Eric Nuttall's Top Picks: Parex, TORC and Whitecap
We are at the cusp of the next bull market for oil. Demand appears to have finally inflected positively after several months of very tepid growth (1.1 million barrels per day of growth in Q3) with hopes of a U.S.-China trade truce in the coming months. U.S. shale growth has sharply decelerated from a high of 1.9 million bbl/d year-over-year in August 2018 to 1 million year-over-year growth in August 2019 and its likely to only grow by 500,000 to 700,000 bbl/d in 2020. Meanwhile, global offshore oil production (27 per cent of global production) will peak in 2020, entering into a multi-year decline due to a lack of sufficient investment in four- to seven-year lead projects. Barring an end to Iranian sanctions by the U.S., the market should be undersupplied in the second half of 2020, resulting in strong inventory draws.
Energy stocks today trade near their lowest valuations in history. Discounting less than $50 barrels, many Canadian midcap stocks trade at about 15-per-cent free cash flow (FCF) yields at $55 WTI, over 20 per cent FCF yields at $60 and at three to four times their enterprise value to cash flow (EV/CF) at $55 to $60 WTI. We expect 2020 budgets to focus on maintaining flat production while maximizing FCF to allow for meaningful share buybacks. Given how under-owned the sector has become (index weights less than 50 per cent of historical levels) and how bad sentiment is (despite strong medium-term fundamentals), we believe that investors should be increasing their energy exposure now.