Eric Nuttall's Top Picks: TORC, Whitecap and Freehold
Oil has seemingly found a near-term floor around $40 per barrel, while demand normalization continues and the inventory surplus begins to more rapidly draw down. While consensus varies wildly on the pace of eventual inventory/demand normalization, we see encouraging trends as traffic congestion in major cities around the world has reached pre-COVID levels, people switch from mass transit to driving and certain areas within aviation, like Chinese domestic flying, are only down 10 per cent. We expect demand to reach 100 million barrels per day again by late 2021, and with U.S. shale declines continuing, global offshore production stagnating/falling and OPEC sitting on limited spare capacity (adjusted for currently curtailed volumes), the outlook for oil over the medium- and long-term remains very strong. We think we will see $50 WTI in early 2021 and $60 WTI in the second half of 2021. With that backdrop, energy stocks remain extremely inexpensive trading at 15 to 40 per cent free cash flow yields at $50 WTI and 20 to 100 per cent free cash flow yields at $60 WTI. We see the best opportunities within Canada due to increasing takeaway capacity, lower financial leverage, foreign exchange benefits, and a greater ability to generate free cash flow due to lower corporate decline rates.