for the second half of this year, in 2025. >> What about this phenomenon in the States that gasoline demand has been surprisingly weak? And some people are linking that to better vehicle efficiency, even though we got all these SUVs on the roads. >> I think the source of that is the weekly DoE numbers that we got-- like, even this past week, I think gas was down 0.9% officially from that number. We rely on Gas Buddy; we find it to be a little more reliable. >> On gas demand, sorry, Eric, or prices. I was talking about demand. >> Gasoline. >> Yeah, gasoline demand, I'm sorry, yeah. >> So I think what we've seen is the weekly numbers that came out from the DoE typically are of low quality. What we saw even last year was there was underestimation just in the US of about 400,000 barrels per day of demand. So what I look to is the monthlies that come out, and I wouldn't be surprised to see an upward revision. 'Cause even in here, anyone driving around-- like, I live eight kilometres away, it took me 45 minutes to get in. Why? Because everybody's driving on the roads. And so there's 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, but if you look at miles driven, any tangible evidence we have-- we have Rystad real-time cube that we can measure-- we think demand is fine. It's not shooting the lights out, but it's fine. And so the inventory cuts, or the continuation of the production cuts from OPEC over the next couple of months, I think will be enough to draw down inventories to all-time lows exiting this year. >> What do you listen to on your drive? Showbiz, podcasts, Eric? >> I'm more techno-- techno music, actually, to get me fired up-- get fired up for the show. >> Techno! That's a great idea. Okay, Eric Nuttall is here to take questions on energy stocks, both producers and energy service names. 1-855-326-6266. Or you can email Eric. marketcall@bnnbloomberg.ca. This is what your ear looks like filled with wax. Here's a cotton swab. Watch. It just pushes the wax in. Now here's Wush, the new, safe and effective way to clean your ears. Just Wush the wax out. That's insane. The triple stream safely clears dirt and wax buildup. It feels incredible. Get 15% off and free shipping at Wush.ca Money is a thing. You're told to make money,

invest money, save money. While others are encouraging you to spend your money. You might even be planning your money ...based on someone else's plan. Maybe it's time to do things...differently. And get obsessed over something other than money. Like building a path based on what's important to you. ( ) we understand money's a thing, but it's not everything. Edward Jones. We do money differently. >> We're back with Eric Nuttall taking your questions on energy stocks. Dave has sent an email asking about capital gains. Are you concerned the upcoming capital gains change will affect share buybacks? Because I think there is a school of thought that it'll make it less attractive to buy back shares, because it'll make capital gains less attractive. >> 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, that there could be some selling pressure, probably when it was announced to the end of June-- I think June 28th, you can correct me if I'm 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 buyback. The current government put in the 2% Eric Nuttall share buyback tax, and that hasn't changed anything either. So, companies-- what you think about now, they're awash in free cash flow, they're not meaningfully growing, they've paid down debt. There's literally nothing else to do with that cash than give it back in the form of dividends or buybacks, and investors very clearly want share buybacks. >> So yeah. And that's the mantra now, unless there's a very attractive way to invest money or takeover company, investors don't want to see you do that. >> Yeah, 'cause the surest way to drive a re-rating, and let's be honest, we've had a bit of a re-rating. You know, stocks aren't trading at two times cash flow anymore, the large caps are trading at 10 to 12% free cash flow yield. So energy has done well. We still see meaningful upside, even at $80 oil, $4 gas. So part of the re-rating has occurred. But the real power between now and the next couple years is that compounding effect of buying back 10 to 15% of your shares outstanding every year. 'Cause 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. 'Cause you've got fewer shares you'd have to satisfy. So I hear and I see on Twitter, you know, I think retail demand is very high for dividends, even variable dividends, which isn't a model we're huge champions of. We just think the surest path going forward where while yes we do have I'd say 4 to 5 years of adequate takeaway capacity with TMX now online, industry still needs to be very disciplined, and we're seeing no signs of that discipline fading. >> Okay, yeah. The latest I've seen from the finance Minister is that the capital gains tax change will be introduced with all the House of Commons rises for the summer, and it's scheduled to sit until Friday, June 21. >> Okay. >> 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 would be very much appreciated. I have a side question regarding LNG. It's been two decades since Chairman Greenspan called for global LNG transfer. I'm wondering, is there any plan to build an LNG terminal on the Hudson Bay Coast? >> Right. >> Caller:Anyway, 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 hope will change, you know, the year's time with everyone's pensions invested, we don't see that occurring. What is happening Canada, LNG Canada, it's almost online. Hopefully at the gold well they'll be taking in gas very, very soon. The real story is in the United States, which benefits Canada. So they're going to be going from about 14.5 BCF a day of current liquefaction capacity to almost 28, 29. And so a lot of people look at the drilling plans of the members of LNG Canada. Especially one would think they're going to announce a phase two sanctioning in the next year, I would say. The demand for input gas is much stronger than what drilling plans would suggest. And so there's a belief that you can 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. So I think some people own it for that. Personally I don't like to own stocks just on M&A takeout capacity. We remain in a market where the

interest 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 four dollar gas and $80 oil, we've got the stock at 2.7 times cash flow. That's very, very inexpensive. More modest free cash flow 'cause they are pursuing a little more growth than average. We would see, you know, a four multiple being reasonable at four dollar gas. That would be about a $7 target. But it's not a name that we own right now. >> Okay. We have Don in Grand Prairie, Alberta. Go ahead, Don, please. >> Caller:Good afternoon, gentlemen. My question is on Crescent Point. >> You bet. >> Caller:$80 WTI, if we could get that average somewhere around the next 12 months, what do you see a price target on Crescent Point? >> Yeah, so Veren, we're all going to have to get used to the new name. At $80 oil we've got them trading at 3.3 times any 17% free cash flow yield. We think that the mid-caps, a fair range is 10 to 12% free cash flow yield as 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, you know, as they continue to pay down debt from some of their acquisitions. So at a 10% free cash flow yield, which we think it's reasonable for them when you look at the drilling depth that they have, they think they have at least 20 years of high quality inventory. They just drilled recently the longest well ever drilled in Canadian history. They're also drilling some of the most economic wells ever drilled in the money right now. So I think they've proven their ability to successfully execute on their drilling program. They've completely re-changed the company, hence the name change. So a 10% free cash flow yield at $80 oil is about in $19 and 57 target price, that would be 70% upside from here, and it's the reason why remains one of our top holdings. It would be about a 9.5% weighting in our fund. >> Crescent Point, okay. Freda in Chilliwack, BC, go ahead please. >> Caller:Hi there. I'm interested in comparing Tamarack Valley with Baytex. Which one do you think is the best bet, or are they both the best bet? Thank you. >> They both remain deeply out of favour. Because investors over the past year have had a poor experience. Both share the same attributes, they were active doing M&A. Tamarack a little bit more than others. It created overhang. So the timing and quality of the assets that each of 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's any existing overhang now. The last one would have been ARC Financial, and I'm 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 executives are more than happy. >> Eric: More than happy, yeah, more than happy. So 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 our confidence in their execution is increasing. And as we look to the company do you get some natural gas leverage in 2025 at $80 oil 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 the future. For now you have to be happy with 50%. That's only a modest 10% of the shares outstanding that they can retire every single year. We had reduced our weighting a little bit about a month and-a-half ago when we were just cautious on the overall market. We took the weight down from 10 to about 6.5. I will say on those share price weakness we've had over the past week 20% free cash flow yield up side almost adds $7 price target which is almost a doubling from here. So, 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. >> Okay, and we're going to be talking more about Baytex Energy later in the show. Eric Nuttall taking your questions on energy stocks. . IT'S SPRING TIME IN PARIS AND THE KINGS AND QUEENS OF CLAY HAVE COME OUT TO PLAY Tennis played on another planet That is a piece of art right there Ooo lala! ROLAND GARROS ON TSN AND TSN+ ( ) ( ) The INFINITI QX60 exemplifies modern luxury. With powerful SUV performance, three rows of comfort, and a sleek-yet-daring design. ( ) Lease a 2024 QX60 from 0.99%

Copyright protected and owned by broadcaster. Your licence is limited to private, internal, non-commercial use. All reproduction, broadcast, transmission or other use of this work is strictly prohibited.

Transcripts