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COMMENT
Market Outlook 2018 was a disaster year for energy investors. What we didn't see was the narrative around the Saudi production ramping up in support of the the Trump Administration Iranian embargo. However, exemptions were allowed for Iran and there was a clear long position for supply and traders sold oil and energy stocks. The late season tax loss selling was the most vicious he has seen in his career. This year is a year of rebuilding confidence for energy investors. He sees this as an opportunity for investors as upsides are easily 50-100%.
HOLD
So little interest in the sector, but 70% of the index is in 7 names and Suncor is the largest. No fund manager would ever be fired for holding Suncor. The new CEO is liked by the street. It is a free cash flow story and share buybacks. If you are bullish on oil going forward, this is not the one to one -- there are higher beta names out there.
integrated oils
COMMENT
Venezuela impact on Canadian energy? Setting aside the humanitarian issues, this has the biggest impact on Canadian heavy companies. They have struggled with PDVSA, the national oil company, suffering from a massive brain drain. Fields have been under invested for years. Even a change of government will not allow them to turn around production quickly -- it may take several years. As their production has been falling it has been bullish for Canada and has contributed to the $9 differentials now.
DON'T BUY
A fine company, but there are concerns over their total inventory. It comes down to what is the problem with Canadian energy market as a whole. There are only about 5 active analysts in the sector now. When money comes back it may be Cenovus, Baytex or MEG. Canadian light oil producers have a hard time competing against US Permian producers and there is not that much difference in value -- so investors are slow to return here as well. There is just not the depth of investors for this space.
COMMENT
What happened with Husky? He has to be vague. HSE-T stepping away from its tender of MEG-T was not about Alberta curtailment risk. It was not about the lack of pipeline progress. Rumours suggest 60% of the shares were tendered. So it makes him think it was something too sensitive to be officially released. Perhaps there could have been an outside entity or government that would not allow Husky to purchase MEG. That is as far has he is going. MEG has been a huge winner for the production curtailment as the WCS differentials have tightened.
oil
gas
COMMENT
What happened with Husky? He has to be vague. HSE-T stepping away from its tender of MEG-T was not about Alberta curtailment risk. It was not about the lack of pipeline progress. Rumours suggest 60% of the shares were tendered. So it makes him think it was something too sensitive to be officially released. Perhaps there could have been an outside entity or government that would not allow Husky to purchase MEG. That is as far has he is going. MEG has been a huge winner for the production curtailment as the WCS differentials have tightened.
oil
gas
DON'T BUY
They have SE Sask production. He likes the management team and there are good assets. The dividend is sustainable. He does not own it because he prefers US light oil producers. The growth rates are double in the Permian and inventory depth is twice that of Canada. He is only paying a one point premium to buy in the US. He likes Canadian heavy oil instead.
oil
gas
BUY
He bought it two weeks ago. They have improved their reserve life index from 4 to 11 years. Their netbacks are expected to grow 19% this year. They will likely buy back 10% of their shares next year. There is Colombian exposure, but for 4% weight in his portfolio he is happy to take the risk.
oil
gas
PAST TOP PICK
(A Top Pick Feb 09/18, Down 57%) He sold them out at $3.50 back in April or May last year. Oil was at $60 and cash flow was growing. He liked this pressure pumper then. But now natural gas prices have gone to zero and condensate discounts have expanded. The whole service sector was decimated.
oil
gas field services
PAST TOP PICK
(A Top Pick Feb 09/18, Down 28%) This was an IPO of the US assets of Trican. A US pressure pumper company that is still under stress. Investors have to remember this sector has to compete with others with the same rate of return metrics. This company will again under spend their budget -- not fantastic.
Energy
COMMENT
He thinks WCS will stabilize at $17 discount to WTI for the next few years. If you see Line 3 being completed this year and rail filling the gap, this company offers a tremendous leverage to tightening WCS. Their debt levels have been cut sharply. At $55 WTI, this company generates massive cash flow. At $80 WTI and $20 WCS discount, his target is $4.13 for the stock price. At $70 it is $2.67 per share. You can see the leverage.
oil
gas
