Top Energy Fund Manager Says He Will Ride Out Canada’s Oil Surge

Eric Nuttall of the Toronto-based Ninepoint Energy Fund prefers Canadian oil and gas companies — for more than patriotic reasons. Far from the war in Ukraine, safe from Houthi rockets and less complicated than fracking shale wells, Canada’s oil fields – including Alberta’s oil sands – are the perfect place to invest for the peak oil of 2022. “People don’t understand how much free cash flow is being generated,” Nuttall says.

A favorite holding of Nuttall’s $1.5 billion Ninepoint ETF Energy, is MEG Energy, which extracts oil from a 1,000-foot-deep layer of oil sands near Fort McMurray, Alberta. MEG uses the on the spot method; which involves injecting high-pressure steam that softens the oil and pushes it up production wells. MEG doesn’t have to worry about exploration; it has enough reserves to sustain 35 years of production at its current level of nearly 100,000 barrels per day (bpd) and would make money even at $50 worth of oil. MEG trades at around 5x expected cash flow, and once the company pays down $1.2 billion in debt this year, 50% of all additional cash will go to buy back shares.

Nuttall has been managing energy portfolios since 2005 and co-founded Ninepoint with the Toronto-based precious metals investor’s former energy team. Sprott. Although his fund is up 160% last year and 49% annualized over 3 years, he is confident that there is no end in sight to oil’s outperformance.

Indeed, there are many reasons to be optimistic oil producers right now. First and foremost is the possibility that a large part of Russia’s 7 million barrels a day of exports will be prevented from reaching the market. Russian exports fell by 600,000 barrels per day last week, according to Cowen & Co. In about a month, exports will be reduced further, by 3 million bpd, according to the International Energy Agency.

Replacing this supply will be a challenge. Even before the war, the 100 million barrel a day oil market was struggling to keep up with demand. OPEC, after cutting production during the pandemic, is now adding supply back, but in recent months it has fallen about 800,000 bpd below its quota of 30 million bpd. Nuttall doesn’t think the cartel – which is now generating profits – is even capable of replacing Russian oil in the short term. “OPEC has not reinvested. We will see the exhaustion of OPEC spare capacity in six months.

In the best-case scenario, the world will see an additional 700,000 bpd flow out of Iran this year, and perhaps 300,000 bpd out of Venezuela. US shale frackers could grow by up to 1 million bpd. But that’s far from guaranteed, Nuttall says. Given shortages of labour, materials and advanced rigs, “shale will be lucky to replace its production.”

Among American companies, he likes Oklahoma City, Oklahoma-based fracker Devon Energy, which has enough reserves to last 18 years of production. Devon is trading at an enterprise value of less than 5 times the expected 2022 EBITDA of $9 billion. “Despite the pressure, they will only expand significantly when investors want them to.”

The United Kingdom and the United States have imposed import bans on Russian oil. Many companies have followed suit. But Russia still has willing buyers. German Chancellor Olaf Scholz said in March that Europe would still need to get some of its 2.4 million bpd pre-war supply from Russia. “Europe’s energy supply for heating, mobility, electricity and industry cannot currently be ensured in any other way,” Scholz said. Germany has already halted manufacturing of fertilizers, chemicals and steel due to record energy costs.

UAE Oil Minister Suhail al-Mazrouei, speaking in Dubai this week, said there was no substitute for Russian supplies at the moment and would be suicide for the world. to stop buying Russian energy when it had nothing to replace it. .

India is a nation faced with this reality, since it imports 85% of its oil needs. India maintained strong relations with the Soviet Union during the Cold War, both for a reliable supply of oil and for a necessary balance with China. Prime Minister Narendra Modi abstained from voting on all UN resolutions condemning Putin’s aggression. India reportedly contracted new shipments totaling 8 million barrels this week.

But selling more oil to China and India won’t absorb all of Putin’s excess oil. To influence opportunistic buyers, Russian oil companies would be forced to offer deep discounts, in the order of $25 a barrel.

Nuttall prefers owning businesses that can sell for a premium, like ARC Resources (Toronto: ARX), which produces about 350,000 barrels per day of so-called natural gas condensate from the Montney fields between Alberta and British Columbia. ARC, which doubled in size last year through its merger with Seven Generation, has about two decades of development on its existing projects. With a market capitalization of $11.7 billion, ARC is valued at about 4 times the amount of operating profit Nuttall expects the company to generate this year. At current commodity prices, it could soon pay off its $1.7 billion debt.

He likes other independent Canadian operators like Cenovus Energy, Pipestone Energy and Baytex Energy. The world’s biggest oil companies have little interest in it, largely because they have been hampered “by the decision to let their mainline oil and gas production taper off while reinvesting in renewables.”

US politicians like Senator Elizabeth Warren, who have fought against fracking, have threatened in recent weeks to impose windfall taxes on companies that don’t fracking enough. That’s enough to make a guy proud to be Canadian. “They mean well, but ultimately you can’t live in la-la land. You cannot vilify a sector and then demand that it increase its production.

But a funny thing happened on the bridge to a low-carbon energy future: “Fear of peak demand leads to reality of peak supply.”

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