Cardinal Energy Ltd (CJ.TO)

(A Top Pick August 17/17 Up 32%) They thought the dividend was secure when it yielded 10%. He sold out of their position after the rally into May and diversified the money into international energy holdings to avoid Canada’s infrastructure issues.

Payout ratio is about 20%. No concern about dividend. Not going to hit enough institutional screens to get a meaningful uplift. Would be challenged to have this stock double. There are other stocks with more upside.

He's been underweight energy for a long time. CJ just bought Devon Energy in the U.S., loading the balance sheet do do it. He's been averaging down on this stock and would still buy it. Buy this if you think oil will hold at current prices or rise. Pays a 7.6% dividend, which is safe. He sees lots of upside. (Analysts' price target: $6.73)

Cash harvesting, strong yield, plus decent growth, not too expensive. Cardinal’s good way to play straight-up growth or harvest some yield. Lots of cash flow with the dividend, which doesn’t look like it’s going anywhere except up.

(A Top Pick Aug 10/17, Up 47%) It had peak pessimism last August. His view was that crude oil was going to move higher, which it did. It is still generally good value here. It could give you 15-20% more.

He has said to buy it for the yield as he does not expect a high capital appreciation. Its yield has retreated to about 8%. It is trading 3.6 times EBITDA at $70 oil and could return to $10 per share. They have only moderate leverage towards higher discounted oil prices, unfortunately they have too little liquidity to attract large investors. Yield 8%.

The caller asked how the company can pay out more dividend than it earns. Mr. Nuttall explained that there can be a mismatch between earnings and cash flow based on when the company books its costs of land and exploration. From a cash flow perspective, using strip pricing, he sees their dividend at about 33% of cash flow. The 9% dividend of Cardinal is completely sustainable, from the perspective of cash flow. If you look at cash flow minus maintenance capex, you see free cash flow of 18%. It is rare to find a business with an 18% free cash flow yield. From the perspective of a dividend-oriented investor, this is a good stock with good exposure the oil market. However, from the perspective of capital appreciation, other companies will grow faster. He acknowledges that companies like Cardinal are perceived to have abandonment liabilities, but he isn’t as concerned about them as he thinks the rest of the market is. He expects a total return in the mid-teens.

Pays a 10% yield, so, is there a flaw here? No. They generate enough cash to cover it, and they can still grow production 7-8% annually and can pay down debt which is manageable. He personally encourages them to do a 10% share buyback.

All these companies have been creamed. They don’t have too much heavy oil. They are all getting painted with the same brush. The company could cut the dividend to fund a buy back or do an acquisition, but the fundamentals continue to look good.

Canadian oil producer. 10% yield that is sustainable. It trades at a material discount to its average. Cash flow per share has not gone down but the share price has. You can’t stay this negative for long. (Analysts’ target: $6.35).

Cardinal Energy (CJ-T) vs Torc Oil & Gas (TOG-T). Very different companies. Cardinal is a medium gravity producer. They are 60% exposed. They are going to lower their debt. They can pay the 10% yield and that is sustainable. He would buy Cardinal Energy (CJ-T) vs Torc Oil & Gas (TOG-T). (Analysts’ price target is $6.44)

They are on her watch list. They have a very low decline rate compared to peers, but they are not as light oil-focused as she likes. They want to move this way as well as to reduce debt. She is waiting to see what happens after a CFO change.

The company is exceptionally strong. The last time he stress tested the dividend, it was sustainable down to about $47 WTI, so at the current $59, not only can they pay the dividend, but can grow production. However, you could massively underperform by having money in a name that is going to languish, such as this name. It is absolutely cheap, and thinks they can grow production by 12% and pay the 8.5% dividend and still generate free cash flow. They are trying to monetize more royalties, hopefully by the end of this quarter. Because it is going to underperform other names he does not have any shares.

They started looking at oil & gas a little bit more. This would be on the riskier side of centre. Thinks it’s a little bit too early. Return on capital still negative. Looks cheap but there is quite a bit of debt. A lot of things could go in their favor or a lot of things could go the other way. That’s going to be one of those that’s either going to be spectacular or it’s going to flame out. Depending on your risk tolerance it’s probably best to take a small position and see how it goes.

(A Top Pick Oct 7/16. Down 44%.) One of the few Canadian names he has actually added to recently. Oil is down about 1%, while this name is down 57%. Over that time period, they did an acquisition. The balance sheet has always been pretty good. Yielding 8.9%, which is sustainable.