From this morning's edition. No doubt the bashers will respond although it's interesting to see that CPG is now a significant 9.5% of Nuttall's holdings. GLTA
Manager: Eric Nuttall, Sprott Asset Management
Fund: Sprott Energy Fund
Description: Long/short energy fund focused on Canadian oil and gas equities
Performance: 1-year: -12.5% (as of Dec. 31, 2012)
Management fee: 2.5% (+10% of excess over S&P/TSX Capped Energy Total Return Index)
Unfortunately for investors, many of the same challenges the Canadian energy sector faced in 2012 will persist for at least part of 2013.
The good news is the weak performance of oil and natural gas stocks (the average small- and mid-cap name was down 19% in 2012) during the past two years presents a potential buying opportunity.
“The bar has been set so low and sentiment towards the space is so awful that despite some of the challenges we face, the risk/reward looks pretty compelling for 2013,” said Eric Nuttall, portfolio manager of the Sprott Energy Fund.
He highlighted growth in U.S. oil supplies as the major challenge to Canadian producers. It also will take a couple of years to alleviate the severe transportation bottlenecks these companies face.
As a result, Nuttall expects Canadian crude producers will face a $10 discount to U.S. pricing for the next year or two.
“The near-term challenge for Canadian energy investors is that the current oil differential stymies interest in the patch, despite valuations largely reflecting the depressed realized oil price,” the manager said. “U.S. and international investors have largely abandoned the space, and this represents a future wave of buyers in time.”
Nuttall thinks the energy sector could produce returns in the 20%-plus range in 2013 with more clarity on pipeline initiatives expected in the second half year.
“A very large refinery is also coming back online in the summer, which will increase demand for heavy oil by 20%,” he said. “Differentials are set to narrow, it’s just a matter of patience.”
As for M&A, Nuttall thinks buyers will focus on a few specific themes such as west coast LNG, where he noted the three main projects probably need to add more feedstock, and the Duvernay shale play, where a name such as Trilogy Energy Corp. could be in play.
Crescent Point Energy Corp. (CPG/TSX)
The position: 9.5% of fund.
Why do you like it? Nuttall never thought Crescent Point would be a contrarian idea, but much of the negative sentiment around its stock is due to the large amount of equity issued in 2012. Crescent Point now has 18 billion barrels of oil in place and a 20-year drilling inventory.
“Management gets that the Street does not want them to go out and make any more acquisitions this year,” the manager said. “It is really a year about organically growing production and they have been executing.”
Biggest risk: WTI oil prices fall below US$80.
Whitecap Resources Inc. (WCP/TSX)
The position: 5% of fund.
Why do you like it? Whitecap is implementing a dividend this month and Nuttall is confident the suite of assets management has put together creates a very sustainable base for several years of dividends.
He also noted the stock is trading at a relatively cheap multiple of around 5.4x cash flow this year and offers a yield of almost 7%.
Whitecap should grow production by at least 5% and is 70% oil-weighted. “It has the most sustainable model in Canada that I can see,” Nuttall said.
Biggest risk: Weaker energy prices.
Torc Oil & Gas Ltd. (TOG/TSX)
The position: 5.5% of fund.
Why do you like it? In addition to being run by a management team that has proven to be value creators, it also has two strong plays in the Cardium and the Alberta Bakken, where the company believes it has discovered 2 billion barrels of oil in place.
Nuttall sees upside for the company if it can find a joint venture partner to help with drilling.
“The stock is trading at a slight premium to the group, but with production expected to grow 50% this year, I think they’ll grow into their multiple,” he said.
Biggest risk: Exploration at the Monarch light oil resource play.
Natural gas stocks
The position: Extremely underweight.
Why don’t you like them? Due to a relatively warm winter, Nuttall expects there will be a surplus of natural gas exiting the heating season.
“That means prices will likely be weak until the summer,” he said. “At the same time, many natural gas stocks rallied hard in 2012 anticipating a price recovery, so I think a lot of the froth could come out of many of these names.”
Potential positive: Colder-than-average weather for the remainder of the winter