Opinions
Eric Nuttall
MEG Energy Corp
MEG-T
BUY
Apr 02, 2024
Stock price when the opinion was issued
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Has taken profits, because the CEO changed (whom he's met), but really it was due to valuation, which has risen with the share price. He sees less, but still decent upside in this. Likes their long-dates reserves, good free cash flow yield and benefits from the WCS differential. Foreign investors will return to Canadian energy stocks when they realize that shale producers have inventory challenges (weak quality and quantity). He targets $42-43. They will be debt free in Q2, he expects.
His thesis is 35 years minimum of stay-flat inventory, 14-16% free cashflow yield for 2025-26, soon to pay down as much debt as it needs to. Inflecting imminently to 100% return of capital. If you're bullish on oil, sit on it and collect the modest dividend. Two years out, sees $45 target at $80 oil.
Believes company is reaching final debt target in ~October 2024. Will pivot to 100% return of capital. Trading at 11% free cash flow yield at $70. Expecting a $40 share price at $80 oil. Large amount of reserves that will allow company to continue excellent capital allocation strategy. Continued share buybacks are very good for investors. Market currently ignoring hidden value in company.
Looks good. He got a weekly buy on this 2 weeks ago, and a monthly buy would be more substantial (the more you go out, the better it is.) Short term, hitting resistance. Once it gets through $28.40, it will probably play out with what he sees in the longer-term charts, which look quite good.
Thinks it can work at $70 oil. Generates 10% FCF yield at $70 oil. Reached final debt targets, so all free cashflow should return to shareholders mostly in form of buybacks. Over the next 5 years, compounding effect should expand FCF yield from 10% to 20%. If oil goes to $80, you go from 14% FCF to 55%. Inventory depth would allow them to achieve this. Yield is 1.5%.
Update next week should allow for short covering or for $$ to come back into the name. Trades at material discount to peers.
One of his largest holdings. It has sold off from tariff worries, just hitting a one-year low. They have 35 years of stay-flat inventory. Over 5 years, will grow production 25% while buying back half their shares as they pay a dividend. At $70, will trade at 4x cash flow and 13% free cash flow yield. At $80, they could buyback 80% of shares over 5 years. Is way oversold. Targets $30 in a year.
(Analysts’ price target is $31.25)
His biggest holding though has reduced it. Trades at 13% free cash flow yield, so as shares have risen, that yield has declined. The new CEO looks capable and he remains bullish MEG. He expects a change in Ottawa next year which will be reduce political risk. Meg should hit its debt target in Q3 which could trigger share buybacks. He targets $42 or 31% upside.