An oil sands worker at the Syncrude mine north of Fort McMurray, Alberta, Canada.
Eric Nuttall at Toronto-based Ninepoint Energy Fund prefers Canada-based oil and gas companies — for more than just patriotic reasons. Far from the war in Ukraine, safe from Houthi rockets, and less hassle than fracking shale wells, Canada’s oil fields – including the tar sands of Alberta – are the perfect place to invest for the oil spike of 2022. “People do not understand how much free cash flow is being generated,” says Nuttall.
A favorite holding of Nuttall’s $1.5 billion Ninepoint Energy ETF, is MEG Energy, which coaxes oil out of a 1,000-foot deep layer of oil sands near Alberta’s Fort McMurray. MEG uses the in-situ method; that involves injecting high-pressure steam that softens the oil and pushes it up producing wells. MEG doesn’t have to worry about exploring; it has sufficient reserves to support 35 years of production at its current level of nearly 100,000 barrels per day (bpd) and would make money even at $50 oil. MEG trades at about 5 times expected cash flow, and after the company pays down debt to $1.2 billion this year, 50% of all additional cash will go to buy back stock.
Nuttall has managed energy portfolios since 2005, and cofounded Ninepoint with the former energy team of Toronto’s precious metals investor Sprott. Despite his fund being up 160% in the past year and 49% annualized over 3 years, he’s convinced there’s no end in sight to oil outperformance.
Indeed, there are plenty of reasons to be bullish oil producers right now. First and foremost, the possibility that a big chunk of Russia’s 7 million barrels per day in exports are kept from getting to market. Russian exports fell by 600,000 barrels per day last week, according to Cowen & Co. In a month or so exports will be reduced further, by 3 million bpd, according to the International Energy Agency.
Replacing that supply will be a challenge. Even before the war the 100 million barrel per day oil market was having trouble keeping up with demand. OPEC, after slashing its output during the pandemic, is now adding back supply, but in recent months has fallen 800,000 bpd or so short of their 30 million bpd quotas. Nuttall doesn’t think the cartel – now rolling in profits – is even capable of replacing Russian oil in the near-term. “OPEC has not been reinvesting. We’ll see the exhaustion of OPEC spare capacity in six months.”
In the best case scenario the world will see another 700,000 bpd out of Iran this year, and perhaps 300,000 bpd from Venezuela. America’s shale frackers might grow as much as 1 million bpd. But that’s far from guaranteed, says Nuttall. Given shortages of labor, materials and advanced rigs, “shale will be lucky to replace its production.”
Among U.S. companies he likes Oklahoma City, Okla.-based fracker Devon Energy, which has enough reserves to enable 18 years of production. Devon trades at an enterprise value of less than 5 times expected 2022 Ebitda of $9 billion. “Despite the pressure they are only going to grow meaningfully when investors want them to.”
The U.K. and U.S. 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 still would need to get some portion of its pre-war diet of 2.4 million bpd from Russia. “Europe’s supply of energy for heating, mobility, electricity and industry currently cannot be secured in any other way,” said Scholz. Germany has already shut down fertilizer and chemicals and steel manufacturing due to record high energy costs.
The United Arab Emirates’ oil minister Suhail al-Mazrouei, speaking in Dubai this week, said there is no substitute for Russian supplies right now and that it would be suicidal for the world to stop buying Russian energy when it had nothing to replace it with.
India is a nation facing that reality, as it imports 85% of petroleum needs. India maintained strong relations with the Soviet Union during the Cold War both for a reliable oil supply as well as a necessary balance to China. Prime Minister Narendra Modi has abstained from voting on all UN resolutions condemning Putin’s aggression. India this week reportedly contracted for new shipments totalling 8 million barrels.
But selling more oil to China and India won’t soak up all of Putin’s excess oil. To sway opportunistic buyers, Russian oil companies are reportedly having to offer deep discounts, on the order of $25 per barrel.
Nuttall prefers to own companies that can sell at a premium, like ARC Resources (Toronto: ARX), which produces about 350,000 barrels per day of so-called natural gas condensates from the Montney fields between Alberta and British Columbia. ARC, which last year doubled in size via merger with Seven Generation, has about two decades of development on its existing projects. At a market cap of $11.7 billion, ARC is valued at roughly 4 times the amount of operating income Nuttall expects the company to generate this year. At current commodity prices, it could soon pay down its $1.7 billion in debt.
He likes other independent Canadian operators like Cenovus Energy, Pipestone Energy and Baytex Energy. The world’s biggest oil companies hold little interest, in large part because they have been hobbled “by the decision to let their core oil and gas production gradually decline while they reinvest in renewables.”
U.S. politicians like Sen. Elizabeth Warren who have fought against fracking have in recent weeks threatened windfall profits taxes against companies that aren’t fracking enough. It’s enough to make a guy proud to be Canadian. “They mean well, but eventually you can’t live in la-la land. You can’t vilify a sector and then demand they increase production.”
But a funny thing happened on the bridge to a low-carbon energy future: “The fear of peak demand is leading to the reality of peak supply.”
Source: https://www.forbes.com/sites/christopherhelman/2022/03/31/top-energy-fund-manager-says-to-ride-out-the-oil-spike-in-canada/